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» Kirk - Probe shrinks Buffett premium
.Probe shrinks Buffett premium
Excerpts:
On Reputation and honesty:
Four decades after Buffett bought Berkshire Hathaway Inc., now a holding company worth $129.9 billion, his reputation for honesty and openness is threatened as never before by a wave of federal, state and international investigations of Berkshire's General Re Corp., the largest U.S. reinsurer.
"I know it bothers Warren a lot," says Robert Soener, 80, a retired Omaha stockbroker and Berkshire investor who has been a friend of Buffett since the 1950s when the two taught an investment class at the University of Nebraska at Omaha. "Even if he comes out -- and I know he will -- clean as a whistle, there's still going to be that stigma, not to the stockholders, but to the outside."
On Valuation and performance:
Shareholders say they worry that the premium Buffett brings to Berkshire's bonds and stock may be eroding. The company's borrowing costs are rising, and shares have fallen 4 percent this year.
On Reinsurance:
Now, New York Attorney General Eliot Spitzer, the U.S. Securities and Exchange Commission and the U.S. Justice Department are all examining reinsurance deals of Stamford, Conn.-based General Re.
Spitzer filed a civil complaint May 26 against New York-based American International Group Inc. and its then-chief executive officer, Maurice "Hank" Greenberg, accusing them of accounting fraud. The complaint said General Re "created false and misleading documentation to satisfy Greenberg's illicit goals" in 2001 to manipulate the financial statements of AIG, the world's largest insurer. Joseph Brandon, General Re's CEO, declined to comment. Greenberg's lawyers issued a statement denying Greenberg had engaged in "any fraudulent conduct."
Also on May 26, Australian regulators said the Australian unit of Zurich-based Zurich Financial Services AG used reinsurance transactions with Cologne-based General & Cologne Re Group, a unit of Berkshire's General Re, to overstate 2000 profit by A$61 million ($47 million). The Sydney-based Australian Prudential Regulation Authority didn't say if General & Cologne knew how its policies were being used. Mark Westfield, a spokesman for General Re in Australia, declined to comment.
The investigations of reinsurance -- coverage one insurer buys to share the risk of underwriting losses with another insurer -- pose high stakes for Buffett. The probes might disrupt General Re, the largest of Berkshire's insurance divisions, which Buffett called "the propellant of our growth" in his annual shareholder letter released March 5.
Investors fear the scrutiny will lead to unwarranted penalties on reinsurers, says Thomas Russo, a partner at Gardner Russo & Gardner in Lancaster, Pa., which has about 15 percent of its $2 billion under management in Berkshire shares.
On corporate governance:
The probes might also increase pressure on Buffett to alter Berkshire's governance policies and the makeup of its board. They could as well challenge the acknowledged hands-off way he manages the company's 65 operating companies from his offices in Kiewit Plaza, an unassuming gray building across from an Omaha strip mall.
"He has a very iconoclastic view of corporate governance that I don't think anyone but Warren Buffett could get away with," says Patrick McGurn, senior vice president of Rockville, Md.-based Institutional Shareholder Services, which advises fund managers on governance.
"That could come back to hurt them as people look at reinsurance practices at Berkshire," says McGurn, 44.
Among Buffett practices cited by McGurn: Selecting a board that, aside from Buffett's son, is composed exclusively of business partners and friends -- including Microsoft Corp. Chairman Bill Gates -- and providing little information about who will eventually succeed Buffett as chairman and chief executive officer at Berkshire.
I'm sure Warrenn Buffett will come out all right after all this clears, but the huge premium he's had just for being "The Oracle of Omaha" has been evaporating which means people who've invested in his company in recent years have far less to cheer about than those who invested with him when he was much, much smaller. In the end, being big can hurt you.
I've heard Buffet said he could get 50% a year returns if he "only" had $1M a year to manage. I wonder now if he means 15% a year compounded given his feelings the markets don't hold the value they once had? I calculate Buffett has only generated 2.7% annual returns since 12/31/98. Check my math, but I think he'd be quite pleased with 15%.
As of 6/11/2005 since 12/31/98
Total Return Annualized
My newsletter portfolio is up 149.3% 15.2%
While they S&P500 is only up 6.4% 1.0%
and the Nasdaq Composite is down (5.9%) (0.9%)
and Warren Buffett's BRKA is up 18.6% 2.7%
[Warren Buffett lost 20% in 1999 while the markets went up 24%. I made 77% in 2003 but gave back 4% in 2004 for a two year, 30% annualized return. Both of us have had off years while our longer-term results are impressive. I show 6+ years since that is how long it has been since my newsletter portfolio was first in print. Mark Hulbert says you want 10 years to really evaluate a newsletter for performance, but I think I have a good start after nearly seven years. ] Even if you don’t market time or buy individual stocks, my newsletter offers quite a bit of useful information and tables (Discussion of interest rates, The Fed Model, etc.) which many say are worth the price of the subscription on its own. Show your support for my work at Suite101.com and become a subscriber today! Support Suite101 and Buy The Bond Book: Everything Investors Need to Know About Treasuries, Municipals, GNMAs, Corporates, Zeros, Bond Funds, Money Market Funds, and More
by Annette Thau
-- posted by Kirk
» Kirk - Warren Buffett's Problem Child
.General Re is one of Berkshire Hathaway's biggest buys -- and worst investments
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
» Kirk - $25K to Dine with Buffett
.A meal with the “Oracle of Omaha” will be up for bids on the Internet auction site eBay from Thursday to June 30.
Bidding starts at $25,000, and proceeds will go to the Glide Foundation, which works with the poor and homeless in San Francisco.
Buffett will have lunch with up to eight people at a mutually chosen restaurant in Omaha or New York.
It marks the third year Buffett has auctioned a lunch on eBay and donated the proceeds to the foundation. Buffett began auctioning the lunches for the charity off-line in 2000.
-- posted by Kirk
» Kirk - Buffett: derivatives "financial weapons of mass destruction"
.Now it is first hand experience.
Another Bad-News Bear?
By DANIEL KADLEC
Warren Buffett may be the greatest investor ever. But his long-term philosophy, which was ridiculed as he avoided the dotcom boom--and vindicated as he avoided the bust--is being scrutinized once more. The buy-and-hold billionaire is up to his ears in exotic investments known as derivatives, which are used to bet on things like the weather and the direction of interest rates. Derivatives were at the core of the 1994 bankruptcy of California's Orange County and the 1998 demise of hedge fund Long-Term Capital Management. Buffett once called derivatives "financial weapons of mass destruction," so you'd think he would steer clear. But his company, Berkshire Hathaway, has acknowledged a $307 million pretax loss in the first three months of this year that's due to a $21.4 billion position in "currency contracts," which are derivatives that hit pay dirt when the dollar falls. Problem is, the dollar is rallying. The greenback--up 4% against the euro in the first quarter and an additional 8% since then--shows no signs of stalling, and Jim Bianco of Bianco Research estimates that Buffett's losses this year have surpassed $1 billion.
Sweden surprised the world last week by cutting interest rates, which could trigger rate cuts throughout Europe and a falling euro. Yet Buffett has indicated that he's sticking with his bet. "There's no change in the underlying factors affecting currencies," he said, adding that in the long run, the U.S. trade deficit must weaken the buck. It's not all bad news for Buffett fans. He first bet against the dollar as it was falling in 2002 and remains in the money overall. But with his gains eroding, dreaded derivatives may claim the biggest victim yet.
<img src=http://stockcharts.com/def/servlet/Sharp... width=520 height=468>
-- posted by Kirk
» Kirk - EBay Bidder Pays $351,100 For Lunch With Buffett
.EBay Bidder Pays $351,100 For Lunch With Warren Buffett
Fri Jul 1, 2:44 PM ET
A bidder on EBay Inc. has won a power lunch with billionaire investor Warren Buffett for $351,100.
The auction ended Thursday night and the winner was identified as "hanka3153." Bidding had started at $25,000.
Money paid to spend a bit of time with the chief executive of Berkshire Hathaway is going to the Glide Foundation, a charity group that works with the poor and homeless in San Francisco. Buffett has hosted lunches over the last several years to benefit Glide.
The winner will be able to take up to seven friends to the lunch, which will be in either Omaha, Neb., where Buffett lives; or in New York. Buffett and the winner would select a time, date and location.
The package does not include travel and accommodations, but is tax deductible.
As of 6/30/2005 since 12/31/98
Total Annual 2005
Return -ized YTD
My newsletter portfolio is up 163.1% 16.0% 1.3%
While they S&P500 is only up 5.9% 0.9% (0.9%)
and the Nasdaq Composite is down (6.2%) (1.0%) (5.4%)
and Warren Buffett's BRKA is up 19.3% 2.8% (6.4%)
- BKRa is Legendary Warren Buffett's Berkshire Hathaway
- Click for a free issue of my newsletter
- Suitable for the aggressive growth part of your diversified investment portfolio or the “Explore” part of your “Core and Explore” strategy.
- Portfolio Beta < 1.50 vs 1.88 for QQQQ(5 yr).
This means I’ve beaten the pants off the Nasdaq while taking less risk than owning QQQQ!!!
Even if you don’t market time or buy individual stocks, my newsletter offers quite a bit of useful information and tables (Discussion of interest rates, The Fed Model, etc.) which many say are worth the price of the subscription on its own. Show your support for my work at Suite101.com and become a subscriber today!
-- posted by Kirk
» Kirk - Buffett views PacifiCorp as long-term investment
.I would not expect him to say anything else, but I can see why he can make this investment (hint: BRKA does not pay a dividend.)
Buffett views PacifiCorp as long-term investment
Famed investor promises to put money into improving utility
http://www.gazettetimes.com/articles/200...
By The Associated Press
BOISE, Idaho — Warren Buffett has promoted his proposed $9.4 billion acquisition of PacifiCorp to regulators who must sign off on the transaction, saying he wants to build the Portland-based utility, not run it as a profit machine.
On Monday, Buffett spoke to the Western Conference of Public Service Commissioners, a group of state regulatory agencies, at their annual meeting in Boise.
MidAmerican Energy, the utility Buffett controls through his investment company, Berkshire Hathaway, announced May 24 that it had agreed to buy PacifiCorp from its parent, Scottish Power, for $5.1 billion, plus the assumption of $4.3 billion in debt.
The company operates as Utah Power in southeastern Idaho.
Buffett, aiming for his biggest purchase since 1998, is targeting the 1.6 million-customer PacifiCorp because utility companies typically generate high operating cash flow. To complete the transaction, he must overcome hurdles such as a 1935 federal law, the Public Utility Holding Company Act, that places some restrictions on utility mergers.
Some analysts say Berkshire Hathaway may have to cut its 80 percent stake in MidAmerican in order to persuade regulators to sign off on the transaction, though Congress may give Buffett some help. Proposals are being considered in Washington, D.C., to repeal the Depression-era law.
"The people of Idaho are going to know that there's going to be money put into the business, and that they'll have just one owner,'' Berkshire told reporters after a midday speech to the regulators. "We're going to put every dime into the company that's needed.''
Buffett has said he could spend up to $10 billion to buy utilities if the 1935 act is repealed.
MidAmerican, based in Des Moines, Iowa, has said the deal will create an energy holding company serving about 3 million electric and natural gas customers in 10 states and would have 6.6 million customers worldwide.
That includes 60,000 customers in Idaho.
ScottishPower, based in Glasgow, Scotland, wants to unload PacifiCorp, which it bought in 1999, because it would have to invest too much money in power-distribution infrastructure over the next half decade, taking away cash dividends from its investors, company officials said last month.
PacifiCorp needs to spend about $1 billion a year over the next five years, company officials have said.
Regulators from across the West at Monday's conference said they were waiting for official documents to be filed in the proposed transaction before making a judgment about whether Buffett should be allowed to proceed.
The Oregon Public Utility Commission recently rejected a proposed acquisition of Portland General Electric by Texas Pacific Group, an investment company, partly out of concern that the deal would have required the local utility to take on too much debt.
Lee Beyer, chairman of that commission, said the vast wealth of Buffett's businesses — the investor's personal fortune is estimated at nearly $43 billion — would probably eliminate those concerns with this transaction.
Still, Beyer said MidAmerican Energy must prove that its deal for PacifiCorp benefits consumers.
"We don't rely much on luncheon speeches,'' said Marsha Smith, an Idaho Public Utilities Commission member. "We have to rely on evidence in the filing, such as whether (the acquisition) is in the public interest, whether it would benefit the ratepayer.''
-- posted by Kirk
» Kirk - Taxman challenges BNZ deals
.A pattern is emerging.
http://www.nzherald.co.nz/index.cfm?mode...
Taxman challenges BNZ deals
05.07.05
By Gareth Vaughan
The Bank of New Zealand shared the benefits of tax avoidance arrangements with global investment bank Credit Suisse and a subsidiary of Warren Buffett's firm Berkshire Hathaway, the Inland Revenue Department alleges.
The BNZ is fighting tax reassessments dating back to 1998 that left it with a potential liability of up to $518 million - including interest of $102 million - at March 31.
Documents filed in the High Court at Wellington by the IRD and the BNZ show some of the methods used in the alleged avoidance arrangements.
They also show the IRD believes some fees paid by BNZ to Credit Suisse - then Credit Suisse First Boston - and the General Re group of companies, were a mechanism to "share the benefits arising from the tax avoidance".
The General Re group is headed up by Berkshire Hathaway's reinsurance subsidiary General Re Corp. Berkshire Hathaway chief executive Buffett was ranked second last year on Forbes Magazine's list of the world's richest people with a net worth of US$44 billion ($65 billion).
The IRD is also disputing similar "structured finance" deals done by ANZ National Bank, Westpac and ASB. The four Australian-owned together face potential retrospective tax bills of more than $1.7 billion.
The dispute relates to deals where banks borrowed money overseas, channelled it through New Zealand, then invested it offshore.
The BNZ wants the IRD's reassessments overturned - and also wants the tax department to pay its court costs.
The IRD says it is entitled to adjust the taxable income of any party involved in tax avoidance.
Court papers show the BNZ case centres on a series of loans BNZ subsidiaries - BNZ Investments, BNZ International, BNZI Securities No.1 and BNZI Securities No.2 - took out with General Re and Credit Suisse subsidiaries.
The 1998 and 1999 deals saw BNZ buy beneficial interests in two General Re trusts and a CSFB trust each valued at $500 million.
BNZ then paid procurement fees of 2.95 per cent a year on the loans. General Re repurchased BNZ's interest in its trusts, both for $500 million, in 2000 and 2004 and the CSFB group bought back BNZ's interest in its trust for $500 million in 2002.
The IRD alleges BNZ wrongly booked the procurement fees on loans from the US-based institutions as allowable deductions in New Zealand tax returns.
The IRD also claims guarantee arrangement fees paid between BNZ subsidiaries relating to the loans were "part of a tax avoidance arrangement".
The IRD also objects to one of the BNZ subsidiaries claiming tax credit for more than $25 million of tax paid to the US Internal Revenue Service by a General Re trust.
BNZ says it was entitled to a foreign tax credit because this reflects foreign tax paid on its behalf.
The IRD, however, claims this is an "integral" part of the tax avoidance arrangement.
BNZ claims procurement and guarantee arrangement fees in the deals were paid in order to achieve a commercial advantage.
But the IRD maintains: "The fees were a mechanism to maximise tax deductions and share the benefits arising from the tax avoidance arrangement" with the General Re and CSFB groups of companies.
The IRD rejects the BNZ's claim that similarities between the disputed deals and previous approved deals meant it was entitled to expect the green light from the taxman.
This is a claim also made by Westpac in its argument with the IRD.
"A binding ruling is given on a particular transaction and is not a statement of policy on a particular type of transaction," says the IRD. Therefore, the BNZ was not entitled to expect the IRD to treat other transactions, similar or otherwise, in the same way as ones previously approved.
The next pre-trial hearing is set for August 16.
-- posted by Kirk
» Kirk - Berkshire Hathaway Will Acquire RV Co. Forest River Inc.
.I doubt Warren Buffett would buy Forest River Inc. if he felt there was a depression led by the collapse of "the housing bubble" on the horizon.
Berkshire Hathaway Will Acquire RV Co.
07.21.2005, 06:59 PM
Berkshire Hathaway Inc. said it will acquire Indiana recreation-vehicle manufacturer Forest River Inc.
Billionaire Warren Buffett's holding company will buy the company from its founder and chief executive officer, Peter J. Liegl.
Liegl will continue to manage Forest River from its headquarters in Elkhart, Ind. The closely held company employs 5,500 and generated $1.3 billion in sales last year, said Joseph Greenlee, Forest River's chief financial officer.
"We are very excited about the growth prospects of Forest River," Buffett said in a statement. "Pete Liegl and his strong management team have built a remarkably successful company that is well-positioned for further growth.
"Forest River's focus on building quality leisure vehicles at fair prices represents a strong opportunity for the company's dealers and customers throughout the U.S. and Canada."
Joseph Greenlee, Forest River's chief financial officer, declined to disclose the purchase price. Berkshire officials could not be reached for comment.
Liegl said partnering with Berkshire creates a great opportunity for Forest River employees, dealers and suppliers.
"With Berkshire's strong reputation and financial backing, we now have the firepower to make investments and acquisitions at a rate that otherwise would not have been possible," Liegl said.
The acquisition is expected to occur in the third quarter, and Forest River will be a wholly owned subsidiary of Berkshire.
Omaha-based Berkshire is a diversified business with interests in GEICO, life insurance, annuity sales and sales of jewelry.
Forest River manufactures a line of motorized and towable RVs, utility trailers, buses, boats and manufactured houses.
Berkshire's Class A shares fell $179.90, or 0.2 percent, to close at $83,700 Thursday on the New York Stock Exchange.
-- posted by Kirk
» Kirk - Probe Expanded to Its Own Accounting
.Buffett's Berkshire Says Probe Expanded to Its Own Accounting
Aug. 8 (Bloomberg) -- Warren Buffett's Berkshire Hathaway Inc. said authorities who have been probing whether it helped American International Group Inc. improperly record reinsurance policies are also examining Berkshire's own accounting.
Some of Berkshire's insurance units, which include General Re Corp., were asked how they have accounted for a type of reinsurance that can be abused to manipulate earnings, Berkshire said in an Aug. 5 earnings report. The inquiry earlier focused on how AIG, the world's largest insurer, used a reinsurance contract with General Re to overstate reserves for claims by $500 million. Berkshire's second-quarter profit rose 13 percent.
The disclosure suggests state and federal prosecutors may be widening their probe beyond whether Omaha, Nebraska-based Berkshire helped clients such as AIG misstate their finances, said Christopher Bebel, a former federal prosecutor. Buffett said in April that General Re's potential liability rested on whether it had ``knowing participation'' in clients' misdeeds.
``The accounting treatment applied by its own subsidiaries is being questioned,'' said Bebel, who now practices law in Houston. ``Berkshire Hathaway has always been viewed as a company that's above the fray and operates on a higher level.''
Berkshire, built on Buffett's strategy of buying undervalued assets, owns dozens of companies selling products such as insurance, paint, carpet and mobile homes.
``Governmental authorities are also inquiring about the accounting by certain of Berkshire's insurance subsidiaries for assumed and ceded finite transactions,'' Berkshire said in the Aug. 5 financial report, referring to reinsurance -- coverage one insurer buys from another -- that has been both bought and sold by the company. Berkshire is cooperating, the report said.
For the reset of the story: http://www.bloomberg.com/apps/news?pid=1...
-- posted by Kirk
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