15
TUESDAY, APRIL 26, 2011
analysis
Is Buffett’s teflon finally wearing off? By Ben Berkowitz side from maybe the odd cheeseburger stain on his tie, nothing much sticks to Warren Buffett. Whether his underlings are convicted of helping insurance companies inflate results or a major company he helps oversee is sanctioned for accounting shenanigans, his admirers don’t seem to care. Or at least, they haven’t historically. But with a key Buffett lieutenant resigning under a cloud recently, some sophisticated investors are no longer willing to overlook the obvious. For all the shareholders who still consider Buffett the epitome of American capitalism, there are others who wonder whether the time may be near for Buffett to take a graceful bow and exit the stage. Some will clamor for that this weekend, when 40,000 of his shareholders prepare to descend on Nebraska for the annual meeting of Berkshire Hathaway, the ice-cream-toinsurance conglomerate he runs with absolute authority. “I want to hear more about Sokol, I want to hear more about how they’re going to outperform the markets. I want to hear about what (Buffett’s recent) trip to India leads us to believe about how the money is going to be invested in the future,” said Michael Yoshikami, chief executive of wealth management firm YCMNET Advisors and a widely quoted Berkshire shareholder. Investor disappointment reflects not just the revelation that David Sokol, once Buffett’s presumed successor as chief executive, bought stock in a company he then pushed Buffett to acquire. It is also because of Berkshire’s lackluster performance recently, and questions about the firm’s ability to thrive after its octogenarian chairman and chief executive moves on. Berkshire Hathaway has grown exponentially over decades, but many investors question how it can possibly do as well in the future. With the dozens of companies that Berkshire Hathaway owns having had relatively little oversight for years (by Buffett’s own proud admission), some wonder how much earnings power Berkshire actually has and whether future earnings can be as strong as past. “Obviously Berkshire has intrinsic value but now I have to question that intrinsic value,” said Janet Tavakoli, an expert on derivatives and author of “Dear Mr Buffett,” a 2009 book laden with fulsome praise for the legendary investor. Tavakoli, like many others, has revised her thinking sharply in the intervening years. Yet she, like so many others, added an important caveat about Buffett: “(His) brand is so powerful you are reluctant to question.”
A
Sokol Affair By now the details of Sokol affair have been told many times. Citigroup bankers pitched a long list of companies to Buffett’s presumed successor, and he told them he thought Lubrizol Corp, which makes lubri-
cants and other chemicals, might make a good acquisition target. He started buying up shares for his own account, and after building up a $10 million position he pushed Buffett to buy the company. As Buffett put it, Sokol made only a “passing” mention that he owned some Lubrizol shares. Sokol made about $3 million on the trade, perhaps at Buffett’s expense. Buffett has been called to task for how he handled the matter. In a letter to investors, he announced Sokol’s resignation, explained the stock issue and offered a grant of absolution: “Neither Dave nor I feel his Lubrizol purchases were in any way unlawful,” he wrote. Less than three weeks later, the first shareholder suit was filed, accusing Berkshire’s board of breaching its fiduciary responsibility. More are expected, particularly from bigger firms with a track record of winning large settlements for shareholders. Governance experts say Buffett blamed the sin but not the sinner. “ The response wasn’t as strident as ... I would have hoped for in suggesting that personal stock transactions that are related to corporate stock transactions are problematic and not the sort of thing that the company thinks is a good idea,” said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. “And I would hope in these situations that you would be pretty tough on that in your response.” Some of Buffett’s biggest investors also say he should have chastised Sokol or told him to sell his stock. What is murkier, however, is the question of whether Buffett actually did anything wrong from a legal standpoint. “There’s a lot of very problematic behavior here that doesn’t easily find an explanation, so the question remains, what in fact was going on here?” said Harvey Pitt, chief executive of Kalorama Partners and the former chairman of the US Securities and Exchange Commission. “Why would somebody be allowed and be deemed to have acted properly in profiting to the tune of $3 million based on his privileged position at the company?,” Pitt added. It wasn’t the first time that Buffett has been close to people
behaving questionably. But few of his investors have cared, and the damage to his reputation seemed slight if at all. In 2008, for example, the government won convictions of four executives from his reinsurance business for helping other insurers inflate their results. The nearly uniform reaction from legions of Buffett fans around the world: yawn. And in 2005, the SEC sanctioned the Coca-Cola Co, whose audit committee Buffett sat on, for inflating earnings. His admirers barely batted an eyelash. ‘That’s My Guy’ Buffett, of course, benefits mightily from his folksy image. After all, it’s tough to imagine how someone who drives himself to work and stops at McDonald’s for a bite on the way home can also be guilty of high crimes of finance. “Warren Buffett works very hard reflecting an image that 300 million Americans, six billion people around the world say, ‘That’s my guy. That’s the way I’d like to be like.’ And he works very hard at that - not every week or every month, but every day. And I think by working hard at it every day, he drives that image hard into people’s minds,” said Robert Dilenschneider, a public relations executive who heads the Dilenschneider Group in New York. The audience at the annual meeting is one of the tools he uses to burnish his reputation. There is no better financial television than footage of Buffett having an ice cream at (Berkshire-owned) Dairy Queen, with hordes of investors thronging him and hoping he might drop a stock tip on the floor with the crumbs of his vanilla cone. It is hard to interrupt that storyline. “With the cash that he was able to squeeze out of that dying textile business (Berkshire Hathaway) and astutely reallocating it year after year after year, the business grew from $18 a share to $120,000 a share,” said Roger Lowenstein, author of a well-regarded 1995 Buffett biography and a number of other finance books. “I have no doubt that he’ll be regarded as the investor and probably the financier of the era. This incident sort of tells people
that he’s human.” Performance Under Fire While many would agree with Lowenstein on Buffett’s place in financial history, his returns of late have not necessarily matched his reputation. Berkshire shares have only barely matched the S&P 500 since Sept 2008, the depths of the crisis and the time Buffett made some of his most lucrative bets, like buying Goldman preferred shares that threw off more than $15 a second in dividends. Just this year, Berkshire has underperformed the S&P 500 by about 4 percent. Buffett has said returns will slow, so it does not necessarily come as a surprise. There is expected to be less reluctance to question him this year in Omaha. Author Tavakoli said shareholder dissatisfaction was already palpable at the last meeting she attended in 2009, as Buffett went on about his bet on Wells Fargo and investors grumbled that he was not talking about the “crony capitalism” they saw behind the crisis-era bailouts. “It seems as if Warren Buffett has sort of lost touch with the tone of the people who invest in Berkshire Hathaway and their sentiment,” she said. The Q&A session will again be moderated by financial journalists this year, so even if investors don’t ask tough questions, reporters may. Words like “contentious” and even “raucous” are being thrown around. And yet, some investors still do not expect much. “I don’t expect any great revelations but what I want is not necessarily what I’m going to get,” said YCMNET’s Yoshikami. Yet he still expects the annual meeting to be a “lovefest”, given the overwhelming number of shareholders who flock to Omaha annually for nothing more than pearls of Buffett’s wisdom (and perhaps some discount pearls from his jewelry business, one of a number of Buffett companies to offer steep shareholder discounts over the course of the weekend). Yoshikami said that if Buffett gets away from the Sokol episode unscathed, it will be because he has banked sufficient goodwill with investors in the past. “When you have an inventory of transparency that you can fall back on I think you get the benefit of the doubt,” he said. “I think when you self-disclose enough and you have a reputation for self disclosing it buys you some reputation credits.” But no matter what Buffett says or does in Omaha, there is a growing realization that the old days have slipped by. Buffett and his partner, Charlie Munger, are aging, the questions about the future of the conglomerate are getting louder and people are recognizing, as they do, that all good things have to come to an end. “The passage of time is hitting home. This year is the end of Berkshire as it used to be,” said Alice Schroeder, a former stock analyst who wrote what many view as the definitive biography of Buffett. “It will never be the same. Even if people think Buffett’s not going to address all these issues and the questions won’t be as tough as they should be, Berkshire as it used to be is over,” Schroeder said. — Reuters
Lockerbie shuns limelight as Libya unravels By Raphael G Satter ne winter’s night in 1988, dozens of bodies fell from the sky onto the green fields surrounding a small stone church a few miles outside this Scottish town. A Boeing 747 had blown up over Lockerbie, scattering its doomed passengers and crew across the countryside. That moment, and the ones that followed, turned Lockerbie into a byword for international terror. Pan Am Flight 103’s nose cone, lying on its side just across from the Tundergarth church’s moss-streaked graveyard, became the disaster’s unforgettable symbol. Ever since, the town of about 4,000 has been trying to heal and draw a veil over the tragedy that just happened to take place above it. “It’s over 20 years ago, but it’s still very real,” said Moira Mortimer, the church’s treasurer. She recalled the warm food she and others cooked for the workers hunting for corpses, and the red blankets local farmers used to cover the bodies of the pilot and co-pilot. The past can be difficult to leave behind, particularly when the present butts in. In recent weeks, the regime of Libyan leader Moammar Gadhafi, which years later would accept responsibility for the bombing, has unraveled. Armed conflict has spread throughout the North African country. International powers have intervened. And the name that keeps coming back is Lockerbie. For the world, it means one thing: an evil act that killed all 259 people on the plane and 11 on the ground. For the people here, the word means something else: home. In many ways, Lockerbie is a perfectly ordinary town. It’s dominated by a big boxy supermarket, and its position along the London-to-Glasgow road means it has long supported a respectable hotel trade. Sawmills feed the newly completed wood-burning power plant, Britain’s biggest, while agriculture remains one of the area’s most important employers, particularly the dairy industry. Lockerbie butter, produced by the local creamery, used to be served on airplanes with the town’s name written across the packet. But the reminders of 1988 dot the town. The town hall, which served as a makeshift morgue for Lockerbie’s victims, has a stained glass window bearing the flags of all 21 countries whose citizens died in the attack. At Sherwood Crescent, a simple landscaped garden marks the small side street almost completely consumed in a fireball caused by the plane’s fuel-laden wing. A mile from the center of town, the official memorial garden in Dryfesdale Cemetery has slabs of Finnish granite inscribed with the victims’ names. A recent visitor found it arrayed with stones, coins, pictures of Catholic saints and a small, faded American flag. A card, covered in a rain-spattered plastic bag, said: “Life is so short, like the wind on a bird’s wing.” Another, more faded, was signed “Mom and Dad”: “Dearest Sarah,” it said, “You stand at the gate of the quiet place. Wait for us.” Lockardians, as the townspeople are called, had known tragedy in the past. At 11:25 pm on May 14, 1883, a collision at Lockerbie railroad station involving the Glasgow Express left seven people dead and dozens badly injured. Today, at the cozy, halogen-lit Lockerbie Library down the street from the station, microfilmed local newspapers from 1883 carry eulogies made eerie in the context of today. “Who could have imagined,” the Rev A D Campbell told his church congregants, “that when that train, filled with hundreds of human beings, started amid merry jokes and good wishes and pleasant partings of friends and relatives, that it would never reach its journey’s end, and that some of its passengers would in a few short hours be hurried into eternity?” Flight 103, “Clipper Maid of the Seas,” blew up four nights before Christmas. Many of its passengers had left London to be with family for the holidays. Campbell offered Lockardians a
O
prediction which now resonates even more: “The name of our little town has become known to all Europe, and for the future will be associated in the minds of many with nothing but the most harrowing scenes and the most painful feelings.” Lockardians are welcoming people, but walk up to someone and ask about the situation in Libya today, and the response is likely to be something like: “I don’t want to talk politics.” John Gair, a 75-year-old retired history teacher, is watching the developments in Libya but doubts they will provide many answers. He says people here avoid the media because of bad memories of 1988, when 1,000 journalists descended on the town, thrusting cameras into every stricken home. “A lot of people,” Gair says, “have felt that they just want to get on with their lives.” Even Marjorie McQueen, a former councilwoman often quoted in the press, said she had no comment on the recent events in Libya. Nor did she want to discuss Scottish prosecutors’ effort to get information out of Libya’s former Foreign Minister Moussa
on the sidelines of an evening soccer game outside Lockerbie Primary School. “‘So what happened?’ ‘What was it like?’ ‘How do you feel about it?”‘ said James Murray, 16, reeling off some frequently asked questions. They don’t bother him, he says; they’re just part of being from this place. And if Flight 103 had never happened, the only question he might hear is “Where’s Lockerbie?”“It wouldn’t even be on the map.” Tundergarth, the parish where the nose cone landed, is about five kilometers from Lockerbie, along a winding road through deep green pasture, forests, hedges and stone fences. Sheep and horses stand stock still as visitors walk past. Just past a bridge that spans a fast-running river known as the Water of Milk, Tundergarth’s late Gothic steeple looms over the top of a hill. The church has been closed for years, but the memorial room, a small square stone structure, was unlocked on a recent day. Motion-sensitive lights illuminated a copy of “On Eagle’s
In this Dec 1988 file photo, a police officer walks past the wreckage in Lockerbie, Scotland of Pan Am Flight 103 from London to New York. – AP Koussa, whom some accuse of having a hand in bringing down Flight 103. “Quite a lot of people would be reluctant to talk, to be honest,” McQueen said. “We don’t feel it has anything to do with us.” Lockerbie would much rather people asked about its Roman ruins, its castles, its stately homes; the nearby birthplace of John Paul Jones, the father of the American navy; and Lockerbie Manor, where the Marquis of Queensberry invented the rules of boxing. “Lockerbie is known for one night, but people have been here for 6,000 years,” said Joanne Dalgleish, a steward at Dryfesdale Lodge, a visitors’ center which stands outside the memorial. The library carries an oral history of Lockerbie, “An’ Then The World Come Tae Oor Doorstep.” It’s full of people who, like Elizabeth Jane Crawford, lament that their town has been linked enduringly to calamity. “It’s not that quiet, little, anonymous place that I grew up with,” Crawford said. Youngsters born well after the bombing accept outsiders’ curiosity as a fact of life. “We’re famous, but for a sad reason,” said 15-year-old Stuart Rankine, who was hanging out with friends
Focus
Wings,” a book that carries the names, photographs and life stories of the bombing’s victims. A huge guest book contains thousands of messages, the most poignant addressed to the dead by their relatives. “I miss you so much brother,” one says. “It doesn’t get any easier. I am having a baby which would be your niece or nephew. I wish so much that you could be here.” The notion of moving on, of “closure,” seems so paramount here. But families of the victims argue that too many questions remain unanswered. Dr. Jim Swire, whose daughter Flora died in the attack, is one of several British relatives who contend that the only man convicted of the bombing - Libyan agent Abdel Baset Ali al-Megrahi - was innocent, the victim of a flawed US investigation and a miscarriage of Scottish justice. For years, Swire has pressed for a public inquiry. With Libya back in the news, he has returned to the TV screens and camera crews have returned to Lockerbie. Swire, who doesn’t live here, says he believes many in the town are weary of his frequent media appearances. “They would much rather that the atrocity was forgotten, and of course so would I,” he said. —AP
Nigeria unrest about poverty, not religion By M J Smith he explosion of deadly unrest after Nigeria’s presidential election saw clashes between Christians and Muslims, but had more to do with poverty in the country’s north than religion, analysts said Sunday. Observers have hailed the April 16 vote won by President Goodluck Jonathan as a major step forward for Africa’s most populous nation, which has been trying to break from a series of deeply flawed ballots. But that did not stop the rioting that began sporadically last weekend before spreading rapidly across the mainly Muslim north, with mobs taking to the streets, burning houses and shops, and hacking victims with machetes. Authorities have declined to provide a death toll out of fear of provoking reprisals, though hundreds are believed to have been killed. Curfews and military patrols have largely restored calm, but there are concerns over governorship polls set for Tuesday in most of Nigeria’s 36 states. The election exposed deep divisions in the country, whose 150 million population is roughly divided between Christians and Muslims. The north is mainly Muslim, while the south is predominately Christian. There are some 250 ethnic groups, but three main ones: Yoruba, HausaFulani and Igbo. Jonathan, a Christian from the south, defeated his main rival, ex-military ruler Muhammadu Buhari, a northern Muslim, by a score of 57 percent to 31 percent. The unrest saw churches burnt and Muslims targeted in reprisal attacks, and Jonathan went as far as to say the violence was a reminder of the events before the country’s 1967-1970 civil war, which killed more than a million people. Concerns have been raised over the potential for militant Islam to take hold in the north considering the poverty there. In one of the diplomatic cables recently released by WikiLeaks, a top US diplomat expresses fears over the potential for radicalism in the north, saying Nigeria could be a “future Pakistan”. But to call the recent violence the result of religious extremism would be to misunderstand it, analysts say. A range of factors are believed to have ignited the rioting - none of which strictly involve religion. “I think the bigger issue is poverty, and there is poverty in ways that are even more pronounced in the north than in the south,” said Clement Nwankwo, head of the Policy and Legal Advocacy Centre. “So some of this is really the desperation and the frustration of people who can’t find hopes on the horizon. It’s gotten to the point where they feel that their leaders are part of the problem.” One fact that analysts point to: nor thern Muslim leaders were among those targeted by the rioters since they are seen as in bed with the corrupt. Nigeria is Africa’s largest oil producer, but has long been held back by deeply rooted graft. The burning of churches and mosques should not be taken as the work of religious extremists, but as mobs unleashing their fury and attacking symbols of the other side, analysts say. Nigeria’s north has long been economically marginalised when compared to the oil-rich south, feeding animosity. The problem was exacerbated when Jonathan took over as president in May 2010 following the death of Umaru Yar’Adua, a northern Muslim, causing further bitterness in the region over its loss of power. Nigeria’s north also has a high number of unemployed youths, analysts point out. “This is a spectacularly young community, and no effort is being made ... to lift people out of these depths of desperation,” said Chidi Odinkalu of the Open Society Justice Initiative. Many in the region turned their hopes to Buhari, though some say he offered no real program to change their situation. How the unrest began is a matter of dispute. Initial reports indicated the first targets of the riots were ruling party members in the north suspected of rigging. There have also been claims that some of the early attacks involved ruling party supporters themselves targeting more senior members because they had not been paid what they were promised for election duties. Whatever the reason, it quickly fed on itself and Buhari supporters took to the streets. The unrest took on a sectarian slant since those who consider themselves the indigenes of certain areas went after those seen as the more recent arrivals - despite the fact that many have been there for generations. That led to reprisals and a repeat of a violent cycle - often stoked by politicians in the struggle for local power - that has plagued parts of Nigeria for years. Jibrin Ibrahim, head of the Centre for Democracy and Development, said Jonathan must find a way to include the north in his plans so the country can heal. He said the president was right to point out similarities between the run up to Nigeria’s civil war and the unrest. “Those things are easy to start, but sometimes they’re difficult to stop,” said Ibrahim. “There’s a possibility that they could just go on, and before you know it the whole country could be in flames.” — AFP
T