SOS Secret of Warrent Buffett

2008 + Warren Buffett + Goldman Sachs = Unethical

2011 + David Sokol + Lobrizol deal = Unethical

2008 + Warren Buffett + Using Derivatives = Unethical

Accounting issue + SEC query + CFO Berkshaire Hathaway = Unethical

1.0 Transparent Issue & Insider Trading Issue

I would have no way of knowing for certain that Sokol would bring the opportunity to Warren Buffett. I would have no way of knowing for sure whether Berkshire Hathaway would invest in Lubrizol. But if I bought shares in Lubrizol the next day, I would expect that the Citi banker would be investigated by the SEC for passing along insider information, and I would be investigated for trading based on insider information.*

Yet David Sokol, who bought shares in Lubrizol the day after his meeting with Citi's bankers, told CNBC he did nothing inappropriate. His actions were absolutely inappropriate -- front-running is an offense for which a banker or investment banker would be fired.

Berkshire Hathaway has a bigger problem than Sokol's actions. Its reputation has revolved around the lip-service paid by Warren Buffett to a high standard of corporate governance. His actions and attitude to this matter raise serious questions for the future of Berkshire Hathaway. The moral tone set at the top is now being publicly questioned as well as his seeming support of Sokol's actions.

2.0 Accounting Issue

"Despite [the Chief Financial Officer's] objection, the company recorded $938 million in impairment charges in the fourth quarter to reflect declines in shares of Swiss Reinsurance Co., U.S. Bankcorp and pharmaceutical firm Sanofi Aventis S.A."

"Berkshire Wrote Down Stocks After SEC Query," by Erik Holm, Wall Street Journal, March 29, 2011.

The SEC and the financial press may not have noticed that Berkshire Hathaway had the last word: "such losses that are included in earnings are offset by a corresponding credit to other comprehensive income."** Note added April 3: As David Merkel and a commenter have noted, there must be this adjustment to avoid double counting; it is a non-issue other than the original point that Berkshire resisted taking the impairments as a charge to net income. Berkshire had the last word when it came to Kraft and Wells Fargo, two other stocks. Wells is of particular interest since its value has long been touted by Warren Buffett, particularly at the 2009 shareholder meeting. Older purchases have gains, but recent purchases have unrealized losses. There may have been reluctance to highlight the latter by taking the write-down, particularly after the controversy over a September 2008 favorable tax rule implemented by Treasury, I.R.S. Notice 2008-83, to facilitate the Wells/Wachovia merger. Only Congress has the authority to do that, and it was repealed in 2009.

Berkshire Hathaway is a conglomerate, and the nature of accounting for conglomerates is opaque and messy. Warren Buffett's reputation has been crucial to Berkshire Hathaway's perceived value. Investors may now challenge their previous perceptions.


MyView

When it come to business, I guess there is no ETHICAL in the equation. No wonder the elderly always tell us not to judge a book by its cover. Lots of things we look from the surface, and the truth is far from what is the perception. Tiger Wood just do it.