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» Kirk - Warren Buffett's Problem Child

From "Warren Buffett's Problem Child" By Pallavi Gogoi

Excerpts:

Now at the center of a series of investigations, General Re is one of Berkshire Hathaway's biggest buys -- and worst investments

When Salomon Brothers was embroiled in a bond-rigging scandal in 1991, Warren Buffett, its largest investor, took the helm as chairman and chief executive of the embattled company for an annual salary of $1. In testimony before Congress, Buffett said his message to Salomon employees was he would understand if they lost money for the firm. But then he warned of his less-understanding side: "Lose a shred of reputation for the firm, and I will be ruthless."
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How ruthless can Buffett really be? We may soon find out. Fourteen years after his testimony, the Sage of Omaha is faced with a corporate-reputation scandal that may rival the Salomon one. The stink is coming from General Re, a division of Berkshire Hathaway (BRKA ) that's under investigation by New York Attorney General Eliot Spitzer, the Securities & Exchange Commission, and the Justice Dept. over deals it did with insurance giant AIG (AIG ), which is also under investigation.

At issue: the transfer of $500 million of premiums from General Re to AIG during the winter of 2001, which investigators say AIG should have considered a loan rather than revenue. Gen Re spokesman James Heslin says the company isn't commenting on any questions involving the investigations.

STRATEGIC SHIFT? Two former General Re executives have pleaded guilty to criminal conspiracy to commit fraud, while Berkshire has terminated the consulting services of former General Re CEO Ronald Ferguson and placed another senior executive in Europe on leave. On June 13, reports circulated that General Re was in settlement talks with the government.

A key difference between this case and the Salomon one: Buffett is the CEO of Berkshire, 100% owner of the troubled General Re. True, he acted swiftly to assist in the AIG investigation, offering details of the transactions and severing ties with any executives who refused to cooperate with the investigators.

But will Buffett be ruthless enough to cut Gen Re loose? That's unlikely, because he generally keeps hold of the companies he buys. Buffett was unavailable for comment for this article, according to his assistant, Debbie Bosanek.

Still, if Berkshire's stock continues to suffer because of General Re, Buffet may have to rethink his strategy. Berkshire's "A" shares have fallen 7% so far this year, recovering 1.26% on June 13 on news of the settlement talks. "Reputation and character are more important to Warren than anything," says Robert Miles, an investment adviser, Berkshire shareholder, and author of several books on Buffett. "He certainly won't tolerate any misbehavior."

Rest of story: http://www.businessweek.com/bwdaily/dnfl...

Buffett has offered prosecutors all possible assistance with their current investigations. That could translate into better settlement terms for Gen Re and help Berkshire -- and Buffett -- save face.

-- posted by Kirk