Buffett inadvertently nails it evoking Salomon

May 2, 2011

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.

Comments

Inadvertent? Hardly. Salomon is now part of Citi. Buffett didn’t find out about Citi investment bankers meeting with Sokol until he read it in Lubrizol’s draft of the proxy.

When confronted about Citi, Sokol lied and promptly resigned. Buffett is putting this totally on Sokol and Citi and well he should. How many other stocks on that list of 18 that Citi provided did Sokol decide to purchase for his own account?

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