By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

OMAHA, Nebraska — Warren Buffett, to his credit, dove right in to the David Sokol affair. Early at the Berkshire Hathaway annual shareholders meeting on Saturday, the Oracle of Omaha compared his one-time deputy’s dealing in Lubrizol shares to the scandal that rocked Salomon Brothers two decades ago. Buffett called both events “inexcusable” and “inexplicable.” Yet he overlooked the more significant link to the Wall Street bank he once partly owned and led as chairman. The rogue trading at Salomon exposed poor controls.

Buffett’s long-time investing partner, Charlie Munger, at least diagnosed part of the problem. He told the packed Qwest Center in Omaha, Nebraska, that hubris can sometimes cause irrational behavior. It probably wasn’t his intention, but he could easily have been describing some of his boss’s actions, too, including praising Sokol in the press release that disclosed his executive’s dodgy trades and resignation. Buffett at the time said nothing of the glaring violations of Berkshire’s codes of conduct and went out of his way to say he didn’t believe any laws had been broken.

What’s inexplicable is why Buffett didn’t disclose more when alerting the world to the trouble at Berkshire. And still, he seemed unwilling, or unable, to dwell on his own failings when addressing Berkshire shareholders. He pleaded guilty for not expressing any outrage and joked that Munger would be left in charge of future press releases.

But Buffett nevertheless stumbled on to something, whether he knew it or not. Evoking Salomon Brothers was right on the nose. Paul Mozer’s violation of Treasury trading rules was only a major symptom of a bigger internal ailment, which led all the way to the top of the investment bank. Buffett and Munger would learn belatedly, for example, that senior management, including boss John Gutfreund, had neglected to inform the board and regulators about the full extent of the trading misdeeds.

Sokol’s actions don’t seem to be exposing anything quite so sinister at Berkshire. In fact, it is generally, and rightly, admired for a strong ethical focus. But this recent blind spot, along with an audit committee report about it, reveals a lack of appropriate governance and controls nonetheless. The whole handling of the Sokol affair suggests that if Buffett were to reflect a little further on his time on Wall Street, he might yet have more to learn from it. And by doing so, he would pass along an even better Berkshire to his successors.

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Agnes T. Crane

Berkshire Hathaway’s directors are cleaning up after their chairman. The audit committee’s findings that David Sokol, one-time heir apparent to Warren Buffett, misled the company and violated its ethical standards should help restore confidence in Berkshire’s corporate governance. But just days before the annual shareholder meeting in Omaha, Nebraska, it raises even more questions about how Buffett handled the matter.

Sokol’s purchase of shares of Lubrizol in the months before Berkshire bought the company never looked good. And the trickle of information in the ensuing month, including Sokol’s odd TV appearance and Lubrizol’s subsequent timeline of events, has only made it worse. But Buffett, the model of commonsense investing, abandoned his signature skepticism when it came to his own deputy. When Sokol told his boss he owned Lubrizol shares, according to the audit committee’s report, Buffett didn’t inquire further.

Worse, when Sokol resigned, Buffett not only praised him, but even allowed the former chief of NetJets and chairman of MidAmerican Energy Holdings, both Berkshire companies, to sign off on the press release before it was issued.

The committee’s report is damning for Sokol. In addition to making clear he violated any number of the company’s ethical standards, it says he did not satisfy the duty of loyalty required under Delaware law. The board is considering possible legal action against Sokol, whose attorney disputed the board’s report, saying Sokol is “a man of uncommon rectitude and probity.”

Though it is Sokol being thrown under the bus, Buffett gets sideswiped, too. By taking a much tougher stance on the scandal, the directors leave the Oracle looking incredibly naïve. Buffett may not have known when Sokol had bought his $10 million of shares before deciding to pull the trigger on the $9 billion Lubrizol deal, but he had a fairly detailed chronicle of events by the time he cobbled together his now daft-looking statement on the matter.

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

It’s no secret the Obama administration would prefer to offload the U.S. government’s remaining stake in General Motors. Adding a successful exit from at least one of the automakers it bailed out to the profits made on Uncle Sam’s banking exploits would be a handy feather in the president’s cap as the election season heats up. So reports that the U.S. Treasury is considering another stock sale later this year should come as no surprise. The trouble is GM’s shares aren’t cooperating.

The Detroit automaker’s stock is wallowing some 10 percent below its $33 per share debut last November. Lackluster fourth-quarter earnings, rising oil prices and expected supply chain disruptions following the Japanese earthquake and tsunami have made shareholders moody. If the outlook doesn’t pick up, a flood of shares from the government would make them downright cranky.

Of course, GM would probably welcome a government exit sooner rather than later. The potential hit to the stock price would be outweighed by the ability finally to shake the “Government Motors” moniker it has worn since it first took taxpayers’ money in 2008. And even President Barack Obama and his Democratic party could make an argument for selling at a loss. The bailout saved jobs and the Midwest economy, outweighing the $12 billion hit implied by GM’s current share price.

And retaining a stake come election season would be a political liability. Some voters already suspect Obama’s Democrats of being closet socialists. Hanging on to GM shares would hand Republicans an easy target they would be sure to attack. But a rush to sell brings its own headache: Treasury only breaks even if it sells for more than $52 a share, some 73 percent above the current price. The stock’s unlikely to hit that any time soon. So a secondary offering in the next few months would hand Obama’s opponents another welcome gift.

Take the 2012 elections out of the picture and the need for a quick exit is much less compelling — and taxpayers would have a better shot at getting their money back. There may come a time when it makes sense for Uncle Sam to cut his losses, but that decision should be driven by economics, not politics.

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

NEW YORK — Borrowing short and lending long is the essence of banking. But the business model has some serious flaws when big banks dive too deeply into short-term debt, as they did before the 2008 financial crisis. There’s little danger yet that bad habits have returned, but recent data indicate some banks may be flirting with temptation.

Banks — in the United States and UK in particular — have made serious headway in reducing their reliance on debt markets in the past two years. They’ve also worked to stretch out the time they have to pay creditors back. Moody’s calls the progress significant, with debt profiles heading back toward a more normal six to seven years rather than the alarming 4.7 years on average globally and 3.2 years in the United States seen in 2009.

Banks will still need to roll over or pay back $3.6 trillion over the next two years, however, according to the IMF. As long as credit markets remain on cruise control this shouldn’t be a problem. Even if turbulence strikes, banks in the United States, for example, count on a fat cushion of deposits to soften the blow.

But quiescent capital markets may be emboldening some to creep back into shorter-term debt. In the first three months of this year, a third of the $51 billion borrowed by America’s biggest and most systemically important banks in the corporate debt market matured in three years or less, according to Thomson Reuters, up from 15 percent a year ago. Commercial paper borrowing is also on the rise, up 11 percent in 2011.

Some of the change could be the result of the Federal Deposit Insurance Corp’s efforts to curb borrowing in the repo market, where financing can be as short as one day. Maturing bonds issued during the crisis, and guaranteed by the FDIC, could also be causing an outsized spike as banks refinance them with bonds of maturities below three years.

Still, borrowing patterns bear watching to make sure a creep doesn’t become a slide. The allure is powerful. Borrowing $1 billion for one year would cost a bank like JPMorgan <JPM.N> just $6 million over 12 months where a 10-year bond would cost around $47 million.

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

It didn’t take long for financial engineers to find a new playground. Fresh from dreaming up collateralized debt obligations (CDOs), structured finance specialists are applying the same techniques to exchange-traded funds. ETFs are wildly popular with big and small investors who love the liquidity and diversification such investments promise. But derivatives, special purpose vehicles and skewed incentives — hallmarks of the last boom — have found their way into ETFs as well.

The Financial Stability Board and the International Monetary Fund sounded the alarm this week, warning that ETF innovations could pose a threat to financial stability. In an eerie echo of what many said about CDOs and other complex financial products last decade, the regulators noted that no one really knows how these ETFs will stand up when markets next freak out.

ETFs that use derivatives to mimic the performance of an underlying index are worthy of particular scrutiny. The FSB notes that, in these structures, incentives may be skewed. As a synthetic ETF involves both the bank’s asset management arm and its swaps desk, the bank can benefit twice. Additionally, synthetic ETFs can give banks a cheap source of funding for difficult-to-trade securities. But that could be a potential disaster if ETF investors suddenly want their money back.

Moreover, synthetic ETFs bring back the bogeyman of the 2008 financial meltdown — counterparty risk. Synthetic ETFs, which make up nearly half of Europe’s $275 billion market, expose investors to the fortunes of the bank, not just the ups and downs of the market.

Then there is securities lending. This is a profitable side business for some ETF providers, who lend the collateral backing their investment vehicles to other investors for a fee. This is all well and good, until there’s a spike in redemptions and providers need their collateral back in a hurry.

At $1.5 trillion and climbing, the global ETF market is here to stay. Yet the onus should be on banks to prove their new toys aren’t simply hiding risk behind a complex web of arcane, yet fragile, financial innovations. If they can’t do that, it’s better to keep ETFs confined to their simplest form.

– The author is a Reuters Breakingviews columnist. The opinions expressed are her own –

By Agnes T. Crane

The Federal Reserve’s 25,000-page data dump on bank borrowings so far hasn’t unearthed any shocking revelations or sent financial markets into a tailspin. But it has caught out Goldman Sachs Chief Operating Officer Gary Cohn. Last year, Cohn told the Financial Crisis Inquiry Commission, under oath, that Goldman tapped the Fed’s discount window — the mechanism that allows banks to get emergency funding — once for a “de minimus” amount of money.

At least he got the amount right. Goldman hit the Fed up for less than $60 million. Yes, that’s an “M” for million. But, it went to the discount window five times from the fall of 2008 to early 2010. The biggest drawdown was also the first, of $50 million. It’s possible that Cohn was only aware of this one, given its size and the timing — Sept. 23 2008, when the crisis was in full swing. It’s hardly the kind of cover-up conspiracy theorists may have hoped for. Yet, it’s still another public relations snafu — though more of a 2 than a “God’s work” 9 — for a bank that is still cleaning up its post-crisis image.

The Federal Reserve fought hard to keep information on its borrowings under wraps. A lawsuit forced its hand. And the Dodd-Frank Act makes sure the veil remains lifted. Even though bankers like JPMorgan’s Jamie Dimon reckon such open books will keep banks away, it’s hard to see how a misstep by Cohn — if that’s the most controversial item found in the data trove — will cause banks to boycott the lender of last resort when crisis strikes.

Dodd-Frank mandates disclosure, but grants the Fed a two-year lag. On Wall Street, two years is a lifetime. To investors, history is of interest but not concern: to wit, Goldman shares were up 2 percent Friday. Yet it’s still important to keep the record straight. It forces bank executives to take a closer look at their own records, if for no other reason than to avoid embarrassing misstatements that could come back to haunt them.

JPMorgan is creating loan envy. Jamie Dimon’s record-setting $20 billion financing for AT&T is turning bankers green the world over. With this as the new benchmark for credit-hungry corporate executives the risk is that banks wind up competing in a game of one-upmanship that leads some to fly solo on far dicier deals.

Working with just one lender has many merits for companies. The borrower has a greater capacity to minimize leaks — an enormous perk when navigating regulatory briar patches like the one AT&T must to win approval for buying T-Mobile. For banks, of course, it means juicy fees and huge bragging rights. Andy O’Brien, JPMorgan’s dauphin of leveraged finance (if Jimmy Lee is still the prince), certainly has them.

It’s going to be difficult for rival banks to meet JPMorgan’s ante. First, they must have a big enough balance sheet to accommodate so large a single credit without freaking out regulators. That probably leaves only Bank of America and Citigroup — both still weak from their excesses in the last boom — given the legal limits on lending  in the United States, and HSBC.

So stepping up on riskier deals would be another way to make a mark. The AT&T loan is about as safe as they come. It’s an investment grade company flush with assets that will throw off an estimated $7 billion in free cashflow in 2011 after dividends, according to Moody’s Investors Service. Even if credit markets tighten up, it’s unlikely its bankers would be left holding the bag.

Moreover, JPMorgan could be joined as soon as tomorrow by a host of other banks interested in taking a slice of the T-Mobile financing. This will create the impression that going it alone isn’t that big of a deal. And while joining the syndicate should give banks dibs on the lucrative re-financing AT&T is sure to launch in the bond market, JPMorgan is likely to get the lion’s share of such business.

Moody’s says the JPMorgan deal is a negative since it raises the stakes in an industry that thrives on one-upmanship. Loans to highly-rated companies aren’t too worrisome. That is until bankers, driven by envy and fees, head down-market. Regulators may want to revisit old rules on single-loan limits to nip that possibility in the bud.

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Agnes T. Crane

Warren Buffett’s succession plans have hit serious turbulence. The shock resignation of David Sokol, the chief executive of Berkshire Hathaway’s NetJets airplane charter unit who was considered a prime candidate to run the whole shebang, highlights two huge obstacles to filling the Sage of Omaha’s wingtips. First, the candidate needs to be beyond reproach. Second, there may be better ways to make a pile of money. Until today, Sokol had been a golden boy. Buffett praised him for the NetJets turnaround and the chattering classes put him at the top of the list of successors. His credentials seemed to have been burnished by bringing to Buffett’s attention the charms of Lubrizol, the lubricants maker Berkshire said it would buy for $9.7 billion just two weeks ago.

As it turns out, Sokol had made personal trades in Lubrizol shares around the same time he was telling the company’s bankers at Citigroup that Berkshire might have an interest in discussing a takeover. Though Buffett and Sokol believe no laws were broken — as Sokol ultimately had no vote in making a deal happen — the disclosure suggests Sokol personally profited to the tune of almost $3 million from a transaction he sold to Buffett.

But comparing Buffett’s account of Sokol’s trades with Lubrizol’s own rendering of events in its regulatory filings over the deal leaves many questions unanswered. Whether prosecutors or the Securities and Exchange Commission agree with the assessment of Buffett and Sokol remains to be seen. But if there’s one certainty, any candidate to succeed Buffett cannot have engaged in behavior that is even remotely questionable.

Even assuming Sokol’s actions were above-board his own words suggest Buffett faces another hurdle in grooming his successor: money. In his resignation letter, Sokol cited a desire to “utilize the time remaining in my career to invest my family’s resources in such a way as to create enduring equity value and hopefully an enterprise which will provide opportunity for my descendents and funding for my philanthropic interests.” In other words, he wanted to make more cash.

Whatever the case, the Lubrizol saga is likely to rumble on. At a time when the 80-year-old Buffett and his board should be putting the final touches on a succession plan, it’s a good bet they will be tied up with a whole different set of discussions — with a lot of lawyers present.

A time traveler from the 1950s would hardly blink at the standards American regulators are mulling for run-of-the-mill home loans. True, the new underwriting criteria that bank watchdogs have outlined for most standard mortgages appear to be a radical departure from the funky terms of products that borrowers had their choice of in recent years. But in fact, they are more a return to the conservative ways of the past.

The U.S. regulators — including the Federal Reserve, Federal Deposit Insurance Corp and Comptroller of the Currency — are hoping to rein in excessive risk-taking in the securitization of mortgages by issuing guidelines on “qualified residential mortgages.” In defining these, they’ve leaned on previous rules for safe lending. Notably, the 20 percent down payment — which had all but disappeared outside the rigid co-op boards of Manhattan — is back on the table, together with debt-to-income limits and lower home equity thresholds.

Such standards — considered draconian by some since many first-time home buyers can only afford down payments of around 5 percent — will cause some banks to squawk. Loans that don’t conform to the criteria can only be repackaged and sold to investors if the banks retain 5 percent of the bond. Regulators hope such rules will limit the mortgage-bond machinery of banks from going into overdrive again.

Future borrowers aren’t likely to be thrilled since it may mean their dream house will remain just that for a while longer. It takes more time to save $80,000 on a $400,000 home than $12,000. The good news for the economy as a whole, however, is that the proposed changes won’t have much of an impact on the housing market.

That’s because the rules are, for now, aimed at the private financial sector, not Fannie Mae and Freddie Mac , which still guarantee the vast majority of mortgages in the nation. The hope, though, is that these failed housing agencies will eventually leave a much smaller footprint on mortgage finance, which is why standards set today matter.

If the private sector fills the void, regulators need to keep standards high or risk backsliding into a dysfunctional home finance system. Banks may have to work harder for their profits and borrowers will have to save more before signing the papers. But after the housing market’s blow-up, that’s a worthy price to pay.