The following post is by “Gatzzb,” a friend of Dealbreaker.
Over the last decade few investors have been more quoted – and emulated – than Warren Buffett, the Oracle of Omaha. And for good reason. Mr. Buffett remains one of the most talented investment managers, capital allocators and business managers of our generation with a track record few have come close to matching. Just read any of his letters from the last 30 years and you’ll quickly understand why (sex jokes help). But with his long time passive stake in Moody’s Corp (MCO), I believe Mr. Buffett has practiced what he has often preached against: putting profits before ethics.
He is invested in Moody’s Corp. because it fits his major criteria – large margins and a huge “moat” given it operates under an oligopolistic umbrella provided by our government. However, Mr. Buffett clearly has no great love for the actual product Moody’s produces. On numerous occasions, Mr. Buffett has stated he does not use Moody’s ratings (or that of other firms such as S&P and Fitch’s). On numerous other occasions, Mr. Buffett has famously discussed derivatives as being “weapons of mass destruction.”
Well, in 2005-2006 over 40% of Moody’s revenues came from rating these weapons such as CDOs. This surely did not elude Mr. Buffett. The danger of the AAA ratings placed on these weapons of mass destruction, by companies such as Moody’s, surely did not elude Mr. Buffett either. In fact, several years ago Berkshire took great pains to remove their exposure to these types of derivatives. Yet while he actively removed Berkshire’s exposure to derivatives and actively avoided using Moody’s et al’s flawed ratings, he did nothing to facilitate change to this poisoned model – perhaps Moody’s record breaking profits had something to do with this. Certainly as the largest shareholder in Moody’s and one of the most influential investors in the world he could have easily enacted such change or in the least spoken out openly about the problems.
Now here we are several years later with a financial system in ruins. AAA rated AIG went bankrupt and cost investors and taxholders billions in the process, AAA rated GE has been in a brutal downward spiral and the tailspin is not showing any signs of abating soon, FNM-FRE were AAA rated when they began their final collapse, and AAA rated derivatives helped facilitate the most spectacular financial collapse since the great depression.
But Berkshire is a passive investor, the long term holders everyone in the media loves – and activist investors, those who have pointed out problems are all bad, aren’t they?
The original oracle, Buffett’s teacher Benjamin Graham, once wrote, “The best opportunity for demonstrating investor intelligence is in the field of stockholder-management relationships.” This tenet is the foundation for activist investing. I can’t speak for Mr. Buffett on why he chooses to eschew from this pillar of Graham’s thinking, but personally I think this passive behavior is dead wrong.
Media (read: sensationalism) has unfortunately helped bring us to the point where activist investing has become synonymous with a corporate raider strategy. For many – perhaps most – “Barbarians at the Gate”, “Predator’s Ball” “Gordon Gekko” and “Greenmail” define activist investing, Wall Street, and Hedge Funds. Meanwhile, attempts to improve shareholder value get lumped in the same “bad guy” category. Sadly, this attitude towards activist investing – and hedge funds in general, wherein they’re simply cast as the villains by default– have come at great price to shareholders over the last several years.
* David Einhorn points out borderline fraudulent activities in Allied Capital (2002) – his company, Greenlight Capital, is sued. His company is attacked by Allied Capital and the SEC. Even once fraud is found at Allied, the government issues a mild sanction and it takes over five years before Allied finally unravels. The retail investor loses hundreds of millions of dollars in this process.
* Bill Ackman details the enormous problems with MBIA and our oligopic ratings system (2002). He spends more than seventy pages detailing the faults, attempting to help save the system at a cost to potential profits for his firm. His firm, Gotham Partners, is investigated for libel. After more than five years, MBIA finally unravels. Retail investors again lost hundreds of millions of dollars.
* David Einhorn questions Lehman’s accounting and health (2007). He is attacked by the firm and the press. Lehman is now bankrupt, of course. Retail investors lose hundreds of millions of dollars.
The most recent example comes from the recent Target Board of Directors proxy contest. Boards of Directors exist as an independent entity designed to lend their expertise to the company and protect the interests of the shareholders. They are an integral part of corporate governance and business management. Yet too often the board is a close knit group of members who serve only to protect their own interests, paycheck, and status quo. Witness how Target voted to extend the term limits of their board members from ten years to twelve years despite this rule having been created explicitly to enforce this occasional turnover.
When Bill Ackman launched his proxy initiative to add several independent industry experts to Target’s board, he did so for the future benefit not just of his investors but of every single Target shareholder – of which he is one of the largest. He even spent his own money on this campaign. Target fought vigorously to protect their current board members and, in a funny commentary, even spent millions of shareholder dollars to do this! Target wouldn’t even allow Mr. Ackman’s nominees to be voted for except via special proxy card or if you traveled in person to the remote meeting location in Minnesota. Seems to me they are working very hard to protect their own interests, not that of their shareholders.
Especially distressing have been some of the media coverage and the way some have derided Mr. Ackman’s efforts, painting him with the lazy, broad, ‘hedge funds are bad’ brush. Joe Nocera at the Times wrote a story which could have as likely come from Target’s PR department. He latched on to the stereotypes of an activist investor and seemingly ignored the truth of greater matters at stake. Mr. Nocera even mocked that with his proxy fight “Somehow, [Ackman] seemed to believe, it was going to make corporate America a better place.” And this is a bad thing how, exactly? At least people like Ackman have put money behind their words; critics of activist investors should try this approach!
Looking at GM, one of the reasons they failed could be that their Board had no executives with automotive experience. Target’s board also has significant shortcomings:
* The board members are not independent; many of their own companies do business with Target!
* The board members do not have expertise which directly pertains to Target’s business
* The board owns almost no Target stock and over the last five years has sold nearly $550mm in stock
Yet even after the past several years, where the ineptitude of many managements and misalignment of incentives between management and shareholders has reared its head, shareholders remain remarkably compliant. In both the Einhorn and Ackman situations, corporate managements were able to use a game of smoke and mirrors to counter the claims lobbied against them. The media, eschewing real investigative (read: researched) journalism, trotted out management’s side of the story. Every defense needs a good story and what better story than these hedge funds, short your stock, are maliciously attacking it for their own gain – the evil hedge fund story, 101. To see respected voices such as the New York Times and Barron’s (also with a critical article) not grasp the greater picture in these cases truly distresses me. Our system should be designed to protect the retail investor, yet it seems designed only to protect those in power. Each time another wave of scandals goes through Wall Street I hope that this is the one which will facilitate a true industry-wide change in actions and perceptions, but thus far each time I have been disappointed.
It is often implied that hedge funds need a little more Warren Buffett in them, but I think the reverse contains as much truth if not more. Warren Buffett needs a little more hedge fund in him. So Mr. Buffett, on behalf of all investors I beseech you – maybe one day we’ll all listen more closely to an Einhorn or Ackman but right now everyone will definitely listen to you… please speak up!
How dare you speak ill of WB! /sarcasm
um, is this “friend of Dealbreaker” Bill Ackman?
I swear it’s not me.
-Bill A…. I mean, friend of DB
Buffett has “scoreboard” and all the sucker hedge funds call him “Sire!”
Ackman for Congress 2010! (At least that’ll prevent him from running money.)
It was me!!
-Einhornswoggle
I love this article and I hope WB reads it.
What is this nonsensical farce? You have magnificently garbled underlying motiviation among your sample parties.
Ackman/Einhorn ain’t doing that shit to improve the overall welfare of the proletariat. Rather, it has Everything to do with their leveraged short/long positions.
Please elaborate how their market bets aimed at P&l have anything to do with the Original BSD and MCO.
Someone named “Gatzzb” preaching ethics?
Read much?
I agree that often hedgies are looking at short terms profits, don’t blame them, they are looking out for their LP’s and their constant need (much like analysts short term EPS orientation) for short term returns. But often these ideas are and do point out issues with the underlying companies that can, should and have been corrected. In this case the article absolutely gets it right…Buffet needs to be more of an agitator that he has been…maybe the world will learn more!
what the f kind of TLDR sh*t is this?
I have always thought that Buffet could have done more in being pro-active about things rather than being a retroactive investor! Good and gutsy story…albeit a bit too positive on Ackman and Einhorn!
I have always thought that Buffet could have done more in being pro-active about things rather than being a retroactive investor! Good and gutsy story…albeit a bit too positive on Ackman and Einhorn!
I think you’re being a little naive about wb. He is not your jolly old uncle, he just plays that on TV. The whole golly-gee, coca cola drinking hick from Omaha, is actually a private plane flying (at company expense), sharp operator. Like Bill Ackman, WB is only interested in one thing. His persona is the simple hick, Ackman’s is the earnest investor, but both are just playing their part for TV and neither has you me or the “little guy” at heart. You don’t get rich any other way.
The thought of Ackman buggering Buffett is repugnant to many Americans.
Great article! Should submit it over to those douchebags at the NYT… maybe some intelligent writing can delay their downfall.
In the money, safe, for the long term.
That’s WB does. Not ethics. What do you want WB to do? Be a liberal angel?
10 Except that as it applied to Target, Ackman wasn’t at all helpful. His REIT idea was nonsense. Letting go of the credit card business good idea in hindsight. But it has been good to Target.
Good piece, but aint never gonna happen, unfortunately.
Some thought provoking ideas. It is too bad that the press seems to ignore the whistle blowers in the financial world.
Warren Buffet sold off Anheiser-Busch to InBev. Moron.
Moody’s is a flaming scam. I hope it evaporates.
you sound like a stupid 6 foot 5 Turkish investor. I don’t trust there people, and quite honestly, don’t trust them with money
Gatsy, Greenlight – Einhorn is Finkle, Finkle is Einhorn! or Ackman. Your friend is a pussy.
-Publius
P.S. Ironic, I know.
I have always thought that Buffet could have done more in being pro-active about things rather than being a retroactive investor! Good and gutsy story…albeit a bit too positive on Ackman and Einhorn!
I have always thought that Buffet could have done more in being pro-active about things rather than being a retroactive investor! Good and gutsy story…albeit a bit too positive on Ackman and Einhorn!
@8 Thank you for calling my piece magnificent!!
I think @10 addresses your other points a bit. Sure, HFs have $ stake in what they write about/their positions. But their writing & publicizing of the critiques, if listened to by the companies (et al), would have cost the HFs money. Problems would have been addressed. MBIA could have maybe gone to $10 instead of $2. Lehman to $10 instead of bankrupt. Etc.
As for the proletariat, talk to your congressmen. Maybe if we didn’t ‘protect’ them from HFs they all wouldn’t have lost 40% last year…
@14 – totally agree and I like the jolly old uncle line
@9 – well said :)
thanks for all the comments
Ackman is not a saint; he was right on MBIA, wrong on TGT.
Wasn’t Einhorn on the board of NewCentury? (Total fraud, bankrupt, corrupt).
On a composite basis, neither is a particularly good stock picker / hedge fund manager. I think Einhorns 3-yr returns ending Dec 2008 are -3% and his 5-yr returns are roughly 5%. While this maybe be good in “average” terms, it doesnt really make the top 100.
Ackman isnt even worth discussing. The fact that his “career” (neg total profit $?) is not over is just a tombstone to the silly stupidity of institutions.
But all 3 of these guys have 1 thing in common — they like publicity.
STUPID ARTICLE. Dumb reasoning.
Why did Buffett invest in GS GE and WFC ? Talk about weapons of mass destruction.
Moody’s may have rated securities.
Those firms created them ! Buy them ! Sell them ! Dump them on unsuspecting investors.
Not impressed …..
STUPID ARTICLE. Dumb reasoning.
Why did Buffett invest in GS GE and WFC ? Talk about weapons of mass destruction.
Moody’s may have rated securities.
Those firms created them ! Buy them ! Sell them ! Dump them on unsuspecting investors.
Not impressed …..
STUPID ARTICLE. Dumb reasoning.
Why did Buffett invest in GS GE and WFC ? Talk about weapons of mass destruction.
Moody’s may have rated securities.
Those firms created them ! Buy them ! Sell them ! Dump them on unsuspecting investors.
Not impressed …..
Warren Buffett might as well join the communist party. He’s for higher death taxes, he constantly owns government-protected companies (FNM, Moody’s, geico), and he supports the Fed’s money printing as necessary, mainly because he owns a very large swath of big banks (WFC, STI, BAC, etc…). Warren Buffett looks out for #1, and no one else. He’ll support any cause, so long as it supports his portfolio. He’s on TV like every day now.
Lastly, even his supposedly non-evil companies are evil. Coke is filled with ingredients no caveman would recognize as food, and godonlyknows what those ingredients do to our internals. Gillette sells us overpriced blades using a marketing scheme. Frankly, if you stop using shaving cream, you can extend the life of a razor for over a year, so don’t tell me a company with all their R&D budget can’t come up with a blade that doesn’t go dull. Instead, Gillette spends its R&D trying to figure out how to protect it’s margins with complicated plastic blade attachments, and soapy strips that go away after a few shaves to help people pop the next cartridge. Warren Buffett doesn’t care how he makes his money, he just makes sure he makes it. don’t be fooled by the wise old codger BS he throws out there, it’s a facade.