Felix Salmon

Why Warren Buffett would never have gone into private equity

Felix Salmon
May 18, 2009 21:14 UTC

Here’s a snippet from that Michael Lewis review of The Snowball:

Buffett’s second great decision was to maximize, at great financial cost to himself, the interest that the public might take in his business affairs. In 1986, Congress passed a tax reform that changed how Berkshire Hathaway’s capital gains were taxed. Previously, those gains had been taxed only once, when a shareholder sold his shares. Now, so long as Berkshire remained a public corporation, Buffett would need also to pay tax on any gains from the sale of stocks inside his portfolio. There was an obvious solution, and it was seized upon by public fund managers everywhere in Buffett’s position: shutter the corporation and become a private equity fund. At the time Berkshire had $1.2 billion of unrealized capital gains. Buffett might have doled these out, and then restarted as a partnership free of corporate double tax. Instead, at a cost to himself that Schroeder puts at $185 million, he kept Berkshire intact.

A man who cares so deeply about money reveals himself most wholly in his decisions to part with it. Buffett had exchanged cash for an audience.

Would Buffett really have gained from going private? I doubt it, somehow: having sought-after equity with which to pay for acquisitions was extremely valuable to Berkshire Hathaway. What’s more, Buffett prides himself on (to a first approximation) never selling anything; he doesn’t even pay a dividend. As a private-equity fund manager, he would have to give his investors back their money at some point, and that would mean selling assets he loved.

What’s more, there’s something fundamentally unegalitarian about private equity funds: they’re for millionaires only, while a large part of Buffett’s dream was always to take ordinary middle-class Americans and make them millionaires. (On paper, at least, since they never got any dividends from their stock, and he encouraged them regularly never to sell their BRK stock.)

So I’m not sure that it really makes a lot of sense to say that Buffett took a decision which personally cost him $185 million. It doesn’t make sense with hindsight, since Buffett went on to make untold billions more and become even wealthier than he would have become had he gone private. And it doesn’t make sense in terms of opportunity cost either, since while going private might have saved Buffett $185 million in taxes, it would also have cost him a number of golden opportunities down the road. Indeed, Lewis himself explains that Buffett is a master at monetizing his reputation:

By 1986, Buffett’s every move was being watched, and usually cheered. His fame became not only a pleasure but an asset. His capital became unlike anyone else’s, because it came with his name attached to it. Warren Buffett saw deals that no one else saw, and had access that no one else had. If the stock market was a roulette table, he had his hand on the wheel.

Later — much later — a handful of private-equity groups (TPG, KKR) started to get some small measure of the kind of access that Buffett had enjoyed for years. Even then, however, that access was entirely a function of their ability to borrow money, and it disappeared the minute that the market in leveraged loans dried up.

Finally, as Lewis says, “as rich as Buffett became, he never stopped measuring himself by how much money he had”. When Berkshire Hathaway was trading at a significant multiple of book value — as it nearly always was — Buffett could judge how much money he had just by taking the number of shares he owned in Berkshire Hathaway and multiplying them by the share price.

If Berkshire went private, however, Buffett could do that no longer: he would have to measure his own wealth on book value alone. Which, while surely a large number, wouldn’t be quite as large as the market value of his stake in Berkshire Hathaway. And that might well make the difference between him being the richest man in the world and, well, not being the richest man in the world.

Given that choice, it’s quite easy to see how he chose the former course of action.


“as rich as Buffett became, he never stopped measuring himself by how much money he had”….100% of which he has given away (small point Lewis ignored).

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Insider-trading datapoint of the day

Felix Salmon
May 18, 2009 20:38 UTC

How incompetent are the lawyers at the SEC? Here’s what happens when they use the material non-public information at their fingertips to indulge in insider-trading schemes:

[#2] testified that at the time of her testimony in October 2008 she owned more than 50 stocks after a recent sell-off of stocks. She testified that her stock portfolio was then valued at about $45,000, but that it had been valued at about $170,000 at one point.

This particular attorney said that the markets were her “main hobby and passion”. An expensive one, too, it would seem.

Is the Obama administration condoning Ecuador’s default?

Felix Salmon
May 18, 2009 20:07 UTC

One of the great things about working for Reuters is that if an important story appears on the wire, I can agitate to have it put online as well. So go and read this, by Alexandra Valecia and Alonso Soto: the astonishing yet seemingly all-but-missed news that Ecuador’s audacious and dangerous decision to bite its thumb at the entire international financial community has seemingly been ratified by not only its Andean neighbors, the owners of the Andean Development Corporation, but also by the international community more generally, in the shape of the Inter-American Development Bank.

The Andean Development Corporation’s representative in Quito, Luis Palau-Rivas, said the lender sees the OPEC-member nation’s defaulted debt restructuring “positively.”

“We see the process positively because it’s a voluntary process,” Palau-Rivas told reporters. “It’s helping to solve a difficult situation … and will benefit everyone.”

Palau-Rivas said the CAF was planning to disburse up to $700 million in loans to Ecuador in 2009. From those credits about $450 million will go to the public sector.

The IADB also said it was seeing progress in Ecuador’s talks with bondholders.

“The good results obtained (in the restructuring) will benefit all Ecuadoreans during difficult times,” the lender’s representative, Carlos Melo, said in a statement. “The IADB reiterates its predisposition to work alongside Ecuadoreans to promote economic development.”

This is absolutely astonishing stuff. Historically, private lenders have looked to the multilaterals having what’s known as a “lending-into-arrears” policy, whereby countries which needlessly and gratuitously default on their debts get cut off from international funding.

In this case, Ecuador had more than enough money to pay all of its debts, but defaulted for nakedly political reasons, and is now in the process of buying back its defaulted debt for little more than 30 cents on the dollar.

The idea that this is “a voluntary process”, as Palau-Rivas says, is utterly ridiculous: the bondholders have had no say whatsoever in what has happened, and their only choice is whether to accept Ecuador’s risible offer or to hold onto defaulted Ecuadorean paper indefinitely.

And it’s far from clear that even if the restructuring does generate “good results”, the consequences “will benefit all Ecuadoreans”. Indeed, it’s quite likely that the opposite will be the case — that Ecuadoreans, cut off from private-sector funding and investment, will find themselves shunned for the foreseeable future.

But never mind Ecuador — what message does this send to the rest of Latin America, not to mention Africa and the rest of the world? The multilaterals seem to be saying that they will embrace any default, no matter how egregious, and that the best strategy for any indebted nation is to simply force its lenders to write off the vast majority of their loans. This is likely to backfire massively not only on the multilaterals themselves — which of course have billions of dollars in debts outstanding to the likes of Ecuador — but also on the countries in question, most of whom who want to be taken seriously but all of whom must now be considered highly suspect credits, given the incentives being put in their way by CAF and the IDB.

I can’t imagine that these statements from CAF and the IDB were made without the foreknowledge, if not the outright approval, of the Obama administration, and that worries me a lot. Somebody should ask Lael Brainard, the nominee to be undersecretary for international affairs, what she thinks of all this. For that matter, somebody should ask Larry Summers and Tim Geithner, both of whom held that job in the past, what they think. In the midst of a major domestic financial crisis, I fear some nasty precedents are being set internationally with nobody noticing.


Felix, I will bet you one pint of good English beer that your prediction that Ecuador will “cut off from private sector financing [...] for the forseeable future” turns out to be a crock.

This theory of yours that sovereign defaults in the past have a material effect on investor perceptions of the likelihood of sovereign defaults in the future, has a certain amount of theoretical attractiveness, but it’s been falsified empirically again and again. This alleged cost of default in terms of future access is illusory. It doesn’t exist.

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Michael Lewis takes down Warren Buffett

Felix Salmon
May 18, 2009 17:35 UTC

Michael Lewis has done it again, this time with a monster 4,700-word book review of Alice Schroeder’s biography of Warren Buffett. (Of course, it’s much less of a monster than the 838-page book itself, and it’s much more readable than Schroeder’s ridiculously overspecific prose.)

Lewis is no fan of Buffett’s, and dwells in his review on many of the investor’s weaknesses: his juvenile shoplifting, his dysfunctional family life, his “diet of an eight-year-old”. He even explains why he thinks that “there has never been a better time to bet against Warren Buffett” — not that Lewis himself is about to do so.

Lewis says that Buffett is unhappy with Schroeder’s book; he’ll be much less happy with this article, I’m sure. But of course Buffett won’t respond directly; he’ll just schedule another marathon interview session on CNBC and revel in the adoration of the cameras and the anchors. He might not be loved by his family, but he’s good at finding people who love him in the world of financial media.

Update: To clear up a bit of confusion, yes, the Lewis piece bends over backwards to claim that it isn’t a takedown. But it is. It’s much harsher on Buffett than the book it’s ostensibly a review of, and the reader is left with a distinctly unpleasant impression of Buffett.


It is really too bad that Lewis is such a cynic, because in his efforts to be objective and contrarian he badly reveals his rationalization and bias. Lewis’s presumption that Buffett’s distancing from Schroeder was due to an assumed less flattering portrayal in a biography that was in actuality very benign is laughable. The whole book read like a novel and gave no special insights to Buffett’s personality. Keep in mind that this is the first biography that Buffett ever collaborated on. In all likelihood, he did not approve of how well it was written. After reading it a handful of times, I cannot say that I disagree either. Lowenstein’s book, for example, is far better.

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The full Gillian Tett interview

Felix Salmon
May 18, 2009 16:34 UTC

My full 18-minute interview with Gillian Tett for Reuters TV, talking about Gillian’s new book, is now up:

I definitely make a better blogger than TV presenter, but there’s some good stuff in here all the same, I think.


I did not realise until now that you were a Brit – not that it matters :-) but one would not guess it from your writing style

P.S. The anti-spam word is impossible to decipher, and difficult to hear

Bad idea of the day: A crippled iPhone

Felix Salmon
May 18, 2009 16:08 UTC

Olga Kharif speculates that AT&T might release a crippled iPhone later this month:

The exclusive U.S. iPhone service provider is considering cutting the price of its monthly service package or offering a range of lower-priced plans, say people with knowledge of the company’s thinking. One plan that could be introduced as early as late May would include limited data access at a $10 monthly reduction, the people say.

This is a stunningly bad idea. For one thing, $10 a month is not very much money, considering that the cheapest iPhone plan is $70 per month excluding text messages, and unlimited texts (which aren’t included in the unlimited data plan) cost an extra $20 a month.

More to the point, unlimited data is intrinsic to how the iPhone works. Everything from visual voicemail to thousands of different apps, including very data-heavy apps like Google Maps, relies on the fact that the marginal cost of data is zero. If you start limiting data access, you’re essentially limiting the use of the phone itself, and it becomes something to be mistrusted rather than something to be loved. If I press the Mail button by mistake, how much data will I inadvertently use? What happens if I think I’m happily surfing on WiFi, but then for some reason get booted onto the cellular network?

The iPhone was the first phone to be fully integrated into the internet; unintegrating it by introducing a limited-data plan would be a horribly retrograde step, especially when lots of other sexy new phones, including the Palm Pre, are about to be introduced.

Incidentally, at the end of that NYT article, we find this:

“Phones don’t stand the test of time,” Mr. Donovan said. “I look at my personal handset museum, and the coolest thing I had in my pocket eight years ago is laughable.” When it comes to phones, he added, “there are no ‘Citizen Kanes’ out there.”

Not true.


It’s funny, I knew what was going to be in that link before I clicked it. Luddite that I am, I still use mine. You people might like your ultra-thin, ultra-versatile, ultra-expensive superphones, but I’ll take complete indestructibility and a two-week battery life, thanks.

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The return of the IHT archives

Felix Salmon
May 18, 2009 15:31 UTC

Richard Pérez-Peña has the story: the IHT archives, which disappeared back in March, are reappearing. Finally. But the story is a little odd:

“Obviously, it was never our intention to make this stuff disappear,” said Marc S. Frons, chief technology officer of New York Times Digital.

The plan was to move all the Herald Tribune articles since 1991 to nytimes.com, but that turned out to be more complicated than expected. And rather than wait, executives combined the sites first, knowing that for a while, The Herald Tribune work would be missing.

Presumably, when it comes to the “executives” in question, the buck stops in this instance with Frons. So if he didn’t intend to make the stuff disappear, then why did he make the switch, given that he knew that the work would disappear? And why didn’t he say anything in public at the time? “Rather than wait” doesn’t even come close to providing an explanation of what exactly happened here and why — although it is great news that the IHT archives are back.

Donald Math

Felix Salmon
May 18, 2009 15:08 UTC

Alex Frangos has some spectacular tidbits from a Donald Trump deposition today. My favorite is in the sidebar:

At the condo and hotel project in Las Vegas, Mr. Trump had told reporters on several occasions that the project sold for $1,300 a square foot on average.

At the deposition, the lawyer, Mr. Ceresney, asks if that sales figure is true.

“For some units it is, yes. We got some — we sold — we got 1,300 — I averaged on some units $1,300 a foot,” Mr. Trump said.

Mr. Ceresney then asked: “Do you understand the concept of an average, Mr. Trump?”

The Donald’s inability to tone down his bluster even during a formal deposition is quite impressive, in its own way. As Ryan Chittum says, “the deposed Trump is a huckster laid bare” — but of course it’s Trump’s very hucksterism which has made him the business celebrity he is today. Trump won’t win his lawsuit against Timothy O’Brien, at least not in the legal sense. But that doesn’t mean he won’t bask in all the publicity it generates — both positive and, as in this case, negative.


Trump is an ass-faced clown. perhaps not a complete fraud, but he’s a joke as real estate man.

if hugh hefner put ugly chicks in his magazine but a centerfold on the cover, that’s what trump would be

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How’s that AIG unwind going?

Felix Salmon
May 18, 2009 14:46 UTC

Are AIG traders dumping their CDS positions at ridiculous prices in order to ingratiate themselves with potential future bosses? It seems not — in fact, it seems that they’re barely making a dent in AIG’s $1.5 trillion CDS portfolio at all, any more. Maybe that’s what happens when you stop paying retention bonuses: your traders stop losing you billions of dollars. Yet another case where going to the beach and doing nothing is vastly more profitable than working very hard.


It was a 2.7 Trillion dollar portfolio that that has been wound down 1.2 trillion dollars to 1.5 trillion dollars. A little fact checking on your part would have been helpful.

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