The Snowball
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36. Geoffrey Colvin, “The Great CEO Pay Heist,” Fortune, June 25, 2001. A 2001 option grant later became the subject of controversy in the 2007 stock-option backdating scandal.
37. Warren Buffett, “Stock Options and Common Sense,” Washington Post, April 9, 2002.
38. Two other companies, Winn-Dixie and Boeing, had earlier started treating stock options as an expense. But they had nothing like Coca-Cola’s clout.
39. Warren Buffett, “Who Really Cooks the Books?” New York Times, July 24, 2002.
40. Warren Buffett, Securities and Exchange Commission’s Roundtable on Financial Disclosure and Auditor Oversight, New York, March 4, 2002.
41. Berkshire Hathaway letter to shareholders, 2002.
42. David Perry, “Buffett Rests Easy With Latest Investment,” Furniture Today, May 6, 2002.
43. He didn’t really want her to come back either, although he looked tempted a few times.
Chapter 57
1. This portrait of Susie in the late 1990s and early millennial era is based on comments from more than two dozen sources who knew her well but cannot be identified by name.
2. Interview with Susan Thompson Buffett.
3. Interview with Howie Buffett.
4. Interest rates, which had been falling since 9/11, hit a low of 1% in June 2003 and remained there until June 2004.
5. This is a shorthand description for investors’ limited risk aversion during this period.
6. In “Mortgage Market Needs $1 Trillion, FBR Estimates,” Alistair Barr (MarketWatch, March 7, 2008) recaps a Friedman, Billings Ramsey research report that estimates that of the total $11 trillion U.S. mortgage market, only $587 billion was backed with equity—meaning that the average U.S. home had scarcely more than 5% equity. Before long, half of all CDOs would be backed by subprime mortgages (David Evans, “Subprime Infects $300 Billion of Money Market Funds,” Bloomberg, August 20, 2007).
7. In The Trillion Dollar Meltdown (New York: Public Affairs, 2008), Charles Morris explains that because the typical credit hedge fund was leveraged 5:1, the 5% equity was reduced to 1%—a 100:1 leverage ratio, or $1 of capital supporting $100 of debt.
8. He used derivatives himself, but as a borrower, not a lender. Therefore, if things went wrong, he did not have to collect from anyone else.
9. Part of Berkshire Re’s reported profits since 2002 are derived from General Re.
10. Alan Greenspan gave a speech on May 8 at the 2003 Conference on Bank Structure and Competition where he voiced his opinion on derivatives. Ari Weinberg, “The Great Derivatives Smackdown,” Forbes, May 9, 2003.
11. For example, he was called “The Alarmist of Omaha” by Rana Foroohar in Newsweek on May 12, 2003.
12. Buffett lent $215 million to Oakwood in debtor-in-possession financing. Through Berkadia (see note 13), he bid $960 million for Conseco Finance. Berkadia representatives left before the auction was over, and were outbid by a consortium that offered $1.01 billion. Berkadia objected to these proceedings and raised its offer to $1.15 billion after it was over, but this effort was rejected by the bankruptcy court judge. The credit bubble for manufactured housing and subprime lenders like Conseco deflated by 2004, more than a year before the broader housing bubble peaked.
13. This deal resembled in some ways another deal he had done two years earlier, partnering with Leucadia National to form Berkadia LLC, which provided a $6 billion secured five-year loan to the bankrupt FINOVA so it could pay down its debt.
14. In First a Dream, Jim Clayton recounts that Michael Daniels, an intern who had “tolerated” him through the six-month final edit of the book, got him to autograph a copy to give to Buffett. When he graduated and went to work for UBS, Daniels handed the book over to the next intern, Richard Wright, for delivery. “The Ballad of Clayton Homes” (Fast Company, January 2004) claims that the Claytons used Wright to send a message to Buffett.
15. In his memoir, Jim Clayton says people find it hard to believe that he did not return Buffett’s call himself. He says it never occurred to him to do so, and he and Buffett have never called each other about business. During the months that the deal was in negotiation and litigation, the author observed that Buffett dealt only with Kevin Clayton.
16. Interview with Kevin Clayton.
17. Jim Clayton, Bill Retherford, First a Dream. (Tennessee: FSB Press, 2002.) The 2004 revised edition gives an account of Berkshire Hathaway’s fight for Clayton Homes.
18. Buffett had spent only $50 million in April to purchase PetroChina stock, but that brought Berkshire’s ownership to $488 million and over the limit that required disclosure to the Hong Kong Stock Exchange.
19. Buffett said he would buy foreign stocks under the right circumstances; e.g., in the United Kingdom or a newspaper in Hong Kong. However, he did not spend time seriously studying foreign stocks until opportunities in the U.S. began to thin.
20. Warren Buffett, “Why I’m Down on the Dollar,” Fortune, November 10, 2003.
21. From unpublished coverage of the 2003 Berkshire Hathaway annual meeting, courtesy of Outstanding Investor Digest.
22. A major advantage of the deal was Berkshire’s access to and low cost of funds. With its AAA credit rating, it could borrow at a far lower rate than any other manufactured-home maker and thus not only survive credit droughts but make money under conditions where Clayton’s competitors could not survive.
23. Speaking at the New York Public Library, June 25, 2006.
24. Andrew Ross Sorkin, “Buffett May Face a Competing Bid for Clayton Homes,” New York Times, July 11, 2003.
25. “Suit Over Sale of Clayton Homes to Buffett,” New York Times, June 10, 2003. Gray alleged that previous shareholder meetings electing directors had taken place without proper notice. In June the Delaware Chancery Court ruled that Clayton had technically not met the notice requirement, but since the meeting was so well attended by shareholders, the mistake was only technical and results of the meeting would not be overturned.
26. Jennifer Reingold, “The Ballad of Clayton Homes.”
27. At its peak before the death of Susan T. Buffett, the foundation spent $15–$30 million per year in total, mostly on reproductive rights.
28. If Buffett had paid dividends and used them for the donations, the whole point would have been moot.
29. Douglas R. Scott Jr., president, Life Decisions International, letter to Warren Buffett, September 26, 2002.
30. The number came from Cindy Coughlon, a Pampered Chef consultant who organized the boycott. Nicholas Varchaver, “Berkshire Gives Up On Giving: How a Pro-Life Housewife Took On Warren Buffett,” Fortune, August 11, 2003.
31. Compiled from various interviews.
32. Pro-life activists, according to the U.S. National Abortion Federation, have committed 7 murders, attempted 17 other murders, made 388 death threats, kidnapped 4 people, committed 41 bombings, 174 instances of arson, and 128 burglaries, attempted 94 bombings or arsons, made 623 bomb threats, committed 1,306 instances of vandalism, made 656 bioterror threats, and committed 162 instances of assault and battery. These numbers exclude stalking, hoax device/ suspect packages, hate mail, harassing phone calls, trespassing, invasion, Internet harassment, and other less serious incidents. The pro-life movement’s activities have resulted in 37,715 arrests as of 2007. Most mainstream pro-life organizations reject the terrorist wing of the movement, some vocally.
33. Berkshire Hathaway press release, July 15, 2003.
34. Under Delaware law, only shareholders in attendance were eligible to vote on a recess.
35. Jim Clayton, Bill Retherford, First a Dream.
36. Interviews with Kevin Clayton and John Kalec, executive vice president and CFO of Clayton Homes.
37. The suit, filed on July 25 by Milberg Weiss Bershad Hynes & Lerach, LLP, initially claimed that Kevin Clayton had asked Janus Capital to continue to support the deal even though it had sold the stock. In court, no evidence of this was found and the case was dismissed.
38. Jennifer Reingold, “The Ballad of Clayton Homes.”
39. Jim Clayton cites these figures in First a Dream, indicating he could not confirm them.
40. Cerberus memorandum, “For Discussion Purposes,” reprinted in Jim Clayton, First a Dream.
41. In a few instances, such as NetJets, private-company owners sold to him at lower prices than they could have obtained elsewhere because they wanted Berkshire as an owner.
42. Jim Clayton, Bill Retherford, First a Dream.
43. Interview with Kevin Clayton.
44. By 2006, manufactured-home shipments had fallen to 117,510 units and were still declining at an average rate of 32% in 2007 despite a temporary bump in 2005 from Hurricane Katrina. (Source: Manufactured Housing Institute.)
Chapter 58
1. Interview with the Reverend Cecil Williams. Buffett participated in two live auctions for Glide before the first eBay auction.
2. Interview with Kathleen Cole.
3. Interviews with Kathleen Cole, Susie Buffett Jr.
4. Interview with Howie Buffett.
5. Interviews with Howie Buffett, Susie Buffett Jr.
6. Interview with Kathleen Cole.
7. Ibid.
8. www.oralcancerfoundation.org.
9. Oral Cancer Foundation.
10. Interviews with Kathleen Cole, Ron Parks.
11. Interviews with Marshall Weinberg, Walter and Ruth Scott, Lou Simpson, George Gillespie.
12. Interview with Susie Buffett Jr.
13. Adapted from John Dunn, “Georgia Tech Students Quiz Warren Buffett,” Georgia Tech, Winter 2003.
14. Bob Woodward, “Hands Off, Mind On,” Washington Post, July 23, 2001.
Chapter 59
1. Interview with Susie Buffett Jr.
2. Interview with Stan Lipsey; Jonathan D. Epstein, “GEICO Begins Hiring in Buffalo,” Buffalo News, February 11, 2004.
3. Interviews with Peter Buffett, Howie Buffett, Susie Buffett Jr.
4. Peter and Susie also gave substantial amounts to the Buffett Foundation in their first two years.
5. Generally speaking, federal law governing foundations requires that foundations distribute or use a minimum amount of their assets regularly for their charitable purposes (approximately 5% of the fair market value of the private foundation’s investment assets).
6. At the time, Susie had about 35,000 shares in her own name, worth about $2.8 billion, apart from what she might receive as part of Warren’s estate should he predecease her.
7. Charles T. Munger, edited by Peter Kaufmann, Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger. New York: Donning Company Publishers, 2005.
Chapter 60
1. Interview with Kathleen Cole.
2. Interviews with Jamie Dimon, Jeffrey Immelt.
3. Berkshire Hathaway 2004 chairman’s letter, annual report.
4. Berkshire Hathaway letter to shareholders, 2006. Buffett had stated these criteria in private earlier.
5. Betsy Morris, “The Real Story,” Fortune, May 31, 2004.
6. Investors felt that Coke should move aggressively into noncarbonated drinks, but the company insisted that international growth in carbonated beverages—the highest-margin product—was the only way to go. At $50, the stock was also still expensive at 24x earnings and 8.6x book value.
7. Coca-Cola Enterprises took a $103 million charge for the European recall during Ivester’s reign. In 1999, Daft had to report the first loss in a decade and take a total of $1.6 billion of charges. Then, in 1Q2000, Daft reported Coke’s second quarterly loss in a row—charges for massive restructuring/layoffs and a write-down of excess bottling capacity in India. In 2000, Coke took more charges and cut its projection for annual worldwide unit case volume growth to 5% to 6%, from 7% to 8%. Coke revised its targets again after 9/11.
8. Suppose Berkshire demanded a special deal. On $120 million of purchases, this might be worth, say, a dime a share, estimating liberally. Berkshire earned $5,309 per A equivalent share in 2003. (The company doesn’t present cents per share in its financial statements.) To a B shareholder, it would be 3/10 of a penny per share. It’s very hard to make a case that an amount so small would incent Buffett to do something so contrary to Coca-Cola’s interests as to force it to turn down a big contract with Burger King in order to keep selling Coca-Cola at Dairy Queen. That would be so even if Berkshire owned zero Coca-Cola stock. The problem with the ISS approach was its absolutist checklist approach that applies no reasoning and proportionality.
9. CalPERS also opposed the election of Herbert Allen, former U.S. Senator Sam Nunn, and Don Keough because of their business relationships with the company.
10. Herbert Allen, “Conflict-Cola,” Wall Street Journal, April 15, 2004.
11. Excerpts from a survey of corporate board members conducted by PricewaterhouseCoopers, as reported in Corporate Board Member, November/December 2004. PWC identified no comments or sentiment against Buffett.
12. Deborah Brewster, Simon London, “CalPERS Chief Relaxes in the Eye of the Storm,” Financial Times, June 2, 2004.
13. Interview with Don Graham.
14. “Coke Shareholders Urged to Withhold Votes for Buffett,” Atlanta Business Chronicle, April 9, 2004.
15. In “The Rise of Independent Directors in the U.S., 1950–2005: Of Shareholder Value and Stock Market Prices” (Stanford Law Review, April 2007), Jeffrey N. Gordon concludes, “One of the apparent puzzles in the empirical corporate governance literature is the lack of correlation between the presence of independent directors and the firm’s economic performance. Various studies have searched in vain for an economically significant effect on the overall performance of the firm.”
16. This issue was resolved through a consent decree on April 18, 2005, in which the company did not pay a fine or admit wrongdoing but promised to clean up its internal audit, compliance, and disclosure systems.
17. The GMP International Union, which also spoke at the meeting.
18. Transcript, Coca-Cola shareholder meeting 2004, courtesy of the Coca-Cola Company; Adam Levy and Steve Matthews, “Coke’s World of Woes,” Bloomberg Markets, July 2004; interviews with several directors and company employees.
19. Transcript, Coca-Cola shareholder meeting 2004, courtesy of the Coca-Cola Company.
20. Adam Levy and Steve Matthews, “Coke’s World of Woes.” The New York Times blasted Coke over severance payments to Heyer and other executives in “Another Coke Classic,” June 16, 2004. The criticism was not universal; the Economist said Isdell was “welcomed by investors and analysts as a safe pair of hands” (“From Old Bottles,” May 8, 2004).
21. For example, Constance L. Hays, in The Real Thing: Truth and Power at the Coca-Cola Company (New York: Random House, 2004), makes this inference.
Chapter 61
1. Interview with Tom Newman.
2. Interview with Kathleen Cole.
3. Ibid.
4. The author, too, has for some years sat in the managers’ section, although she is not a shareholder.
5. This dinner, which was hosted by Morgan Stanley at the time, subsequently became a private event hosted by the author.
6. Courtesy Paul Wachter, producer, Oak Productions.
7. Tom Strobhar, “Report on B-H Shareholder Meeting,” Human Life International, May 2004; “Special Report, HLI Embarrasses Warren Buffett in Front of 14,000 Stockholders,” July 2004. Mr. Strobhar has a curious history. After serving as a leader in the boycott against Berkshire that resulted in canceling the shareholder-contributions program, he wrote an editorial in the Wall Street Journal, “Giving Until It Hurts” (August 1, 2003), criticizing the shareholder-contributions program for being a clandestine way of “paying” Buffett (Notwithstanding that Berkshire made no corporate charitable contributions nor paid a dividend). Strobhar identified himself only as the president of an investment firm in Dayton, Ohio, omitting his role in the boycott and the fact that he was chairman of Life Decisions International. Strobhar
went on in 2005 to found Citizen Action Now, an organization designed to fight “the homosexual agenda” and for “an America free from the manipulation of homosexual groups.” On the website of his investment firm, he borrows Buffett’s reputation by advertising himself (as of November 2007) as “trained in the tradition of Ben Graham, the ‘father of security analysis,’ whose students include Warren Buffet [sic], ‘the world’s greatest investor.’…Like Graham and Buffett, Thomas Strobhar’s focus is on ‘value investing.’”
8. Excerpts from 2004 Berkshire Hathaway annual meeting are from notes of the author.
9. The Omaha Housing Authority bought the house for $89,900.
10. Interview with Susie Buffett Jr.
11. Ibid.
12. Ibid.
13. Ibid.
14. Howard Buffett Jr. (Howie B.), speaking at Susie’s funeral.
15. Interview with T. D. Kelsey.
16. Ibid.
17. Interviews with Al Oehrle, Barbara Oehrle.
18. Interview with T. D. Kelsey.
19. Interviews with Herbert Allen, Barbara Oehrle, T. D. Kelsey.
20. Interview with Susie Buffett Jr.
21. Interviews with Herbert Allen, T. D. Kelsey. According to the Oehrles, Herbert Allen, and Barry Diller, the rest of the guests remained in Cody for the weekend and turned the weekend, as best they could, into a sort of tribute to Susie.
22. Interview with Susie Buffett Jr.
23. Interview with Howie Buffett.
24. Interviews with T. D. Kelsey, Herbert Allen.
25. Interviews with Susie Buffett Jr., Peter Buffett.