Show Buffett the Door
By Peter Eavis
Senior Columnist
3/16/2005 7:06 AM EST
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thestreet.com
If a suspect insurance deal can topple AIG's (AIG:NYSE - commentary - research) imperious CEO, Hank Greenberg, there's no reason it can't also bring down Warren Buffett, America's most-revered investor and CEO of Berkshire Hathaway (BRKA:NYSE - commentary - research).
The deal, which AIG and Berkshire subsidiary General Re forged in 2000, is being probed by New York Attorney General Eliot Spitzer and the Securities and Exchange Commission. The regulators are exploring the possibility that the deal was done not as a proper insurance transaction that included real risks, but instead to make AIG's financial performance look better than it was. But General Re may have done the deal to make its own performance look better as well.
For AIG, at least, there were two potential motives for manipulating results: The company wanted to fend off criticism that it wasn't keeping enough reserves for future claims, and, second, it wanted to keep its stock up as it launched a bid for a large life insurance company in April 2001.
Greenberg will remain at AIG, a company he built into an insurance industry powerhouse, as nonexecutive chairman. However, very few observers expected he would leave the CEO post so quickly. After all, he showed little desire to leave in the past 12 months, when two other similar AIG deals were singled out by regulators.
The fact that a hugely influential fighter like Greenberg has gone so easily strongly suggests that Buffett soon may also be asking whether retiring makes sense. If Buffett, America's second-richest man, did step down as CEO, it would bring a shocking and disappointing end to the most successful investing career America has ever seen. It would also be ironic because Buffett has spent much of his career lecturing corporate America on the need to present clear and dependable financial statements.
So how likely is it that Buffett will suffer the same fate as Greenberg?
Greenberg's rapid descent from the CEO post comes amid reports that he was personally involved in the deal that's being scrutinized by Spitzer and the SEC.
There has been no indication so far that Buffett was personally involved in the deal, and General Re is reportedly cooperating in the probe. Moreover, any easily provable Buffett involvement would almost certainly have been leaked by now.
But it would be absolutely no surprise if Buffett had played a part in this transaction or others like it.
The General Re-AIG deal appears to have been a classic "finite" reinsurance deal. Finite reinsurance is objectionable because it allows insurance companies to make it look as if they've passed losses -- i.e., claims that must be paid out to policyholders -- to other insurers at no real cost and at no real risk over the lifetime of the agreement.
Under finite deals, the companies passing off the losses are usually borrowing reserves from the other companies and paying up for that privilege. The loss-ceding insurers are therefore ultimately worse off because of the deal. And finite deals are deeply deceptive because the loss-ceding companies don't have to put a dent in published capital and earnings by increasing reserves for losses. U.S. regulators, seeing the finite abuses, tried to stamp out this practice in the '90s. So, just the fact that Buffett's Berkshire was even involved in the AIG deal is immediately disturbing.
So why might Buffett have been involved in this finite deal or ones like it? Simple: Because of his very close relationship with Ajit Jain, a Berkshire executive who was involved in a finite reinsurance deal that contributed to the 2001 bankruptcy of a large Australian insurance company called HIH Insurance.
Amazingly, soon after the involvement of Berkshire and Jain's role in the HIH collapse became known, Buffett wrote in Berkshire's 2001 annual report: "I have known the details of almost every policy that Ajit has written since he came with us in 1986." (For a full account of the deal click here.)
Berkshire's savviest observers were stunned when they saw this remark. Why go out on a limb to defend an executive who had been so intimately involved in a deal that the Australian authorities had shown to be deceptive? Was it pure recklessness? Or was Buffett displaying the same sort of "no one-can-touch-me" attitude for which Greenberg had long been criticized?
If Buffett said he knew the details of "almost every policy" in which Jain was involved, it is no stretch whatsoever to assume that he also knew the details of the General Re-AIG transaction. And even if he didn't, Spitzer and the SEC are compelled to take a look at all of Jain's finite transactions and inquire about Buffett's knowledge as they do so. To look closely at the one deal with AIG and not examine other similar ones at Berkshire would be a severe dereliction of duty. Indeed, it would be like looking at only one of Enron's dodgy off-balance sheet trusts and then stopping the probe.
Even if Buffett never ends up getting specifically tied to any particular deal that comes under the regulators' scrutiny, it is time for the Oracle of Omaha to go. His handling of the 1998 General Re acquisition is reason enough. The unit has consistently underperformed since it was bought and Buffett hasn't managed to bring about a serious change in the culture that was overly aggressive in its underwriting. The current CEO of General Re, Joseph Brandon, was chief finance officer when the AIG deal was written.
Neither Buffett, Jain nor Brandon responded to calls seeking comment.
Some Berkshire experts say that Buffett doesn't fire people that underperform, sully the company's name or put it at risk for one reason: Because he's vain. Critics say he doesn't want to admit he made a mistake in keeping lousy execs at their posts. Despite the folksy self-deprecation he calculatedly shows in his public appearances, it's clear that Buffett aims to sustain his reputation as an investment maestro.
But that explanation may be too kind. He may not want to get rid of the offenders because they have evidence that he was involved in "almost every policy" that they wrote. |
