But the varnish was already starting to come off Buffett’s squeaky-clean image before the Sokol fiasco. In 2007, Berkshire invested in PetroChina, the Chinese state-run oil company that activists argue was complicit in genocide in Sudan, only to dump its stake a year later amid public outrage. During the financial crisis, Berkshire landed a sweetheart deal to buy US$5 billion worth of shares in Goldman Sachs. The move was characterized as a vote of confidence in American finance, but the fact is several Berkshire investments, including Goldman, General Electric and Wells Fargo, reaped huge gains thanks to bailouts from Uncle Sam. Another Berkshire company, the credit-rating agency Moody’s, has also been accused of contributing to the crisis by awarding triple-A ratings to worthless mortgage-backed securities, a charge Buffett has refused to discuss. Then, last year, Buffett was accused of being a hypocrite after Berkshire issued billions of dollars in new shares in order to buy the Burlington Northern Santa Fe railway for $34 billion, despite the fact he repeatedly blasts companies for using their shares for acquisitions.
For some of Buffett’s long-time critics, the Sokol affair has simply exposed the real Buffett. In a scathing interview on CNBC just days after Buffett’s letter was released, Michael Steinhardt, the chairman of Wisdom Tree Investments and a Wall Street veteran, accused the media of giving Buffett a free pass, and called the Berkshire chief the greatest PR person of the modern era. “He has managed to achieve a snow job that has conned virtually everyone in the press to my knowledge, and it is remarkable that he continues to do it,” he said. Steinhardt even criticized Buffett over his promise to give away his fortune, accusing him of doing nothing to support charities for the first 70 years of his life, then scoring a media-relations coup with his vow to give it all away. “The biggest thing we have to worry about is how long it will take for Buffett to come down to Earth, where he should have been a long time ago.”
It’s clear from a cursory look at Berkshire’s performance over the last half-century that Buffett has done something right. The compounded annual return of Berkshire between 1965 and last year was 20.2 per cent, versus 9.4 per cent for the S&P 500. Put another way, a $1,000 investment in 1965 would be worth more than $8 million today. Yet it’s also true that Berkshire’s performance has been spotty of late. In four of the last 10 years, the S&P 500 actually outperformed Buffett, though on the whole Berkshire’s returns over the last decade still came out on top.
For his part, Bob Miles, a Berkshire shareholder since 1995 and author of several books on Buffett, says the vilification of Sokol is unwarranted. He sees nothing wrong with the former executive buying a personal stake in a company and then bringing it to Buffett. And he says the incident has overshadowed Sokol’s many contributions to the company. “What’s amazing to me is all this press time devoted to something that I as a shareholder think is fine,” he says. “If the Lubrizol deal closes, it will help shareholders earn US$1 billion a year. That’s an awful lot of value added by a senior manager who has not done anything unlawful or unethical.”
That’s not to say Berkshire doesn’t have its problems, says Miles. He points to two in particular—Berkshire’s sheer size and Buffett’s old age. The bigger Berkshire gets, the harder it is for the company to find investments that are large enough to boost its performance. Meanwhile, with Sokol now out of the picture, the field of internal candidates seen as potential successors to Buffett just shrank from four to three. It’s a concern shared by rating agency Standard & Poor’s, which said the Sokol affair raises questions about Berkshire’s “corporate infrastructure.” With just 20 employees working in the Berkshire head office, it lacks the layers of corporate governance one would normally associate with a company of its size.
There is one reason to expect Buffett to pull through this episode relatively unscathed. He’s done it before. In the late 1980s Berkshire became the largest shareholder at Salomon Brothers, one of the Wall Street investment firms Buffett so often tsk-tsked, and he took a seat on the board. Then, three years later, a rogue trader rocked the firm, and Buffett found himself caught up in the scandal. In 1992, Michael Lewis, a former Salomon bond salesmen who quit and became one of the sharpest chroniclers of Wall Street excess with his books Liar’s Poker and The Big Short, turned his sights on Buffett in an article for The New Republic. Lewis argued the Salomon ordeal tainted Buffett’s reputation. “The corrosion of Buffett by the demands of the market has been largely masked by his moralistic charm,” Lewis wrote. “Nowhere has there been any serious discussion of the shift in what Buffett actually does for his money.” Yet since then Buffett’s charm has only shone brighter, and his popularity—and wealth—has continued to expand.
The difference now is that Buffett, at 80, is far closer to the end of his life than he was then. Given that, you’d think preserving his reputation would be more important to him now than ever before.
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