Warren Buffett

How Warren Buffett Makes Goldman Sachs Look Good

When Goldman Sachs' reputation as 'honest brokers' started being shredded by their real and perceived actions leading up to, during and after the 2008 economic crash, they had to do something. Fast.

And they did. To show their commitment as citizens, they introduced 10,000 Small Businesses, a $500 million investment "to help create jobs and economic opportunity in the United States."

To be fair, this is a good thing.  Investment is always good - particularly in small businesses.

But don't mistake Goldman's largesse for pure-play money - either their own or others.  According to their materials, the "investment" includes:
  • Practical business and management curriculum
  • Access to capital
  • Critical support and consulting services.

And while that's good, too, they don't specify how much investment goes into each category.

But, they do bring Big Name guests.  Like Warren Buffett.

Buffett, you may recall, saved Goldman's bacon when the crash occurred by lending the firm $5 billion in 2008 when they needed a cash infusion.  That was one seriously good investment for Buffett's Berkshire Hathaway Corporation as it netted Berkshire a $5.64 billion payback less than three years later.

Buffett took a lot of grief from that decision - not least at his annual shareholder meetings. Because Buffett, whose reputation he keeps sterling, was suddenly seen as complicit in helping the company that had become the poster child for greed.

Now, that's in the process of changing.

The 10,000 Small Businesses initiative has graduated its first class of 30 small business owners - and they come from New Orleans.

It's a PR move that can only bring good reactions.  After all, it's Goldman Sachs helping New Orleans which is still recovering from the Hurricane Katrina aftermath - all being fronted by Warren Buffett giving words of encouragement and advice.

That's no small thing.  Buffett is known for making his corporate purchases based as much on the target company's management - and particularly its senior executive team - as he is on the numbers they produce.  Because Buffett always keeps the management team intact.  After all, they created the success. 

Why would he want to get rid of them?

(Full disclosure: One of my client companies was purchased by Berkshire Hathaway.)

Whether Goldman Sachs will ever completely recover its reputation in the eyes of the wider public is still an open question.  But, for the moment, the feel-good factor is there and they're moving in the right direction.

At least as far as small businesses are concerned.

(Originally published on Technorati.)

The Dangers of China - Critical Insight from @thereformedbroker

The following piece, written by Josh Brown, is one of those periodic posts that goes beyond deserving attention.  It's a critical warning for anyone currently doing or thinking about doing business with China.

It follows in its entirety.

The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations.

We are under attack.

Chinese corporate criminals and their US-based enablers are committing Capital Genocide against American investors.  We're not talking about "a few bad apples" or "a handful of exceptions", we're talking about a full-blown epidemic.  Subterfuge and malicious avarice are simply the tools of the trade when many Chinese companies do business with outsiders.

This undeniable Red Collar Crime Wave is larger in scope and financial consequence than any other international criminal enterprise in the history of the world.  We are talking about hundreds of millions of dollars, possibly billions should the Yahoo - Alibaba revelation prove itself to be a harbinger of shocks to come.

At the low end of the spectrum, corrupt representatives of sketchy or even non-existent Chinese companies are conniving their way onto US exchanges via backdoor IPOs, reverse mergers and SPACs.  They are slithering through every exchange and regulatory loophole they can find to raise money and establish their fraudulent beachheads here.  The penalties for Chinese nationals fudging numbers on a local exchange could range from exile to imprisonment to disappearance.  The penalties they face for pulling that stuff here in the US?  I don't know, a letter in the mail?  "Don't ever do it again"?

Mainland Chinese fraudsters are untouchable, they can only be barred or banned from US exchanges once caught, and so they will get away with whatever they can as long as there are investors here who are stupid enough to capitalize them.  And so the ownership of one factory in China becomes the ownership of three for the purposes of a quarterly balance sheet calculation.  The ticker symbols will be cutesy and clever while the names of the companies will almost always include the word "China".  After all, let's not forget that the name of this game is the exploitation of Americans who "want to play the growth".

It has become an absolute free-for-all.

For a nation that was so economically backwards and pathetic that it could barely feed itself 15 years ago, China's executives have certainly come a long way.  They're employing every scam and dirty trick in the book against American corporations and investors while we say thank you and send even more opportunity and cash their way.

I've held my tongue for the last 9 months, watching one scam after another appear on our exchanges.  I've said nothing as these financial landmines have been detonated beneath the feet of whichever unfortunate shareholders happened to find themselves in the wrong place at the wrong time.  No longer.

We'll limit the scope of my rage here to corporate fraud.  For the purposes of this post I'll leave out the Chinese poisoning of America-bound toothpaste, pet food and toys at their manufacturing operations.  I'll also leave out the FoxConn factory at which all the Apple products are assembled, a workplace so abusive and abhorrent that the employees must take an oath that they won't kill themselves.

But no, let's not get distracted here, we should simply focus on the accounting chicanery and falsified filings with which Chinese companies are daily relieving US investors of their capital.

The reverse mergers are by far the most insidious manifestation of the contempt that Chinese companies have for our exchanges and rules.  Working with American law firms and shameless stock promoters, these companies have found a financial engineering solution that lets them steal on our shores.  They've been able to subvert the more highly scrutinized public offering process that would normally have weeded them out.  By "cleaning up" shell companies, which should not be trading or available to begin with, the disease gets a foothold first on the pink sheets and then onto the American Stock Exchange where the real grifting can begin.

White Collar Crime columnist Walter Pavlo has collected a slew of recent examples on his blog at Forbes, including:


  • China Electric Motor – Shareholders lawsuit filed claiming underwriters violated federal securities laws by issuing materially false and misleading information.
  • China Natural Gas – Class action lawsuit alleges directors and officers issued materially false and misleading statements.  CFO of company resigned in late 2010.
  • Duoyuan Printing – SEC investigating company for fraud, NYSE delisted April 4, 2011
  • China MediaExpress Holdings, Inc. – Deloitte quit as auditor because “no longer able to rely on the representations of management”.  CFO resigned. Stock trading halted March 11
  • China Agritech – Shareholder lawsuit pending.  Dismissed its auditor Ernst & Young.
  • China Sky One Medical – Under investigation by SEC.
  • Orient Paper, Inc. – Reauditing previous financials due to license issues with previous auditor (Davis Accounting Group).

The full list is actually quite larger, it includes some of the higher profile blow-ups you may remember with stocks like RINO International and China Green Agriculture - spectacular flame-outs complete with massive insider selling prior to the denouement.

Where are the regulators, you might ask?  They are finally getting involved.  The SEC's Mary Schapiro is aware of the epidemic and is now on the case...

From Barron's:

Since March 2011 alone, she noted, more than 24 China-based companies have disclosed auditor resignations, accounting problems or both – following the auditors' inability to confirm the amounts of cash or receivables shown on the companies' balance sheets. The SEC has recently suspended trading in three Chinese businesses that "reverse-merged" into U.S.-traded shell companies.

The smarter thing to do would be to halt the entire shell company process in its entirety right this minute until we can get the rules up to a standard that will protect investors outright from these foreign liars and thieves.  Capital formation can wait fifteen minutes while we get our act together and crack down on this disgusting shell syndicate.

An even more disturbing development of late is taking place in the large cap arena, in full view of the world's media and the global investor class.  With the success of Baidu and Sina, Chinese technology companies are now finding themselves as the Belles of the Ball.  In at least one case that we are aware of, they are also finding that they can easily mislead their Western partners and shareholders.

Here in the deep end of the pool, newly-minted billionaire Chinese executives are violating contract law, globally accepted corporate best practices and fiduciary responsibility to shareholders.  They are disclosing things when and as they choose.  They are "on the level" in their own government's eyes so long as they are playing fair with their fellow Chinese investors.  This isn't a brand new phenomenon but as the companies involved get bigger, the danger grows.

This week's still-unfolding fiasco involving Yahoo being tricked out of their Alipay subsidiary by Alibaba, a company in which they hold a 43% stake, is just the latest and most outrageous example of what we're dealing with.  Here's what Jacob S. Frenkel, a former SEC enforcement lawyer who is an expert in securities law matters and a partner at Shulman Rogers in Potomac, Maryland had to say (via iChinaStock):

"Yahoo! is a victim, plain and simple.  With all the negative attention that US-listed Chinese companies, this action by Alibaba only makes worse an already difficult situation.  It creates the unfortunate appearance that executives in China may totally disregard their contractual and fiduciary obligations to shareholders.  The important message to US partners and owners is to review the effectiveness and enforceability of contracts under both US and Chinese law."

Yahoo will attempt to sue, but they have lost the asset at the end of the day, an asset whose potential was a big part of the investment thesis for the company to begin with.  US shareholders were pummeled over something that took place in secret seven months ago, escaping everyone's notice.  If major shareholders like Yahoo and Japan's Softbank can be scammed in front of everyone, what chance have any of us got?

The Red Collar crime wave is beguiling American investors both large and small.  These crooks are laughing at our securities laws and manipulating their own.  None of us are immune:

Not the savviest and most seasoned asset managers - see Glickenhaus & Co watch $4 million evaporate as China Agritech blows up.  (Bloomberg)
Not Yahoo, a player in Asian web properties since the late 90's - listen as Alipay's Jack Ma regales us with his tale of how he bitch-slapped the "declining" web portal company.  (iChinaStock)
Not even the diligent Warren Buffett can sleep soundly with his Chinese investments - see how the car company he invested in there (BYD) is essentially a counterfeiter playing games with the rules of the Chinese court system to get away with it.  (Reuters)

Can American investors trade and hold Chinese stocks?  I suppose they can...but they can also practice juggling with live hand grenades and roaring chainsaws...just because you can do something, doesn't mean you should.

I've disagreed with almost everything Donald Trump has had to say during his part-Presidential run, part final humiliation speech circuit this spring.  But where Trump and I do find common ground is in our distaste with how the Chinese do business and the lack of regard they show our companies and investors from almost every perspective.

As long as Chinese corporate officers and executives are going to blow cigarette smoke in our faces as they take advantage both here and on their home turf, I'll gladly sit out.  Until I get the sense that they have an ounce of respect for our investors, I'll watch the pickpocketing from the sidelines and focus my capital and attention elsewhere.

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Deming, Health Insurers and the Myth of Scarcity

There's an absolutely riveting article about the record-breaking profits health insurers are making - even as they increase premiums to their customers by double digits.

How are they achieving these incredible financial feats?  Not only is it because of the usurious fees (with ever-increasing deductibles) they charge, but they are also benefiting from the economic downturn.

People keep paying their premiums, but because of those ever-increasing deductibles - now ranging from $2-4K per year - patients are not going to the doctor.  Or having necessary tests.  Or treatment.

Like for cancer.

Because, in this economy, when so many are one paycheck (at most) away from destitution, going to a doctor is a choice.  After all, you may need that money to pay for an unjustifiably priced gallon of gas so that you can get to work.

Unjustified, that is, if you're anyone other than an oil company.

It's gotten to the point that even the shareholders don't feel as strongly as before about the levels of profits the companies they invest in are making.  Even if they receive dividends.

Because, just as the politicians are so disconnected from what's going on along Main Street - or in people's homes - CEOs have lost sight of the fact that their companies are there to serve a greater purpose than simply for the few who own shares.

Or to fill their own pockets.

No matter the product or price point, they're supposed to be contributing to the betterment of society by improving quality of life.  Of everyone's life.

I'm a capitalist to the core.  I want everyone to make money.  I want those who strive - whether minimally or maximally - to proportionately benefit from the work they do and be able to buy what they want.

But I don't believe in exclusivity.  Not when the exclusionary policies and actions on the parts of CEOs and their corporations lead to desperation, disease - and death.

When did corporations lose any semblance of having a clue?

It's more than a Gordon Gekko.  It's not just that "greed is good."

It's that greed - impossible levels of personal and corporate greed - have become standard operating procedure.

It's unconscionable.  Those CEOs, speculators and others pursuing that strategy should be ashamed.

And, frankly, while I applaud the actions of Bill Gates, Warren Buffett and others in the billionaires' club for giving their money to charity - they left it awfully late.

And it's still not enough.

Deming, the management theorist who is the father of what we now call "Lean" and "Six Sigma" (among others), always said that there was no scarcity.  That scarcity is a myth.

That we create scarcity by creating management and corporate systems that either don't access the capabilities of our employees or adequately and fairly share the benefits of what those employees have achieved on behalf of their employer.

Or both.

He was right.  And now it's worse.

Because the health insurers are only one of, literally, a world of corporations that are making, literally, incredible profits.  With war chests of money that analysts and investors are starting to worry are getting too big.

And with speculators who drive prices of commodities up so high that they have to drive their own correction because the public responds by not buying.

What's their justification?  They're afraid - yes, afraid - that things might get worse.  Later.  At some point in the future.  Possibly.

Cowards.

It's time for executives to wake up and smell the coffee.  (I'm being very, very polite here.)

It's time for them to think about the context within which they and their organizations exist.

Everything is not about you and how much you and your cronies make.  Nor is it about "satisfying the shareholders" as you so conveniently excuse your actions.

It's about whether you're willing to do more than do well.  It's whether you're also willing to do good.  On everyone's behalf.

It's time to start.  Now.

Resource:

Health Insurers Make Record Profits as Many Postpone Care (NYT)

Google, Buffett and Succession - Making It Work

As I've written about before, succession planning is a key aspect of how you should be spending your time.  

Since writing the previous pieces, a lot of things have happened at two of the companies I find most interesting in this regard:  Google and Berkshire Hathaway.

At Google, Larry Page officially took over as CEO from Eric Schmidt.  At Berkshire, David Sokol, the 'prince in waiting' left the company under a cloud - and created an even larger cloud over Warren Buffett.

And, even with that, both companies continue to do an excellent, far-seeing job of dealing with succession - which makes it worthwhile to take a look at how.  We'll start with...
Google was on the way to losing its creative steam.  Not only that, it was losing people - mission critical people - at way too fast a rate.

Why?  Because it became just a bit too grown up.

When Google hired Eric Schmidt to be an "adult" it was the right decision.  Neither Sergey Brin nor Larry Page, the co-founders, knew how nor was ready to run an organization of the size and complexity that Google was becoming.  And that was ten years ago.

Now, however, two things have happened.

First, Schmidt's management style is no longer optimal for the company's next stage.

Schmidt is an 'organization guy.'  They's why he was brought in.  He needed to take an amazing technology and a lot of potential and build a working enterprise designed to design, deliver and grow.

That's exactly what he did.

Over time, however, it became too bureaucratic.  Even with its famous 20% Days (the pure R&D time given to each engineer each week), the decision-making became too bogged.  Especially in a larger culture - specifically the Silicon Valley - that not only prides itself but exists in many ways only because it's so nimble.

The company was losing that - right at the same time that Twitter and Facebook came on the scene. And there went the Googlers.

Second, over the past ten years, the co-founders have honed their skills and grown to be ready to take the company to what's next.

With Page having taken over as CEO, the culture of a start-up is being actively re-energized.  He began that process by restructuring the company so that there are now fewer layers between him and the product/service eco-systems he wants created.

Decision-making will be faster and the speed to market of innovations will increase substantially.

Brin, working to his strengths, is driving and overseeing those new technology developments.  And Schmidt, as Executive Chairman, is working to his strengths in all the outreach for future M&A, government relations at a time when the company is under particularly close scrutiny and building other external relationships the company needs.

This was well thought out, well planned and well executed.  It is succession at its best.

Which leads us to...

Warren Buffett is 80 years old.  He's in great shape but no one lives forever.  Buffett is not only aware of that for himself, but he also takes it very seriously when it comes to his company.

For years, in every Letter to Shareholders, Buffett has alluded to - and eventually directly addressed - the succession issue.  He had to.  It was what he owed his shareholders.

And, at $125K+ per share and a company sitting on, minimally $10bn+ in cash at any given time, I'd say that he was right in deciding it deserved his attention.  Wouldn't you?

In recent years, not only his thinking but also the specifics have been consistently brought to the fore.  In his case, one man cannot take on all the jobs he continues to successfully perform.  So, he's divided up his responsibilities into three (at least) positions.

Moreover, the company's Board is ready to move on whatever needs to be done as soon as the moment arrives - which they all hope will be years from now.

Best of all, in his most recent Letter, he included a memo that he biennially sends the CEOs of all the companies Berkshire Hathaway owns.  In that memorandum he specifically asks them to inform him, personally, of who they want to take over in case something happens to them.

Bravo, Buffett and the BH Board.  Bravo, Schmidt, Page and Brin, as well.

Succession is something you never leave to chance.  There are too many people's lives and livelihoods depending upon your fearlessness in addressing an issue no one ever wants to consider.

Take it on - and then, Bravo, you.

Resources


Letter to Shareholders 2010 (Berkshire Hathaway)