The Treasury issues new debt to fund the Fed’s liquidity bailouts along with the hundreds of billions (perhaps running into the trillions) of dollars called for by The Emergency Economic Stabilization Act of 2008 (the Paulson Plan). In other words, the government is printing money like crazy. That is inflationary, and inflation weakens the dollar.
The United States is a nation at war. A handful of financial institutions are chiefly responsible for roiling the housing market, the municipal bond markets, the economy, and the dollar.Yet, executives may still earn tens of millions of dollars through stock awards. The Paulson Plan does not require market prices for the assets our Treasury may buy or for the trading books of the institutions it is bailing out.Warren and I proposed that market prices (to restore confidence) should be required along with new capital, but someone else gave Congress a bad education.Wall Street is getting what it wants, and U.S. taxpayers are underrepresented in Congress.Thomas Jefferson warned: “A government big enough to give you everything you want is strong enough to take everything you have.”
The policies of Washington and Wall Street have weakened the dollar. It is unclear whether the United States has the will to pull the dollar up from its tailspin.The United States dollar is less secure in 2008 than it was 10 years ago, and it is weaker than it was 10 years ago. Warren sometimes takes currency positions to hedge this risk. He currently seeks good foreign companies to add operating earnings in foreign currencies. If you know of a good foreign company (understandable business, sound management, favorable prospects, fair price) that is $1 billion or more in size—$5 billion would be even better—please call Warren.
Chapter 13
The Fogs of War, Religion, and Politics
What would happen if Internet communications were disrupted, how would we trade?
—Warren Buffett
to Janet Tavakoli, August 25, 2005
While the rest of the world seemed bent on mutually assured destruction—pursuing wealth through leveraged mortgage loan products, hedge funds, and leveraged buyouts—Warren had already taken steps to do something about the weakening dollar problem for Berkshire Hathaway shareholders. He used derivatives to take positions in the relative strength of foreign currencies, and he looked abroad for well-run companies that earn money in foreign currencies.
On October 25, 2005, Warren received a letter from Eitan Wertheimer, chairman of Israel’s ISCAR Metalworking, saying: “Berkshire Hathaway would be the ideal home for ISCAR.”1 On May 5, 2006, Berkshire Hathaway used Business Wire to announce it had agreed to acquire 80 percent of the tool-cutting company. Two months later on July 5, 2006, the acquisition was completed. Berkshire Hathaway paid $4 billion.2
ISCAR’s main plant is located in Israel’s Galilee around 7.5 miles south of Israel’s border with Lebanon. It does business in more than 60 countries, has a good source of foreign revenues (a hedge against a weakening dollar), and it is a business with products the world needs: cutting tools used with machine tools.The management is in place, and the family is dedicated to the business.
Eitan Wertheimer is the chairman of ISCAR, and 20 percent of the stock remains in the Wertheimer family. Michael Federmann, the Chairman of Elbit Systems Ltd., a Haifa-based electronic defense company, knows Stef “Steffie” Wertheimer, Eitan Wertheimer’s father. “Steffie,” he later told me, “is the entrepreneur who built the company. Eitan is an administrator and a good steward of the legacy.” Stef Wertheimer started in a backyard shed with no funds and worked his way up from there. Michael’s enthusiasm inspired me to read more about Stef, and I learned that he was expelled from formal education at age 14 for “slugging a teacher who harassed a female classmate.”3
On May 8, 2007, three days after the Berkshire Hathaway annual meeting, I attended a dinner sponsored by the Jewish American Chamber of Commerce at Chicago’s Conrad Hilton Hotel in honor of Eitan Wertheimer. Ralph Gidwitz, a Managing Partner of Capital Results LLC, asked if I would invite Warren, and I did, but he had to decline. Warren attends only one function per year for his senior managers and he had already committed to support one of Eitan’s Canadian charities.
I sat at the same table with Eitan and Ariel Wertheimer. Ariel explained that Eitan’s father, Steffie, settled in Israel after fleeing Nazi Germany as a 10-year-old boy. Stef Wertheimer seems to focus on hope and how he can improve the lot of others. The company he founded is a large employer of Arab Israelis, and Ariel said it provides intensive training and good working conditions. Ariel’s account of Stef reminded me of one of Winston Churchill’s maxims: “Live dangerously; take things as they come; dread naught, all will be well.”4
Eitan Wertheimer gave a speech detailing his vision for a Middle East renaissance including Arabs in Israel and neighboring Arab countries. Like his father, his belief is that wealth distribution via economic growth is the only viable avenue to produce lasting peace in Israel and the Middle East. His contribution is the stewardship of ISCAR and the creation of a pleasant work environment for the large number of Arab Israelis he employs. As Eitan talked of the goal of lasting peace, we were oblivious that in two months Israel would be embroiled in a bloody conflict with Lebanon.
It was not as if tensions were not a concern, but Warren publicly stated that the world in general was a dangerous place and that in the absence of war: “Most of the time Israel is no more dangerous than the U.S.”5 Berkshire Hathaway’s headquarters is located in the Midwest as is Oklahoma City, the site of the deadliest home-grown domestic terrorist attack in U.S. history. In 1995, Timothy McVeigh’s bomb attack killed 168 people and injured more than 800 others.6
Israel during peace time is as safe as the United States, but Israel has tensions with Palestine’s Hamas Movement as well as Lebanon’s Hezbollah. Iran and Syria back Lebanon’s Hezbollah terrorist organization, and although Iran does not actively support Palestine’s Hamas (as far as I know), it is sympathetic with its thinking. On June 6, 2006, shortly after dinner with the Wertheimers, but before the war, I sent Warren an e-mail about a Web site (http://iranvajahan.net/english) with a summary in English about international news about Iran. I noted it draws on media sources in English, German, French, and Farsi: “Print media compilations cannot compete with a well-designed Internet compilation.”
On June 14, 2006, I sent Warren a commentary I had written about our growing tensions with Iran. The U.S. media seem fixated on Iran’s President Mahmoud Ahmadinejad, but he does not control Iran, and he does not have a job for life. Iran’s president serves at the pleasure of the Ayatollah. Ayatollah Ali Khameni is the supreme leader of Iran, and his control in Iran is close to absolute. He controls the media, the judiciary, the military, and he effectively controls the legislature.
Iran has been deeply suspicious of the United States ever since we deposed its first democratically elected government. Iran elected Prime Minister Mussaddiq in the summer of 1953. One of his first acts was to force into exile the young Reza Pahlavi, son of a self-proclaimed Shah, a brutal despot and a commoner of nonroyal origins. Mussaddiq wanted to nationalize the British Anglo-Iranian oil company because Iranians were not getting a fair share of the profits. The United States CIA and the UK’s MI5 deposed Mussaddiq and reinstalled the young Shah, a foreign-educated dictator who now owed allegiance to both Britain and the United States. At the time, Eisenhower was president of the United States. John Foster Dulles was Secretary of State, and his brother, Allen Dulles, was Director of Central Intelligence. The Dulles brothers were alumni of law firm Sullivan and Cromwell, whose prestigious clients included the British Anglo-Iranian Oil Company.
On June 20, 2006, I sent Warren my concerns about Iran’s potential treatment of Israel based on my first-hand experiences living in Iran at the time of the Shah’s overthrow and Khomeini’s return. At a party shortly after the Shah was deposed, a couple announced they were moving to Canada. My then husband, a Moslem in name only, observed that the wife was wise to leave because her grandfather is Jewish. Her grandfather? He insist
ed it might become a problem. As it turned out, he was probably right.
In the summer of 1978, when midday temperatures exceeded 100°F, I met Habib Elghanian at the Shahanshahi Club, where Iranian waiters dispensed pastel-colored iced melon drinks to foreign businessmen and captains of Iranian industry. Elghanian, a pleasant man pushing late middle age, was the third richest man in Iran and a leader in the thriving Iranian Jewish community. He and his two brothers accumulated most of their wealth in Iran during World War II, and one of his brothers had settled in Israel. Among other things, Elghanian owned a manufacturing company that produced refrigerators. His factories created jobs in Iran and were a major contributor to the Iran’s modest industrial progress. My ex-father-in-law imported refrigerators, freezers, stereos, and various luxuries for sale in Iran, and Elghanian occasionally visited his stores to examine the displays of foreign appliances and glean ideas for improvements of his own products.
In May 1979, I remembered Habib Elghanian’s pleasant smile with deepening sadness and horror as I watched his televised kangaroo court trial. Facial bruises and swelling showed through heavy makeup. Bearded mullahs dressed in dark cloaks spat questions at him. Before he could answer, a mullah answered the question for him and twisted it into an accusation. Elghanian had no defense counsel and seemed disoriented and unsteady in his chair. He had been accused of being a Zionist spy, and the mock trial served as a warning to those who wanted to oppose the clerics. If this could happen to Habib Elghanian, any Iranian could be arrested for being a collaborator with the Shah, and any foreigner could be accused of spying. The next morning, the newspapers printed a photograph of Habib Elghanian’s corpse. He was naked from the waist up and lay on his back in the courtyard of the prison. His execution as a spy was the pretext clerics used to seize his property for the benefit of the Islamic revolution. The Shahanshahi Club was renamed the Revolutionary Club.
In mid-June 2006,Warren recommended I see The Fog of War, a movie about Robert Strange McNamara’s role in the Vietnam War and the United States’ military industrial complex. The Middle East is unstable, and one of the challenges of having a large military industrial complex with powerful lobbyists in Washington is that it tends to find a reason for growing, namely a war. I ordered an old VHS copy that arrived in early July, and wrote Warren on July 14, 2006, two days after the war began. McNamara seemed to admit to having floundered his way through the Vietnam conflict.
Thank you for your recommendation [to see] The Fog of War. I watched it twice back-to-back, and I will watch it again in the near future. I was fascinated by Robert S. McNamara’s view of himself, and I was startled by what he felt were revelations. I agree that war is chaotic. But in the epic battle, I’d rather have been one of the hundreds of Roman legionnaires than one of the tens of thousands of Queen Boudica’s Iceni. I am fond of a good plan.
Israel is always in need of a good plan. The 33-day war with Lebanon began on July 12, 2006, when Lebanese Hezbollah, a terrorist organization backed by Iran, shelled Israel’s border and attacked two Humvees, killing seven soldiers including those killed in a subsequent failed rescue attempt of the two Israeli soldiers captured and spirited into Lebanon. Rockets landed in the ISCAR main plant’s industrial park. The plant shut down for several days, but there was no major damage, and business continued as usual after the war. Israel’s forceful response included massive air strikes, the invasion of ground forces, and the crippling of Lebanon’s Rafic Hariri Airport and other parts of the country’s infrastructure. As in Turkey’s conflict in the 1990s with Kurdish insurgents belonging to the PKK (for Kurdistan Workers Party), in which tens of thousands of Kurds were killed, Lebanese casualties were many times the number of Israeli casualties. There were up to 1,000 civilian casualties. The casualties got much more media attention than the much deadlier Turkish conflict with the PKK, perhaps because the Lebanese conflict was between different religious groups. (The media seems to relatively ignore the misery in Darfur, where Moslems are killing hundreds of thousands of Moslems and displacing millions.7)
By August 11, 2006, the United Nations Security Council approved Resolution 1701. Both Lebanon and Israel agreed to the resolution, which included troop withdrawals and, among other things, the disarmament of Hezbollah. Predictably, Hezbollah has not disarmed. Just because you negotiate an “agreement” and obtain a paper with dried ink signatures, it does not mean you necessarily have a deal in the Middle East.
Meanwhile, the dollar is being weakened by the expense of our poorly planned ongoing Iraq War. However one wants to debate how we got there, one of the reasons we may be quick to enter into a war is because we have the military industrial complex to wage it.
On December 8, 2006, I wrote Warren a note about The Iraq Study Group Report. Despite the fact that we waged war in Iraq for more than three and a half years (at the time), we had recruited few Arab speakers, and we hadn’t trained people to speak Arabic. Only six of the 1,000 embassy staff in Iraq spoke Arabic fluently, and only 33 in total spoke any Arabic at all. There were “fewer than 10 analysts on the job at the Defense Intelligence Agency who have more than two years’ experience in analyzing the insurgency,”8 and the report didn’t make clear if any of them were fluent in Arabic, the language of the people they are trying to understand. Our costs were around $8 billion per month for this war, and we had spent a total of $400 billion.
The ultimate dollar cost of the Iraq War might reach $2 trillion in addition to lives lost—thousands of Americans, and tens of thousands injured or killed Iraqis. In January 2007, I wrote Warren about another movie, Why We Fight, a warning about the unchecked growth of a military industrial complex enabled by lobbyists and Washington think tanks. The Iraq war has been mismanaged. Besides possible overcharging by Halliburton, there were many reasons to investigate mismanagement of the war. For example, $12 billion, about half of Ambassador Paul Bremer’s budget for rebuilding Iraq, simply disappeared. I had to add a Bremer amendment to my theory of everything in finance: What is the probability you have someone handing out shrink wrapped bags of money that disappear from your organization? I doubt Berkshire Hathaway will be tapping Bremer’s management expertise any time soon.9
In April 2007, I wrote Warren and sent him a link to an article that appeared in the Washington Post:
When I lived in London, I joined . . . the American Women’s Club . . . [T]hey made it their mission to coax me to use my vacation days for bridge, hiking, lectures, short trips to the continent, language lessons and a variety of other activities they creatively planned.They called the club their Disney Land for women. Among the members was Peggy Sheehan . . . John J. Sheehan, Peggy’s husband, turned down the “War Czar” job and stated his reasons in a Washington Post article.
John Sheehan is a retired Marine Corps general. He turned down the job as White House implementation manager for the Iraq and Afghanistan wars because he thought there is no consensus in Washington on strategy. He was also concerned about Iran as “an ideological and destabilizing threat to its neighbors and, more important, to U.S. interests.”10 Most important, he felt that Washington lacks “a broader view of the region and how the parts fit together strategically.”11
Some pundits feel that pulling out of Iraq would allow Al Qaeda to flourish, but Al Qaeda is almost completely made up of Sunnis. The government of Iraq’s 25 million people is dominated by Shiites. Shia Moslems make up around 55 percent of Iraq’s population, and Sunnis make up most of the other 45 percent.
Iran already has a foothold in Iraq, and Iran would probably help eliminate the influence of Al Qaeda Sunnis. Shiites in Iraq and Iran have strong ties even though they have ethnic and language differences. Khomeini temporarily hid in Iraq when the Shah ousted him, and Shia Moslems make up around 90 percent of Iran’s population of 68 million people. The greater threat might be that Hezbollah, an enemy of Israel, would find more support if we withdrew from Iraq.
It sometimes seems to me that Moslems would get along much more easily wi
th Warren Buffett, a good-hearted atheist, than with members of a different faction of Islam. For centuries, the various factions of Islam have quarreled and, at times, have even gone to war.
The birthplace of Mohammed, the founder of the Islam, is Medina, located in Saudi Arabia. Shiites believe that Ali, Mohammed’s son-in-law, is his successor. The Sunnis believe the Caliphs are Mohammed’s successors. All Moslems have ties to Saudi Arabia. Devout Moslems believe that the hajj, a pilgrimage to Mecca in Saudi Arabia, is required at least once in one’s lifetime. Performing the hajj is one of the five pillars of Islam. The other four are professing one’s faith, praying in Arabic five times per day, giving alms to the poor, and fasting during Ramadan.
Dear Mr. Buffett: What an Investor Learns 1,269 Miles From Wall Street Page 25