Thursday, May 27, 2010

“GET a LOAD of THIS XXX!!!!”: The Least Publicized Article You Will Read Today


The least publicized article you will read today arrives courtesy of the SEC, which shut down an effort by a Disney communications insider to sell advance information on Disney earnings reports to hedge funds.

Here’s how the Wall Street Journal is reporting it:

Federal authorities alleged Wednesday that a Walt Disney Co. executive assistant and her boyfriend engaged in a ham-handed plot to sell Wall Street traders inside information, first offered in a chirpy missive sent to dozens of investment companies.

"Hi, I have access to Disney's (DIS) quarterly earnings report before its release on 05/03/10," the March 5 letter began. "I am willing to share this information for a fee that we can determine later."


It is, of course, a heart-warming thing to know that not all SEC employees are so absorbed in surfing for porn on their office computers they can’t get their jobs done.

That activity, while not normally associated with Good Government, engaged at least 33 SEC employees over a 5-year period, including 17 “senior SEC employees, earnings between $99,000 and $222,000 a year,” according to last month’s report by the inspector general.

Our tax dollars at work, indeed.

But the key to breaking the Disney cash-for-information ring actually was the hedge funds that received the email in the first place:

The alleged plan went awry. Instead of taking the bait, "multiple hedge funds reported the illicit scheme," the Securities and Exchange Commission said in a press release.

—The Wall Street Journal

That is not how the investment world is supposed to work.

According to uninformed Congresspersons (is there any other kind?), incompetent CEOs, conspiracy-theory-spinning web sites and their equally loopy readers, the hedge funds of America are a latent evil within a corrupt system—the heart of darkness at the end of the long, sad journey into the country’s financial soul.

Yet it was the hedge funds that forwarded the Disney goods to the Feds in the first place.

(Okay, maybe they needed to use a subject line such as “GET a LOAD of THIS XXX!!!!” to get somebody’s attention…but still, the Feds did their job.)

And that’s why you won’t read much about the hedge funds’ role in this affair: it’s too close to the truth about hedge funds, which is that most of them have nothing to do with the kind of drama the Galleon case exposed.

Indeed, and not for nothing, most of the SEC has nothing to do with the kind of incompetence the Madoff case or the recent porn-reading nonsense exposed, either.


In fact, for an eye-opening look at what the Feds have to go through to bring down an obvious scam, not to mention what a hard-working hedge fund goes through to bring obvious scams to the attention of the Feds, we suggest reading Richard Sauer’s “Selling America Short.”

Sauer’s informed (he was an SEC attorney before he joined a hedge fund) and detailed set of stories will make you sick, but they’ll also make you appreciate what a no-win position the Feds occupy in America’s—and the world’s—byzantine financial regulatory schema, not to mention how the bad behavior of Goldman Sachs took down a hedge fund on the cusp of making a bundle for its investors thanks to prescient bets on a financial crisis.

We’ll have a review of it once we finish our current Berkshire Hathaway series, but in the meantime, get a hold of it and start reading.

And the next time your Congressperson badmouths hedge funds, ask them what, exactly, a hedge fund is.


That’ll shut ‘em up—if you’re lucky.



Jeff Matthews
I Am Not Making This Up

© 2010 NotMakingThisUp, LLC

Tuesday, May 25, 2010

The Least Helpful Call You Will Receive Today, Guaranteed!


We interrupt the 2010 Pilgrimage to Omaha series to bring you a NotMakingThisUp “Least Helpful Call of the Day.”

The Least Helpful Call you will receive today—and we are fairly certain there has been no less helpful call provided by Wall Street’s Finest this morning—is brought to you by J.P. Morgan Cazenove, whose analysts took it upon themselves to downgrade...the Greek banks.

We are not making this up.

As of this morning, to be specific, shares of the National Bank of Greece no longer merit an “Overweight” rating from the folks at JPMC.

The shares, currently quoted in ADR form at $2.47, within two pennies of their 52-week low, are now officially branded “Underweight” at JPMC.

As always, a tip of the cap from we here at NotMakingThisUp, and on behalf of investors everywhere who may have been holding on for dear life in this one, a hearty “Thanks guys!”



Jeff Matthews
I Am Not Making This Up


© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Friday, May 21, 2010

2010 Pilgrimage, Part III: In Defense of Goldman Sachs, Circa 1976


The essential question for Warren Buffett—“Would you defend Goldman’s actions if you didn’t have a $5 billion investment in the company?”—has not been asked today.

And it will not be.

That’s the downside of the Berkshire meeting format. Despite the fact that half the questions are asked directly by shareholders and the other half are questions that have been submitted to (and sifted by) three reporters, all the questions asked of Warren Buffett and Charlie Munger are asked on behalf of the shareholders.

This is not a press conference.

Thus there can be no follow-ups to whatever glaring howlers, if any, come out of the two men’s responses—and one such howler, we think, there has been.

It was Buffett’s dismissive referrence to one investment bank (Lehman Brothers) as “another carny” while he was stoutly defending another investment bank (Goldman Sachs), whose carny-like behavior went well beyond that of Lehman Brothers in the very example Buffett himself gave to shareholders.

Goldman, for readers who just arrived from Mars, is being pursued by the SEC for creating a destined-for-failure mortgage package at the behest of a hedge-fund client, with the sole purpose of selling it to another client. Lehman, on the other hand, had merely asked Buffett to insure a package of plain-vanilla municipal bonds.

Whether Goldman did anything actually illegal, as opposed to unethical, is the question which the SEC’s complaint has raised in the minds of many on Wall Street and here in Omaha.

Charlie Munger, for his part, clearly sides with the ‘unethical but not illegal’ camp. His earlier summation of the case had generated approving murmers and nods in this crowd:

“I think a lot of companies should decline business that would be legal…the standard should not be what’s legal and convenient.”

Buffett, on the other hand, has cut Goldman some serious slack, admitting neither to illegal or unethical behavior on the part of the “jockeys” in charge of that “horse,” on which he slapped a $5 billion wager during the crisis:

“We think plenty has been wrong, but our experience with Goldman Sachs goes back 44 years… We’ve bought more businesses through them than any other investment bank… They helped build Berkshire Hathaway….And we trade with them as well.

“And they can very well be shorting for their own account…they do not owe us a divulgence of their position any more than we do…they are acting in a non-fiduciary capacity when they are trading with us.”

Nevertheless, regardless of what Goldman might “owe” to its clients, Goldman’s true colors have already been well-aired in public.

And those colors, as anyone on Wall Street might have told anyone on Main Street even before the storm broke when the SEC complaint came down in April, look like this: Goldman Sachs does what is good for Goldman Sachs, period.

The fact that this appears to be a surprise all of a sudden is a mystery to anybody working in Lower Manhattan, and it seems to be a surprise to Warren Buffett.

Indeed, even a casual observor of Berkshire Hathaway might wonder why Warren Buffett would have invested $5 billion of Berkshire’s hard-earned money into Goldman Sachs during the worst financial crisis since the Great Depression unless Goldman operated in its own self interests—and did so always?

And that same observor might also ask themselves how else an investment bank operating in the most cutthroat business on earth could have managed through the storm with only one money-losing quarter, while 3 of its 4 brethren vanished completely?

In any event, today, May 1, 2010, in front of 17,000 shareholders packed into the Qwest Center arena and another 25,000 watching on big screen TVs elsewhere in the building, Buffett has cleverly shifted the discussion away from the legal and ethical issues by providing a sentimental journey of his and Munger’s history with investment bank now under fire.

“Now if they’re working with us on an acquisition or a financing, that’s a different story. I’d like to take you back—some people here will remember this—the very first bond deal Charlie and I did, our maiden voyage in 1967…Slide 2 please…”

Buffett’s call for another slide—this is a very well prepared defense—brings up on the giant screens alongside the stage an image from the front page of a very old prospectus:

“Diversified Retailing Company,” he says, harking back to an early investment of his and Munger’s.

“We went out to raise $5.5 million….What happened in this one was we were having trouble raising $5.5 million, and I called Gus Levy of Goldman Sachs and Al Gordon of Kidder Peabody and said would you guys help me? And both Gus Levy and Al Gordon said to me ‘Warren we’ll take a big piece.’”

A third slide shows the Goldman and Kidder names highlighted in yellow on the back of the prospectus. As Buffett relates the story, neither firm wanted to be on the front page despite their hefty investments:

“They wanted to give us money under an assumed name.”

This brings laughter and Buffett uses that goodwill to say more nice things about Goldman Sachs, and Kidder too.

“I do have a long memory for people that take care of Berkshire over a long time. Al Gordon was a remarkable man. Gus Levy was a remarkable man.”

For the record, Al Gordon sold Kidder to GE in 1986—almost a quarter century ago.

Gus Levy stopped running Goldman Sachs upon his death in 1976—almost 35 years ago.

Things have changed since then. A lot.

Yet this isn’t the first time Warren Buffett has held a quaint, but outdated, view of a business he thought he knew well.

Readers of “Pilgrimage to Warren Buffett’s Omaha” (McGraw Hill, 2008) will recall that Buffett held a similarly rose-colored view of General Reinsurance, for which he spent $22 billion in precious shares of Berkshire Hathaway, in 1998.

Here’s how Buffett described the situation in his almost ten years later:

For decades, General Re was the Tiffany of reinsurers, admired by all for its underwriting skills and discipline. This reputation, unfortunately, outlived its factual underpinnings, a flaw that I completely missed when I made the decision in 1998 to merge with General Re. The General Re of 1998 was not operated as the General Re of 1968 or 1978.

Now, thanks to Joe Brandon, General Re’s CEO, and his partner, Tad Montross, the luster of the company has been restored…

Is the Goldman Sachs of 2010 being operated as the Goldman Sachs of 1976, or 1966, or 1940, when a precocious 10 year old named Warren Buffett visited the firm with his father and traded stock ideas with Sidney Weinberg?

Not likely.

And Andrew Ross Sorkin, the ace New York Times reporter now asking a question, isn’t going to let Buffett off as easily as Becky Quick and the last two Berkshire shareholders.

Those three apparently picked up on Buffett’s vibe that he had finished with Goldman and shifted the focus to other areas, including:

1. The current financial reform bill being debated in Washington, of which Munger observed:

“I don’t think anybody in America, including Congress, knows what’s going to happen, and I would guess that most of them have not read the bill”;

2. Buffett’s lobbying to protect Berkshire from derivative collateral changes, which Munger defended by calling the proposal:

“Both dubious and unconstitutional”;

3. The fallout from Greece’s march towards insolvency, of which Munger said flatly:

“I think in this country—and other countries too—responsible voices are now realizing we’re NEARER trouble from government lack of credit than at any point in my lifetime.”

Sorkin, author of the best and most readable account of the financial crisis, “Too Big to Fail,” somewhat apologetically but firmly returns to Goldman, with several terrific questions rolled into one:

“As a Berkshire shareholder, who would you like to see run Goldman Sachs if not Lloyd Blankfein? Were you made aware of the Well’s notice? Would you have disclosed it? Have you been contacted about the Galleon investigation?”

Buffett begins his answer by disposing of the last question, which relates to the fact that a Goldman Sachs board member has been accused of tipping former Galleon hedge fund honcho Raj Rajaratnam about Berkshire’s imminent investment in Goldman Sachs, with a dismissive joke:

“We’ve not been contacted in any way about Galleon. No contact from anybody, and I can’t pronounce the name of the guy that runs Galleon.”

Ironically, Raj—as everybody on Wall Street, even those who didn’t know him personally, referred to him in his Master-of-the-Universe heyday—has a fairly mellifluous surname when it comes to native-born Sri Lankans, at least to American ears.

But Buffett’s point is this: he doesn’t know the guy, period. He then moves on to the Wells notice issue.

A Wells notice is a sort of legal heads-up the SEC provides to those individuals or institutions against whom it is considering bringing a civil action. The SEC had delivered one such Wells notice to Goldman Sachs in July of 2009, but Goldman chose not to disclose it until the SEC filed its complaint in April of 2010.

That lapse raised eyebrows above and beyond the eyebrow-raising that occurred when Goldman’s behavior in arranging the ABACUS transaction hit the tape, because the receipt of a Wells notice by a financial institution whose business relies on a good relationship with its regulators is surely worth knowing about if you’re an investor in that institution.

Buffett, however, disputes the notion that the Wells notice was that type of “material” information and, therefore, would have demaned immediate public disclosure. He does this by going back in time to when General Reinsurance received such a Wells notice:

“The Wells notice, we didn’t get the Wells notice, but then the Gen Re executives got the Wells Notice …that was not us receiving, but we stuck it in the 10-Qs,” the quarterly financial filings required of exchange-listed companies.

“I’ve been on the board of at least one public company for many years that got a Wells notice and they didn’t disclose. I wouldn’t have regarded it as material either.”

Buffett did not say whether that public company was a financial company dependent on the goodwill of the Securities and Exchange Commission for its daily bread, which would make his example more analogous to the Goldman situation.

More likely, Buffett is referring to Coke, on whose board Buffett served while its make-the-numbers CEO, Robert Goizueta, was driving the business to meet Wall Street expectations so hard that the company would later settle with the SEC on charges of what essentially amounted to channel-stuffing in order to hit earnings targets.

Nevertheless, Charlie Munger supports his long-time business partner’s view:

“I wouldn’t have regarded it as material either,” Munger says, and then makes an excellent point that derives from his perspective as an attorney:

“And you don’t want to give blackmail material to people that make claims.”

Buffett concludes the Wells notice discussion by saying he doesn’t know “what percentage of Wells notices” actually turn into an enforcement action anyway.

As for Lloyd Blankfein, Goldman’s CEO, Buffett gives as complete an endorsement as he can:

“If Lloyd had a twin brother I’d go for him. I haven’t given it a thought. There’s no reason to think of it. Like Penn Central problem in 1972: there was no reason to have someone other than Gus Levy running it. I just don’t see this as reflecting on Lloyd.”

Munger, who has expressed greater discomfort than Buffett with the general “scuzziness” of investment banks, firmly agrees:

“Well there’re plenty of CEOS I’d like to see gone in America, but Lloyd Blankfein isn’t one of them.”

Buffett, who likes to finish up such discussions on a light note, ends the discussion of Goldman Sachs with a nod to Munger, who is not known to hold back when it comes to expressing condmenation:

“I was worried he was going to start NAMING them.”

The crowd chuckles and Buffett moves to the next question, h
is defense of the ABACUS transaction, Lloyd Blankfein and Goldman Sachs & Company complete and on the record.

It is still early Saturday morning, May 1. There are another 50 questions to come. They will be varied in both quality and topic, and the responses will be varied, too.

In some cases, Buffett and Munger will be entirely predictable…but in others they will be surprising. And that is what keeps people coming back to Omaha.

To be continued…



Jeff Matthews
I Am Not Making This Up


© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Friday, May 14, 2010

2010 Pilgrimage, Part II: “A Closer Call” than Buffett Thinks…and Yes, Charlie Did Say “Scuzzy”


“I think the central part of the argument is that Paulson knew more than the bond people….They [the bond people] just made what in retrospect turned out to be a dumb insurance decision.”

So Warren Buffett frames the SEC complaint against Goldman Sachs & Company in the now-infamous ABACUS transaction, and summarizes his defense of that now-tarnished investment bank in front of 17,000 Berkshire shareholders here at the Qwest Center arena in Omaha (and another 15,000 scattered in other rooms watching on monitors elsewhere.)

“ABACUS,” we should add, for readers whose eyes start to glaze over when they see Wall Street deals with testosterone-charged names, was merely a bet by one smart guy—hedge fund manager John Paulson—that a bunch of mortgages would fail.

Paulson helped pick some of those mortgages, and Goldman Sachs & Company packaged those bets and sold them to IBK, a small German bank—all with the blessing of ACA, the supposedly independent third-party bond insurer enlisted by Goldman for the purpose.

Buffett continues his defense, along the lines of ‘let the buyer beware,’ by using a typically Buffettian analogy to bring the thing home for his shareholders:

“Let’s say we had decided to short the housing market in early 2007…I don’t think anybody should blame us.”

With that, Warren Buffett has just done something cagey. Smart, but cagey.

By identifying “the central part of the argument” as John Paulson’s behavior, Buffett has turned the spotlight away from Goldman Sachs & Company’s behavior and on John Paulson’s behavior. Yet nobody—not even the SEC—is claiming that Paulson did anything wrong.

Paulson simply bet that a bunch of old nags (mortgages to people who couldn’t afford them) gussied up like thoroughbreds would keel over and die before they got around the race track. And Paulson won—big-time—at the expense of IBK.

But it is not likely he could have accomplished it on the scale he did without the aid of Goldman Sachs and dumb bond insurers like ACA.

Having thus deflected the issue away from Goldman, Buffett then turns the question over to Berkshire’s Vice-Chairman, Charlie Munger. “Charlie?”

Munger, as is his wont, has been sitting patiently, pouring a glass of ice water for himself and gazing out at the crowd through his Coke-bottle thick glasses while Buffett expounds on Goldman Sachs, John Paulson and the ignoramuses at ACA.

Before he can being, Buffett reminds the audience of something relevant to the discussion: “Charlie has a law degree.”

And in fact Munger started his path to the Forbes 400 not by peddling stocks in his father’s brokerage firm, as did Buffett. Instead, Munger took his Harvard law degree to Los Angeles—where he had been stationed during World War II—and founded Munger, Tolles & Olson LLP.

It was in his capacity as an attorney advising a variety of companies that Munger grasped an important truth which even Warren Buffett hadn’t grasped as a Ben Graham value-maven looking for cheap stocks in the Moody’s manual: it is better to buy a fantastic business at a good price than a bad business at a fantastic price.

That lesson helped create Berkshire Hathaway as we know it, and it underlies the reason Berkshire shareholders have been sitting through a half hour worth of Buffett’s flag-waving defense of Goldman Sachs & Company.

For the investment banking business is not necessarily a fantastic business on its own: it requires fantastic management. As Andrew Ross Sorkin quotes Buffett (in the excellent “Too Big to Fail”) telling Goldman CEO Lloyd Blankfein, “If I’m buying the horse, I’m buying the jockey, too.”

And the Goldman jockeys are under fire.

Munger clears his throat and leans towards the microphone in his deliberate, understated manner, and leads with a reference to the recent revelation that SEC commissioners voted 3-2 to pursue the Goldman case, and were split along party lines.

“This was a 3-2 decision,” Munger says. “If I had been on the SEC I would have been on the minority too.”

This generates a groundswell of good feeling towards Buffett’s defense of Goldman, and Buffett jumps in with another couple of daggers to stock into ACA’s hide:

“I have seen ACA referred to as investor…ACA was a bond insurer, pure and simple—very simple as it turned out.”

Speaking over the ensuing laughter, Buffett prompts Loomis for the next part of the question. “Carol?”

“The next part,” Loomis says, “was, ‘your reflections in light of Berkshire’s large investment in Goldman…’”

This gives Buffett a chance to gloat about Berkshire’s investment in Goldman, which was made during the crisis days of 2008 when the entire financial world look close to falling apart. Buffett invested $5 billion for a fat, dividend-paying preferred, plus warrants to buy Goldman shares for Berkshire’s—and he doesn’t want to give them up.

“Very ironically it’s probably helped our investment in Goldman,” he says. “Our preferred pays us $500 million a year,” and Buffett notes that Goldman has a legal right to pay off the preferred any time it wants, at a 10% premium to Berkshire’s cost.

“If we got that $5.5 billion today we’d put it in very short term securities which might produce $20 million or something”—quite a few dollars less than the $500 million Berkshire is getting from the preferred. “Our preferred is paying us $15 a second. Tick, tick, tick, that’s $15 a second…I don’t want those ticks to go away…they pay me at night, on weekends…”


This generates guffaws, and Buffett—like a comic who knows a good line when he hears the laughs—keeps riffing on that theme while pointing out that the Federal government has been pressuring investment banks to keep as much capital on their books as possible, meaning Goldman probably would be hesitant to repay the Berkshire investment too soon:

“They [the Feds] have been pretty strong with all the TARP companies that they could not pay dividends…and I was just hoping they’d continue to be tough in not letting Goldman call our preferred. ‘Tick tick tick’ will go on so that we will be getting $500 million a year instead of $20 million. We love the investment.”

The audience, likewise, loves the greedy capitalist routine.

When it comes to “losing reputation,” however, Buffett draws what must surely be the weakest quiver from his quiver. Buffett is, after all, almost as famous for the high standard of behavior to which he holds Berkshire managers as he is for making money:

We can afford to lose money—even a lot of money. We cannot afford to lose reputation—even a shred of reputation. Let’s be sure that everything we do in business can be reported on the front page of a national newspaper….Berkshire’s results have benefited from its reputation, and we don’t want to do anything that in any way can tarnish it.

—Warren E. Buffett, memo to Berkshire Managers, August 2, 2000


Leaving aside the obvious fact that Goldman’s successful effort to pawn off some lousy mortgage bets on one customer at the behest of another has resulted in plenty of terrible front page stories on every national newspaper left standing (and their web sites, too), Goldman’s reputation is in no way, shape or form what it was before the details of ABACUS were made public.

Yet Buffett—who, as a student of the Dale Carnegie method of winning friends and influencing people, almost never criticizes individuals in public—answers by first offering a bit of a history lesson. Ancient history, for this crowd:

“Losing reputation—there’s no question the press of the last few weeks can hurt moral…it hurts. Incidentally, Goldman Sachs had a situation with the Penn Central years ago…it was a source of great pain to John Weinberg…”

Penn Central was a railroad that went spectacularly bankrupt in 1970, triggering an SEC investigation and civil fraud suits in 1974. Among those investigated was Goldman Sachs, whose CEO was the aforementioned John Weinberg.

Here’s how Time Magazine described, in 1974, Goldman’s role in the affair, which sounds eerily familiar 35 years later:

Goldman Sachs insists that it did nothing wrong in marketing $83 million of commercial paper for Penn Central in the six months before the bankruptcy. But it signed a consent decree under which it promised that it will investigate companies for which it sells commercial paper and tell would-be buyers what it finds out.Buffett, who can see the forest for the trees better than most investors, knows that Goldman Sachs will, ultimately, work through the current bad press, not to mention the efforts of Congresspersons everywhere to look less incompetent themselves by ganging up on Goldman Sachs.

But he uses that long-term view as the means to insist that what Goldman did was not, somehow, a violation of the ‘front page of the newspaper’ standard he himself uses for Berkshire managers:

“I don’t believe the allegation belongs in the category of losing reputation.”

Yet he’s been proven wrong on this one before the doors opened this morning.

As for “advice” he would give to Goldman Sachs, Buffett cites “our motto” when he and Charlie were working hard to rescue Salomon Brothers during their scandal of more than two decades past:

“Get it right, get it fast, get it over with.”

He then allows himself a significant loophole that might make today’s defense null and void:

“If it leads into something more serious then we’ll look at the situation at that time.”

Before handing off the reputational question to Munger, Buffett finishes up by repeating his central argument:

“But what I’ve seen of the ABACUS activity I don’t see that would be any different from me complaining of that list of municipals. Charlie?”

Munger stirs and says words that are undoubtedly on everyone’s mind here today—and what most of us very likely expected Buffett to say when it came to Goldman Sachs:


“I agree with that but I think a lot of companies should decline business that would be legal…the standard should not be ‘what’s legal and convenient.’”

That draws an appreciative murmur: it seems exactly right. Munger then offers a backhanded defense of Goldman Sachs:

“I don’t think there are too many investment banks that didn’t do scuzzy deals.”

(Yes, Charlie Munger—one of the most erudite and literate investors in the word, did say ‘scuzzy.’)

But now it gets really interesting, for Buffett’s ear is sharply tuned to Munger’s words, and he wants to follow up on them. This is no mere crowd-pleasing aspect to their performance. The two men not only listen to their shareholder’s questions carefully, but they listen to each other the same way.

And if one says something the other disagrees with or wants to clarify, he will follow up in front of 17,000 people.

Thus Buffett follows up on Munger’s lumping of the entire category of credit-bubble-era investment banks together as “scuzzy” with a question about Berkshire’s own participation in the excesses of that era—the municipal bond deal brought to Berkshire by “another carny,” Lehman Brothers, which Warren Buffett and Ajit Jain agreed to insure:

“But Charlie,” he asks, “do you think we should have done our municipal bond deal?”

Munger, who may or may not be the only person in the world that doesn’t think twice about disagreeing with Warren Buffett, says without hesitation,

“I think it was closer call than you do.”

And many of the Berkshire Hathaway here will agree with “Charlie,” as it turns out.

To be continued…



Jeff Matthews
I Am Not Making This Up


© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Friday, May 07, 2010

Pilgrimage to Omaha, Part 1: Defending the Carny




“There is no hiding your history when you stand before these regulators. They can – and do – call their counterparts in other states where you operate and ask how you have behaved in respect to all aspects of the business....”

Quick! Name the public company CEO who wrote those words in late 2008.

If you said, “Warren E. Buffett, Chairman of Berkshire Hathaway,” then you know your Berkshire Chairman’s letters.

More specifically, you know Buffett’s 2008 letter to shareholders, which he wrote less than a year after the now-infamous ABACUS transaction—which Goldman Sachs & Company had helped assemble for the benefit of John Paulson—went (as we say on Wall Street) “tapioca.”

The “Oracle of Omaha” used his annual letter that year to explain why he expected the folks running Berkshire’s extensive utility businesses to behave well “in respect to all aspects of the business.”

Here’s the full version of that discussion:

Our long-avowed goal is to be the “buyer of choice” for businesses – particularly those built and owned by families. The way to achieve this goal is to deserve it. That means we must keep our promises…

In the regulated utility field there are no large family-owned businesses. Here, Berkshire hopes to be the “buyer of choice” of regulators. It is they, rather than selling shareholders, who judge the fitness of purchasers when transactions are proposed.

There is no hiding your history when you stand before these regulators. They can – and do – call their counterparts in other states where you operate and ask how you have behaved in respect to all aspects of the business…

—Warren E. Buffett, 2008 Chairman’s Letter.


So, one might ask Buffett, how does he think Goldman Sachs & Company “behaved in respect to all aspects of the business” when it comes to the ABACUS transaction?

After all, a regulator is a regulator.


So it seems unlikely that a person, especially one who goes out of his way to judge behavior in terms of strict moral clarity as Buffett himself frequently does, could find a meritorious distinction between, on the one hand, the regulators of public brokers in power and light, and, on the other hand, the regulators of brokers in stocks and bonds.

Yet that, it seems, is precisely what Warren Buffett did when he rose to the benefit of the folks at Goldman Sachs & Company—at length and with slides to back up his words during last Saturday’s Berkshire Hathaway meeting—in their run-in with the SEC, which happens to be the most important regulator in the world of purveyors in stocks and bonds.

Now, for the record, we here at NotMakingThisUp expressed the view (in “From BACCHUS to ABACUS: Exhibit A in Defense of Goldman Sachs”) that while we hold no particular esteem for the moral DNA within Goldman Sachs, from our reading of the claim, the SEC doesn’t seem to have a leg to stand on:

1) By withholding the name of the seller—John Paulson—from the buyer, it seems to us that Goldman was doing nothing more or less than is expected of any broker in any securities transaction;


2) Far from duping a rank minor-leaguer, as claimed by the SEC, Goldman’s buyer was a German bank that had boasted of its major league prowess in the kind of complex instruments it eventually volunteered to purchase through Goldman Sachs & Company.

Many good readers disagreed with us, for many good reasons—particularly the ethical sliminess of a broker seeking a buyer for a cynically-constructed synthetic transaction designed to fail.

But people don’t go to jail for bad ethics, they go to jail for breaking laws, and while the ABACUS deal was quite slimy, it seemed no worse than much else we have seen from Goldman over the years. Thus, although we are not attorneys, and really don’t care what happens to Goldman Sachs & Company, the ABACUS deal seemed far from illegal.

And last Saturday, Warren Buffett emphatically agreed.


Let’s journey to that crisp morning in Omaha inside the 17,000-seat Qwest Center arena…


Carol Loomis, the ace Fortune editor, asks the Goldman question right at the start of the session. And while Loomis is best friends with Buffett, we give her credit for asking some of the most controversial and difficult questions at the shareholder meeting for two years running—no easy thing with 17,000 Buffett acolytes in a Madison Square Garden-sized arena where Warren Buffett and Charlie Munger will be holding forth for five-plus hours.

Loomis launches straight into “Topic A,” as she calls it:

“Warren, every year you use the Salomon clip”—the video of Buffett telling Congress during the 1991 Salomon Brothers hearing that he had advised Salomon employees 'lose money and I will be understanding; lose one shred of our reputation and I will be ruthless'—which Buffett includes in the movie shown prior to the start of every shareholder meeting.

“Clearly Goldman has lost reputation because of the SEC’s action,” Loomis continues, and asks for Buffett’s “reaction to the lawsuit, your reflections, and what advice you would give the Goldman Sachs board.”


Buffett is ready. “Let’s start with the transaction,” he says, and begins what we will soon learn is an extremely well planned defense:

“A few weeks ago a transaction described as ABACUS, subject of SEC complaint—I think it ran 22 pages…” (A note: Warren Buffett knows numbers, so when Buffett says of the complaint, “I think it ran 22 pages,” you can bet it ran exactly 22 pages. It did.)

“I think there’s been misreporting—not intentional of course,” Buffett says of the brew-ha-ha surrounding the ABACUS deal, “I would like to go through that transaction first, then we’ll go through the questions.”

And go through it he does.

“The transaction, there were four losers…Goldman Sachs was a loser, they didn’t intend to be I’m sure, they kept a piece and they loss $90 or $100 thousand”—and while Buffett knows numbers, he did say ‘thousand,’ not ‘million,’ which is an odd mistake for a guy who really keeps track of money.

“… The main loser was a very large bank named ABN Amro which became part of RBS. Why did they lose money? They lost money because they guaranteed credit of another company.… They guaranteed the credit of another party.

“We do it all the time. Berkshire has made a lot of money guaranteeing these over the years. We lost money—years ago—on syndicates of Lloyd’s of all things, who found ways not to pay when they found our name on the thing.”

Buffett is teeing up his answer, demonstrating the broad working knowledge he possesses, while also making the point that there was nothing particularly unusual about the deal, except that the players were, by and large, sloppy:

“ABN…took on a $900 million of risk, and they got paid $1.6 million. The company they guaranteed went broke… It’s very hard to get upset about that.”

So far, so good. ‘What kind of moron guarantees $900 million in return for a lousy $1.6 million premium?’ Buffett is asking, before answering it himself: ‘ABN Amro, that’s who.’

Buffett then gets to ACA, the most visible party in the transaction:

“ACA was a bond insurer…they started out as a municipal bond insurer…all those companies started out insuring municipal bonds…and there was a big business and then the profit margins started getting squeezed….and what did they do? They got involved in other deals.”


Demonstrating his age and his 50’s-era sense of humor, Buffett repeats a hoary old joke he has employed many times over the years, in a variety of situations:

“I described this in the annual report a few years ago…like Mae West said, ‘I was Snow White but I drifted.’”

There is a bit of laughter, but clearly not all that many people know who Mae West is any more.

(The 50-for-1 stock split not only attracted a larger crowd of investors this year—20% bigger than 2009, we’d guess—but a younger crowd. At the Borsheim’s open house on Friday night, the crowd was much rowdier than in years past, and the number of Bud drinkers—as opposed to white wine drinkers—was distinctly higher. Still, what matters most to Warren Buffett is they were buying: every counter at Borsheim’s had customers looking over some piece of jewelry.)

Buffett concludes his point about municipal bond insurers like ACA that moved outside their field of expertise this way:

“They all did it and they all got into trouble, every one of ‘em.”

He then brings it back to Berkshire Hathaway:

“Now interestingly enough Berkshire went into the bond insurance business when these guys got into trouble,” although, he makes sure to emphasize, “we stayed away from things we didn’t understand…never insured a CDO.

“I wanna give you an example of something we did insure…if the projectionist would put up slide number one.”

Aha! Buffett has—as he has done in the past—prepared slides to support a point he knows he will be making sometime during the meeting.

The first slide of the day shows a list of $8.3 billion worth of state bonds broken down by state, including the likes of Florida, Illinois, Delaware and Utah:

“Somebody came to us a couple years ago…a large investment bank and they said take a look at this portfolio… They said to us, ‘Will you insure that these bonds in these states will pay for 10 years?’

“I looked at the list and Ajit Jain [Buffett’s ace reinsurance exec] looked at the list and we had to decide would we insure them and what premium we would charge. We offered to charge $160 million for 10 years… We will pay somebody on the other side—the counterparty they call it—if these states don’t pay, we will pay as if they did pay.

“We didn’t dream up this list,” Buffett says, and then makes one of the most revealing statements of the session.


“Another carny dreamed up this list.”

Who was the “carny” in this particular case? “It was Lehman Brothers,” Buffett reveals.

He then names several different reasons why Lehman may have been seeking insurance on the bonds, but adds flatly,

“We don’t care which scenario…if they told me Ben Bernanke was on the other side of the trade, it wouldn’t make a difference to me. It shouldn’t matter…we did with these bonds exactly what ACA should have done with these bonds.

“ACA said there’s about 50 we’d be willing to insure and then got another 30 more… We didn’t do that, we could have, but it was a totally submitted list.”

Buffett then brings it back to ABACUS:

“Now in the end the bonds in the ABACAUS transaction all went south very quickly…. It wasn’t that apparent at the time… Now there could be trouble in the states we insured, there could be big pension liabilities…but I seeing nothing whatsoever, I mean if I lose money on these bonds I’m not gonna go to the other side.

“I think the central part of the argument is that Paulson knew more than the bond people…they just made what in retrospect turned out to be a dumb insurance decision. Let’s say we had decided to short the housing market in early 2007 I don’t think anybody should blame us.”

Thus, Warren Buffett says that nobody should blame John Paulson or, by inference, the broker who packaged and sold the ABACUS transaction.

Take notice, however, of what Buffett just called Lehman Brothers: he called them “another carny.”

Thus, in Warren Buffett’s eyes, Lehman Brothers is a mere carnival barker hawking rigged games to tempt cash out of unsuspecting bystanders.

So how is this different from Goldman Sachs & Company?

Well that is the very question Loomis wants answered: she now prompts Buffett to move from the transaction itself to the question of how the SEC investigation makes him feel about Berkshire’s investment in Goldman, and its reputation.

The first part of the follow-up gives Buffett a chance to play the amusingly-greedy capitalist to the friendly crowd:

“Goldman pays us $500mm a year… $15 a second. Tick, tick, tick, that’s $15 a second…I don’t want those ticks to go away…they pay me at night, on weekends… We love the investment.”

This draws laughter and allows Buffett to move on to what might be the touchiest part of the issue, Goldman’s reputation, with a reservoir of good feelings on which to draw:

“Losing reputation—there’s no question the press of the last few weeks can hurt moral…it hurts…. I don’t believe the allegation belongs in the category of losing reputation…”

Hmmm... Let’s go back to Buffett’s own words from that 2008 letter to shareholders:

“There is no hiding your history when you stand before these regulators. They can – and do – call their counterparts in other states where you operate and ask how you have behaved in respect to all aspects of the business....”

Does Warren Buffett really hold his own utility companies to a higher standard of “behavior” than his friends at Goldman Sachs?


Consider it this way: if, at the behest of one of its customers, a Berkshire natural gas pipeline were to contract for a lousy batch of natural gas in order to sell it to another Berkshire natural gas pipeline customer, would Buffett defend that behavior?

The answer, of course, is no.


And in that light, it seems that the most rational—and successful—investor of his times has merely rationalized the behavior of yet “another carny.”


And he has done so for the sake of, oh, $15 per second.


This becomes clearer when Buffett asks Charlie Munger—his longtime sounding board, nicknamed “The Abominable No-Man” by Buffett for his deeply skeptical view of most deals (even deals that get the “Oracle of Omaha” temporarily excited)—what he thinks of the Goldman deal.


Munger, who happens to be an attorney and founder of a highly successful West Coast law firm in addition to being half of the most successful investment team in modern history, will agree with his partner in the strictly legal sense, but it becomes clear he has a different sense of the ethics of the thing....


To be continued...


Jeff Matthews
I Am Not Making This Up


© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Wednesday, May 05, 2010

The Least Helpful Call You Will Get Today


We interrupt what is shaping up to be a fairly hard-nosed look at Warren Buffett’s comments at last Saturday’s Berkshire shareholder meeting, to bring you a NotMakingThisUp “Least Helpful Call of the Day.”

The least helpful call you will get today is almost any call associated with InterMune, a biotech darling that did what biotech darling’s do best: failed to impress the FDA with a new drug.

So far, five of Wall Street’s Finest have downgraded the stock from some version of “Buy” to some version of “Yikes.” Oh, and at least one maintained the “Buy” but cut the price target from $55 a share to $15 a share.

We are not making that up.

Either way, their clients will not benefit from such actions. The stock can’t be sold for much more than $10 a share—$35 below last night’s $45.44 trading halt.

“Thanks, guys!”


Jeff Matthews
I Am Not Making This Up


© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.


Saturday, May 01, 2010

Buffett to SEC: “You Have No Case!”




The Berkshire meeting is over. Shareholders have given Buffett and his vice-chairman, Charlie Munger, a standing ovation. And now the parties start.

The ovation is for many aspects of Buffett’s stewardship of Berkshire Hathaway, but mainly it seems his “all-in wager” on the American economy—the purchase of Burlington Northern—looks like it’s already paying off.

The economic pickup that “looked spotty” just a few months ago, Buffett has told us, is picking up steam: rail cars in use are up dramatically. And Berkshire is “net, hiring.”

But the show-stopper came early on, “at the top,” as they say in show business—speaking of which, what was George Lucas doing in the Berkshire director’s section before the meeting began?—when Buffett defended Goldman Sachs…and forcefully.

No, Buffett didn’t actually say to the SEC, “You have no case,” but neither did Gerald Ford actually say to New York, “Drop Dead!”

And yet both men might as well.

Carol Loomis asked the Goldman question right out of the gate, without mincing words—reminding Buffett of his famous, and often-repeated “lose a shred of reputation and I will be ruthless” video from the Salomon Brothers days—and Buffett responded without mincing words.

To be continued…


Jeff Matthews
I Am Not Making This Up


© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.