Sunday, April 3, 2011

Does Warren Buffett Have the Media Hoodwinked, Again?

I think so.

The attacks on Warren Buffett have been merciless in recent days for the way he has handled the David Sokol situation.

Sokol was a top Buffett aide who was in the running to replace Buffett as CEO at Berkshire Hathaway, that is until he scooped up nearly 100,000 shares of Lubrizol stock and then a week later pitched  Lubrizol as a  takeover candidate to Buffett. Buffett didn't bite, so Sokol pitched Buffett again, this time Buffett bit hook line and sinker. Sokol cleared $3 million plus on his side purchase. Only Buffett knows (and perhaps Charlie Munger) about how Buffett really feels about Sokol's side trading.

Buffett issued a letter/press release about the situation which Buffett claims answers all the questions. I have already pointed out that it does no such thing. Most journalists are taking the position that Buffett was too soft on Sokol, and hint that Buffett may be losing it.I don't think that is the case at all.

I think the way Buffett is handling things shows just the opposite, that Buffett is at the top of his game and has pretty much everyone snookered.  First for those who think Buffett is not tough enough to fire a top executive, I recommend they talk to John Gutfreund.

Buffett in his letter is doing two things. He is cutting ties completely with Sokol, so that Sokol will have to sink or swim on his own with any investigation, but he is also tipping Sokol off as to how he will testify about Sokol should the SEC ask.

What is telling in the letter is that Buffett explains that he received Sokol's resignation letter via a Sokol assistant. This puts even more distance between Buffett and Sokol. Buffett even tells us he was surprised by Sokols letter, which happens to also conveniently cut Buffett out of the loop of any discussions with Sokol about how the resignation would go down.

So if there wasn't any discussion between the two of them, Sokol has to wonder what is Warren going to say if he is questioned by the SEC or DOJ. Buffett certainly knows this, but again we are dealing with a very clever guy in Buffett. He is not going to go over to discuss this with Sokol, Sokol is more radioactive right now then the Fukushima nuclear plant.  But if he wants to get a message to Sokol that Sokol need not fear Buffett testimony (if it comes to that), why the very clever Buffett does so in a letter/press release that establishes exactly what he is going to say to the SEC or DOJ if they question him.

Buffett specifically writes in the letter/press release:
I have held back nothing in this statement. Therefore, if questioned about the matter in the future, I will simply refer the questioner back to this release. 
I guarantee, no one was more relieved to read that then David Sokol.These two sentences, as was most of the letter/press release aimed directly as Sokol. Buffett is telling Sokol exactly how he will answer questions. It's all in the statement says Buffett. In fact, it ties Buffett down to testifying that way. He is signalling Sokol that Buffett is not going to bury Sokol with the regulators.

So why is Buffett doing things this way and not the way he did with Gutfreund, where Gutfreund was fired and his multi-million dollar payout stopped? Because, Gutfreund, though then head of Salmon Brothers, had little clue as to what went on in Berkshire's headquarters in Omaha. He was no danger to Buffett or Berkshire.

Sokol is a different story. He was being considered as a replacement for Buffett. Sokol knows Berkshire operations. And while it is highly unlikely that Berkshire does anything close to illegal, it is certainly also a fact that Berkshire is a huge multi-billion dollar conglomerate that if you wanted to somehow create a show trial, given the ways laws and regulations are written these days, you could probably do so.

During any investigation, you don't know how someone will hold up to the pressure. Sokol already, just from the media pressure, claimed that Buffett's partner Charlie Munger did the same kind of trading that he did, when the circumstances were entirely different.

Bottom line: Buffett doesn't need a loose canon running around out there, especially if that loose canon is suddenly interviewed by authorities. Buffett's letter made it clear to Sokol that he has nothing to fear from Buffett's testimony about him, should it come to that. It is a big step in neutralizing Sokol against trying to damage to Buffett or Berkshire to save his own neck.

Buffett played this exactly the way a shrewd billionaire should play it. Billionaires really do think different than the rest of us, that's how they get to be billionaires. And one thing shrewd billionaires do is make sure that no one close to headquarters is pissed off at them, if the can help it at all. People close to the billionaire commodities trader, Marc Rich, tell me that when he was still active (even before he had his run in with the law) that he would never ever fire anyone at headquarters, even a secretary, without first finding the person another job. He just didn't want people roaming around who could potentially cause trouble.

Buffett may, or may not, be steaming about what Sokol pulled off, but he is sure as hell is not going to risk himself or Berkshire Hathaway to help out David Sokol.  Buffett wrote the letter the way he did because it was strategically the best way to handle it for the benefit of Buffett, himself, and Berkshire Hathaway. Buffett isn't getting soft. His mind isn't slowing. He played this like the master player he is.

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