Felix Salmon

Actual candor from Jack Welch

Felix Salmon
Jun 23, 2009 17:39 UTC

Jack Welch likes to cultivate an image as a straight-talking kinda guy who would never say something to an enclave of CEOs that he wouldn’t be happy putting his name to in one of his books or columns.

Except, according to the Economist (a/k/a Matthew Bishop):

This columnist once heard Mr Welch tell a chief executives’ boot-camp that the key was to have the compensation committee chaired by someone older and richer than you, who would not be threatened by the idea of your getting rich too. Under no circumstances, he said (the very thought clearly evoking feelings of disgust), should the committee be chaired by “anyone from the public sector or a professor”.

Maybe that’s the reason he finally retired from GE: there was no one left who was richer than he was.

Update: Bishop went into more detail on this here.


When he left there were few older too.

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Conspiracy Jack

Felix Salmon
Oct 10, 2012 02:00 UTC

Why has Jack Welch doubled down on the false, inflammatory, and slanderous tweet that he sent out five minutes after the jobs report came out on Friday?

I was one of thousands who called Welch out on this at the time, both in terms of its substance and in terms of its hypocrisy — coming, as it does, from a particularly notorious earnings massager. Others took his side, or at least suggested that there might be something to what he was saying. And undoubtedly the fact that we’re in the final month of a presidential election campaign served to make everything rather more feverish than it might normally be.

But surely that was only to be expected. When someone of Welch’s stature accuses a sitting president of deliberately manipulating economic statistics for political purposes, just a month before an election, you have to live in a pretty astonishing bubble of flattery and denial not to know exactly what’s going to come next.

The thing about Twitter is that it has a way of piercing such bubbles. Welch is active on Twitter: he has tweeted 1,717 times since he joined Twitter on April 28, 2009. That’s an average of 1.4 tweets per day — and all of them were written by Welch personally, rather than coming automatically from some robot. He particularly likes bashing the Obama administration and supporting Republicans like Herman Cain; what’s more, he has even attacked the unemployment rate, in the past, as being the “most political number out there”.

Such activity, along with his quasi celebrity status, means that he has accumulated more than 1.3 million followers, many of whom are quite vocal. So when he tweets like the grumpy Republican partisan he is, he will immediately see a pretty angry stream of at-replies. Those replies will come from Democrats, of course; but they will also come from people who think that it’s a good idea to have some evidence before accusing the president of a felony that could result in a jail term and/or impeachment; and generally from technocrats on both sides of the aisle who have great respect for the excellent job that the Bureau of Labor Statistics does every month in an enormous and highly complex economy. On TV, Welch is treated with a modicum of respect; on Twitter, he sees real people’s real feelings about him. That’s likely a new experience for him.

A humble man, in such a situation, might have backtracked, realizing that he had gone way too far. But Jack Welch is not a humble man, and so instead he decided to bluster his way through. Hence the bizarre references to Soviet Russia and Communist China, and the way in which he describes his critics as “mobs of administration sympathizers”. (In fact, of course, only in highly autocratic societies could a business leader expect respectful agreement at all times, no matter how stupid his statements.) Hence the brazen — and clearly false — declaration that the reference to “these Chicago guys” in his tweet was in no way about the Obama administration or the White House. And hence his decision to depart the reality-based outlets of Fortune and Reuters, and move instead to the editorial page of the Wall Street Journal, where he can offer up his opinions to the right-wing echo chamber rather than to the public at large. Welch’s choice to appear on the WSJ editorial page — underscored by a declaration that he’ll get better “traction” that way — is a demonstration that Welch is embarking on a new career as a mascot of the right, rather than trying to stretch out his fading post-retirement career as would-be management guru. Welch has chosen the WSJ editorial page much in the way that he hand-picked the Office of Thrift Supervision to supervise GE Capital back in the day: it’s the place where he’ll get maximum  adulation and minimum pushback.

Welch devotes much of his WSJ op-ed explaining why he considers America’s 7.8% unemployment rate to be “implausible”. That’s fine — economic statistics are always inexact, and Welch might well have some insight as to why the real unemployment rate is higher than that. Except, as it turns out, Welch’s unique insight here is wonderfully self-centered and incoherent:

I sat through business reviews of a dozen companies last week as part of my work in the private sector, and not one reported better results in the third quarter compared with the second quarter. Several stayed about the same, the rest were down slightly.

Is there any reason to believe that the dozen companies Welch looked at are representative of the US economy as a whole? Is Welch really saying that looking at these 12 companies gives a better insight into the economy than the official establishment survey, which looks at 141,000 businesses covering 486,000 different worksites? And that aside, if businesses were indeed hiring again, and using their cashflow to employ people rather than just sending it into an ever-growing bank account, you’d expect their profits to go down rather than up. Welch didn’t say that the companies he looked at weren’t hiring; he just said they were making less money in net profit. Which could well be a positive sign.

Welch has statistical-methodology quibbles, too; these are nothing new. Indeed, as he points out in his column, as long ago as 2003 Austan Goolsbee was explaining in the NYT how Democrats and Republicans both have swelled the rolls of the disabled, with the effect that millions of people don’t turn up any more in the official unemployment rate. If you’re collecting disability, you don’t count as unemployed — and the number of people collecting disability today is much greater than it was 30 years ago. As a result, it’s difficult to compare today’s unemployment rate with 1982′s.

But that kind of stats geekery will never set off the kind of Twitter firestorm that greeted Welch on Friday. The slanderous part of Welch’s tweet was his assertion that the White House both could and did “change the numbers” for political gain. Not change the methodology, in some kind of public manner which statisticians could argue about — but instead pull some kind of shady Chicago political move, and release headline unemployment rate just under 8% in much the same way that Welch would regularly release earnings a penny above expectations.

And on that front, Welch is not apologizing in the slightest. Instead, he’s just grudgingly diluting the suggestion a tiny bit:

If I could write that tweet again, I would have added a few question marks at the end, as with my earlier tweet, to make it clear I was raising a question.

Does he have any evidence that the Chicago guys might be manipulating data? No. Does he think it’s even possible for the Chicago guys to be manipulating the data? Evidently, he does. What makes him say that? He won’t say. But is it a legitimate question to raise? In Welch’s eyes, absolutely, yes. If you’re Jack Welch, it seems, any time there’s US data which makes the government look good, the question can and probably should be raised: might the data be wrong? Or, might the government be manipulating it?

The paranoid style in American Politics is nothing new: it was famously diagnosed by Richard Hofstadter in 1964. It has a storied and ignoble history, and Welch is merely the latest in a very long line of American conspiracists. (And yes, of course, you can count Donald Trump in as a bedfellow.) Sometimes the paranoiacs are mostly on the left; these days, they’re mostly on the right. But as with all conspiracy theories, nothing they say can ever be constructive: these are people who will attack empirical evidence long before they use it to help shape their view of the world.

And so, with one unretracted tweet, Welch has effectively rendered himself irrelevant in the so-called thought-leadership world he has dominated for so long. It’s fine to have unusual or minority opinions. What’s not fine is to base those opinions on nothing but ideology, and admit of nothing which could make you change your mind. At that point, you’re not a thinker any more; you’re a theologian. Welch has clearly decided that he would much rather be a pastor, preaching to a like-minded flock of WSJ op-ed page dogmatists, than a participant in substantive debate. The sad thing is that he received much more attention for his outbreak of crazy than he received in response to any of his less-bonkers pronouncements. Which is probably only going to encourage him, going forwards.


This article was link to make conservative look like conspiracy theorist…..except they were proven right….HA!

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Counterparties: Inflate your turkeys

Ben Walsh
Nov 21, 2012 22:14 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.

Thanksgiving is getting more expensive. The WSJ’s Ian Berry reports that wholesale turkey prices are up 26%, on the East Coast, compared to last year. That’s far above the modest increases in other food prices.

As Ben Bernanke noted in his speech at the New York Economic Club yesterday, for most consumers, short-term commodity price spikes don’t translate into higher grocery bills. Despite “the increase in farm prices brought on by this summer’s drought”, he said consumer price increases have averaged “almost exactly 2%”. Turkey is an exception, Berry says, thanks to the peculiarities of a seasonal, capital-intensive industry loathe to expand production in the aftermath of the 2008 recession.

The problem for those of us sitting down for a family meal tomorrow is that there isn’t what economists would term a substitute good for turkey. The solution, Matt Yglesias argues, is to call your local turkey sellers’ bluff and wait until the last minute to buy. That might make you nervous, but the shopkeeper is even more stressed by how little he can charge for a whole turkey the day after Thanksgiving.

At least neither of you has to worry about whether you’ll eat a Thanksgiving dinner. That’s not true for all Americans: Reuters’ Lisa Baertlein reports that those rising food commodity prices are hurting food banks’ inventories.

The U.S. government has less need to buy key staples like meat, peanut butter, rice and canned fruits and vegetables to support agricultural prices and remove surpluses.

Most of the products from those government purchases are sent to U.S. food banks, which then distribute them to food pantries, soup kitchens and emergency shelters…Government commodity purchases through The Emergency Food Assistance Program fell by more than half to $352.5 million for the fiscal year ended September 30.

Tomorrow, then, be thankful that you have a lot to eat, of course. But the econowonks might also be thankful that commodity price inflation hasn’t (yet) made their Thanksgiving dinner more expensive. — Ben Walsh

On to today’s links:

How John Hempton spotted Autonomy’s “self-evidently suspect” financials – Bronte Capital
Marc Andreessen has some explaining to do about the Autonomy debacle – Rob Cox
HP’s explanation just makes no sense – Jonathan Weil
Please buy Jonathan Weil a basic accounting textbook and make him read it – Epicurean Dealmaker

Crime And/Or Punishment
Ex-SAC trader caught up in “largest insider trading case ever charged” – Peter Eavis

CNBC’s move into advocacy and deficit fear-mongering – Ryan Chittum

Technology will bring you personalized pricing even if you don’t want it – BBC

“Jack has a chance now to be more of a free spirit”: Jack Welch’s embarrassing retirement – Businessweek

Zillow: Home prices had their biggest jump in 7 years – Joe Weisenthal

Legal Graft
How charter schools fleece taxpayers – Timothy Noah

Mitt Romney goes to Disneyland alone – Buzzfeed

A conversation with Bill McBride of Calculated Risk – Joe Weisenthal
The author of The Black Swan has now written a baggy, dispiriting, antisocial mess of a book - David Runciman
My reviewer should have been considerably more offended by my book’s contents – Nassim Nicholas Taleb

Goldman Sachs is walking away from the biggest IPO since Facebook – Dealbook

EU Mess
Fukuyama interviews Habermas on the idea of European citizenship – Global Journal

Grey Matter
Heidegger: “If only one could think as directly as Cézanne painted.” – Telegraph

The fall of Monitor Group: “Eventually even attractive illusions come to an end” – Fortune

Good Ideas
Imagine there’s no software patents – Kevin Drum

Counterparties: Angela’s murky trip to Athens

Ben Walsh
Oct 9, 2012 22:00 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com

During Angela Merkel’s six-hour visit to Athens today, her first in three years, she was officially given the “red carpet treatment”, Reuters’ Noah Barkin and Harry Papachristou write. The purpose of her trip was a symbolic show of support for Prime Minister Antonis Samaras and his government’s reforms aimed at turning around the country’s battered economy. Ordinary Greeks seemed intent on producing a different kind of symbolism:

Tens of thousands of demonstrators defied a ban on protests, gathering in Syntagma square to voice their displeasure with the German leader, who many blame for forcing painful cuts on Greece in exchange for two EU-IMF bailout packages worth over 200 billion euros.

Some pelted police with rocks, bottles and sticks, and tried to bust through a barricade set up to protect Merkel and her delegation.

Some 7,000 police were needed to control an estimated 50,000 protesters, some of whom burned Nazi flags or clashed with police. (As usual, the Guardian’s excellent live-blog has full details on the day’s events.) Merkel attempted to convince Greeks that she understood there were “many people suffering in Greece” due to EU-mandated austerity measures, and said she hoped and wished that Greece would stay in the euro zone.

That optimistic message was undercut by a new IMF report that reduced the Fund’s projected 2013 growth rates for advanced economies to 1.5%, from 2%, and highlighted the issues that remain unresolved among euro zone members. The report’s title, “Coping With High Debt and Sluggish Growth,” pretty much says it all. In terms of economic policy, the IMF growth forecast assumes the US will prevent itself from falling off the fiscal cliff, that euro zone crisis measures will be effective, and that long-term solutions to thorny issues like fiscal transfers and a banking union will be achieved.

FT Alphaville’s Kate Mackenzie thinks that with that kind of optimism, the IMF may just be setting itself, and the rest of us, up for “probable disappointment”. — Ben Walsh

On to today’s links:

Goldman: Whatever you do, don’t let the payroll tax cut expire - WaPo
Regardless of who wins the election, you can kiss the payroll tax cut goodbye – Annie Lowrey
America, don’t worry: There is a fiscal cliff, but Jamie Dimon and Lloyd Blankfein are ON IT - Ben White

Mysterious algorithm accounted for 4% of trading activity last week - CNBC

Long Reads
How Bain made millions convincing Russians they should smoke - Huffington Post

Big Ideas
Ireland’s bold, simple plan to fix housing: reduce homeowners’ debt - DealBook

After four years, banks and regulators are still squabbling over annual stress tests - WSJ

New Normal
Total US debt is at a six-year low, and everyone still loves Treasuries - Bloomberg
Investment-grade companies issue record amounts of long-term debt - WSJ

How Washington’s Grand Bargaineers are hurting America - Matt Yglesias
How Congress Turns Deficit Reduction Into a Videogame - Kevin Drum

In defense of idleness (economically) - Stumbling and Mumbling

Data Points
There are some countries where government-produced economic data is suspicious. The US is not one of them - Mark Thoma
Jack Welch quits writing for Fortune and Reuters after jobs conspiracy tweet - Fortune
Why unrevised jobs numbers matter - Ben Walsh

Wall Street bonuses could fall 35% in 2012, after being cut 30% in 2011 - NY Post

UK universities respond to government cuts by entering the bond market - WSJ

Baudrillard, The Matrix and the postmodern economy - FT Alphaville

Secular Declines
Americans making fewer Americans - New Scientist

Help Wanted
The worst writing job ever offers to pay writers between .009 and .02 dollars per word - Gawker

Counterparties: Hyperinflation is so hot right now (in Iran)

Ben Walsh
Oct 5, 2012 22:17 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com

The official Iranian rial-to-US dollar exchange rate has been surprisingly steady over the past several months. That’s somewhat odd, because in 2010, the US and EU imposed tough new sanctions against Iran. But in recent weeks, says the Cato Institute’s Steve Hanke, “hyperinflation has arrived in Iran”:

Using new data from Iran’s foreign-exchange black market, I estimate that Iran’s monthly inflation rate has reached 69.6%. With a monthly inflation rate this high (over 50%), Iran is undoubtedly experiencing hyperinflation.

When President Obama signed the Comprehensive Iran Sanctions, Accountability, and Divestment Act, in July 2010, the official Iranian rial-U.S. dollar exchange rate was very close to the black-market rate. But, as the accompanying chart shows, the official and black-market rates have increasingly diverged since July 2010.

Terrifyingly, the black-market (i.e., realistic) value of the rial recently dropped 60% in eight days. Tougher sanctions in part explain the sudden drop. The US, for its part, seems increasingly unwilling to allow Western financial institutions to pal around with the Iranian regime. Any further reduction in the access Iran’s central bank has to global financial markets would put further pressure on the rial.

Reuters’ Yeganeh Torbati explains how the regime’s attempt to dampen the effects of the currency crisis may have exacerbated the rial’s sudden collapse. As you might expect, the Iranian population is not taking these developments well: Al Jazeera reports that police have clashed with currency protesters in Tehran.

Further sanctions from the EU appear imminent. And that could cause a jittery Iranian regime to pull out the biggest bargaining chip it currently has by closing the Straight of Hormuz. More broadly, Jay Newton-Small rounds up the three most likely outcomes — regime change, a push for greater nuclear capabilities or economic collapse — none of which are particularly heartening. — Ben Walsh

On to today’s links:

Crisis Retro
Lockheed was too big to fail before it was cool - Liberty Street Economics

Primary Sources
US adds 114,000 jobs in September, unemployment rate falls to 7.8% - BLS

Jack Welch and a collection of NFP truther tweets - Zeke Miller
Jack Welch “is now unavailable for the rest of the day in meetings” - Bloomberg
“I wasn’t kidding”: Jack Welch defends his bizarre jobs numbers conspiracy theory - WSJ

How to run your hedge fund from a prison cell - Jonathan Weil
Since 2009, investors have pulled $138 billion from stocks/ETFs and put $1 trillion into bonds - WSJ
An interview with the world’s youngest, most charmingly oblivious hedge fund - Kevin Roose

End-of-life care: the wrong place to look for healthcare savings - David Wessel

Big Ideas
America’s need for more immigrants is the “most important economic issue of our time” - Adam Ozimek

Cognitive Dissonance
“We’ve hit that moment in the election when people begin to lose their minds” - Ezra Klein

Economic research vs. the blogosphere - Why Nations Fail

Meet Mira, the supercomputer that creates universes – Atlantic

Today in Rationing
There have been spot shortages of the Starbuck’s Pumpkin Spice Latte - WSJ

Brian Cox’s Scotch pronunciation guide - Esquire

EU Mess
Greece says it will run out of money by November without more aid - Reuters


Apologies – fixed now!

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Why Mark Zuckerberg shouldn’t listen to management gurus

Felix Salmon
Feb 10, 2012 20:54 UTC

This is why Mark Zuckerberg was smart to stay in complete control of Facebook and not listen to anybody telling him that a multi-billion-dollar company needed a seasoned, professional CEO in charge.

Jack and Suzy Welch are onto something when they diagnose a potential class problem at Facebook, post-IPO.

After its IPO, Facebook is going to have two classes of citizens. That’s just reality. Some of its 3,000 or so employees — several hundred in number by some counts — will have significant riches in the hand. Newer hires, though — well, they’ll mostly have options in the bush.

Where they go hilariously wrong is in their proposed solution to the problem. There’s a carrot, which as far as I can tell involves Silicon Valley manager-geeks suddenly transforming themselves into motivational speakers. And then there’s a stick:

With all this exultant “barking,” there also needs be bite — in the form of frequent, rigorous performance reviews. The facts are, if Facebook wants urgency, speed and intensity around its mission, those behaviors must be explicit values that, when demonstrated, result in bonus money and upward mobility — or not.

Any company, in the wake of an IPO, finds itself growing new and previously-unnecessary layers of management, especially in areas like the general counsel’s office, investor relations, and public relations. But for the Welches, that’s not enough: extra management also has to be marbled throughout the organization, to be found everywhere as “frequent, rigorous performance reviews”.

There is absolutely zero evidence that frequent, rigorous performance reviews ever do any good, and quite a lot of reason to believe that they actually do harm. And what’s true of business professionals in general is especially true of Silicon Valley engineers — a culture where pretty much everybody knows exactly who’s hot and who’s not, without any need for formal, frequent, or rigorous performance reviews.

What’s more, it’s far from clear that the best way to motivate a Silicon Valley engineer is to dangle an annual bonus in front of his face and tell him that if he works hard he could get an extra couple of months’ salary at the end of the year. Rather, the best way to get the most out of engineers is to surround them with other great engineers, in a collegial atmosphere where everybody works hard and everybody does really well building great products that everybody is proud of.

Performance reviews are horrible, divisive things which create a whole other set of class distinctions within a company, between the “high performers” who get money and promotions and the grunts who live in fear that their review will be used to punish or fire them. (And of course if bonus-greed isn’t a great motivator of computer engineers, fear is even worse, especially in the context of Silicon Valley, where there are multiple jobs permanently being dangled in front of just about anybody who can code.)

Managing a company like Facebook is all about creating a magnetic culture — a place where employees love to work, and where they’ll tell their friends that they’re having a great time and that they should come join them. Meanwhile, there has never been a company in the history of capitalism where managers really love the performance-review process and tell all their friends that they would hugely enjoy going through it themselves on a frequent and rigorous basis.

In other words, the mere existence of such things would probably be enough to put off many talented potential employees with a wide choice of possible employers. At a company like GE, a CEO like Jack Welch tends not to worry about such things. But at Facebook, the ability to continue to attract Silicon Valley’s best coders is very high up Mark Zuckerberg’s list of priorities and concerns.

Which is reason number 1,452 that all of Facebook’s shareholders should be very happy indeed that the company is being run by Mark Zuckerberg and not by Jack Welch.


You’re absolutely right!

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Corporate governance chart of the day, Benford’s Law edition

Felix Salmon
Oct 12, 2011 20:30 UTC


This chart was put together by Jialan Wang, and it shows the degree to which companies’ reported assets and revenues deviate from a Benford’s Law prediction over time. (If you want some good background on Benford’s Law and how it can uncover dodgy numbers from eg the Greek government, Tim Harford had a great column last month on the subject.)

Writes Wang:

Deviations from Benford’s law have increased substantially over time, such that today the empirical distribution of each digit is about 3 percentage points off from what Benford’s law would predict. The deviation increased sharply between 1982-1986 before leveling off, then zoomed up again from 1998 to 2002. Notably, the deviation from Benford dropped off very slightly in 2003-2004 after the enactment of Sarbanes-Oxley accounting reform act in 2002, but this was very tiny and the deviation resumed its increase up to an all-time peak in 2009.

So according to Benford’s law, accounting statements are getting less and less representative of what’s really going on inside of companies. The major reform that was passed after Enron and other major accounting standards barely made a dent.

This doesn’t necessarily mean fraud, per se; it could just be a chart of the degree to which companies are managing and massaging their quarterly figures over time. The kind of fraud that’s so respectable, Jack Welch got lionized for it. Once you start down that road, it’s easy to go further and further forwards, while it’s almost impossible to reverse course. So I can easily see how the natural tendency in this chart would be up and to the right.

Still, it’s worrying; all the more so because I can’t think of any way of reversing the trend. If Sarbox can’t do it, nothing will.


This is under the assumption that Benford’s law will always be correct. If, due to other reasons, the reporting of accounting figures changes such that it is no longer correct, no fraud or ‘massaging’ is necessary

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Zero. Nothing. Nilch.

Felix Salmon
Sep 2, 2011 13:00 UTC

The symbolism of today’s payrolls report — ZERO — would be bad enough even if it wasn’t coming out in advance of the Labor Day weekend. There’s a pattern here: no matter how bad Wall Street thinks the employment report is going to be, it always seems to be worse, these days. It’s like GE’s earnings circa Jack Welch, but in reverse.

It’s increasingly looking as though the government is utterly incapable of creating jobs, but is actually pretty effective at destroying them. It’s doing so in a direct, literal way — there were 17,000 fewer government employees in August than there were the previous month, and local government has lost more than half a million jobs since September 2008. And it’s also doing so in an indirect way — there can’t be much doubt that a significant part of the jobs weakness is a function of the anger and uncertainty caused by the utter dysfunction of the legislative branch of government.

Hiring and firing decisions, of course, happen slowly — and they often happen after the summer. The jobs situation, which is always cyclical, now seems to be in a downturn rather than an upturn, which raises the prospect of a negative payrolls figure in September and further gruesome news over most of the 2012 election year. President Obama can speechify all he wants on Thursday, but I can’t imagine that he’s going to be able to get anything substantive through the House — not when Eric Cantor is demanding that even emergency hurricane relief be paid for with spending cuts.

You can call this a double dip, if you like, or you can view it as a kind of aftershock of the financial crisis. Either way, the economy is clearly now below its stall speed, and we don’t have access to the mechanisms necessary to get it moving again. That is going to make for poisonous politics, Washington gridlock, and untold human misery among millions of new and long-term unemployed across the land. Happy Labor Day, people.


Not everybody is in debt, remember, somebody’s debt is somebody else’s income. The problem is the paradox of thrift, everybody scared and saving at the same time, the mirror image of the “irrational exuberance” during the boom times. Typical of capitalist business cycles. Financial crises precipitated by uncontrolled speculative behavior by the private sector is as old as Adam Smith and without government intervention, will continue ad eternum. The question is how long are we willing to let the recession go on and how many lives will be sacrificed in the process. The commentaries regarding the inherent positive aspects of private sector intervention versus the
self-defeating public sector have been proven wrong over and over the past 100 plus years. Those ideologues always focus on the fallen brown leaf and forget the rest of the tree.

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Charlie Munger’s BYD conflicts

Felix Salmon
Apr 5, 2011 21:37 UTC

In April 2009, Marc Gunther wrote a glowing cover story for Fortune profiling hot Chinese automaker BYD, the recipient of hundreds of millions of dollars of Berkshire Hathaway’s money. The headline was “Warren Buffett takes charge” (charge, electric cars, geddit?), and two things were abundantly clear. The first is that Berkshire’s stake had catapulted BYD into the international spotlight and given the company invaluable credibility. And the second is that Charlie Munger was BYD’s biggest cheerleader, both before and after the stake was bought.

Buffett’s friend and longtime partner in Berkshire Hathaway, Charlie Munger, suggested early last year that they invest in BYD…

Buffett, who is 78, was intrigued by Munger’s description of the entrepreneur behind BYD, a man named Wang Chuan-Fu, whom he had met through a mutual friend. “This guy,” Munger tells Fortune, “is a combination of Thomas Edison and Jack Welch – something like Edison in solving technical problems, and something like Welch in getting done what he needs to do. I have never seen anything like it.”

Coming from Munger, that meant a lot. Munger, the 85-year-old vice chairman of Berkshire Hathaway, is a curmudgeon who frowns on most investment ideas. “When I call Charlie with an idea,” Buffett tells me, “and he says, ‘That is really a dumb idea,’ that means we should put 100% of our net worth into it. If he says, ‘That is the dumbest thing I’ve ever heard,’ then you should put 50% of your net worth into it. Only if he says, ‘I’m going to have you committed,’ does it mean he really doesn’t like the idea.” …

In acquiring a stake in BYD, Buffett broke a couple of his own rules. “I don’t know a thing about cellphones or batteries,” he admits. “And I don’t know how cars work.” But, he adds, “Charlie Munger and Dave Sokol are smart guys, and they do understand it.”

Nowhere in the article was there any indication that Munger owned a large stake in BYD before bringing it to Buffett.* And all over the article is the idea that Buffett bought his stake in BYD precisely because Munger was such a strong proponent of the company and its CEO.

But now, in the wake of l’affaire Sokol, Munger’s changing his story:

Munger, 87, said his family invested with money manager Li Lu in BYD through a partnership that has a stake of about 3 percent and that he urged Sokol, then the leader of Berkshire’s energy business, to scout the business.

“I had Dave look at it, because I knew I couldn’t talk Warren into buying into the damn thing by myself,” Munger said…

Munger said his family holds a “little more” than half of the fund with the BYD investment, and that he didn’t participate in Berkshire’s discussions on its deal.

“I recused myself,” Munger said. “But there’s no question about it, that I caused Dave’s original interest.”

What seems clear here is that Munger wanted to “talk Warren into buying into the damn thing”; that he got Sokol to visit BYD with that very end in mind; that Buffett would never have bought his stake in BYD without Munger’s active participation; and that in the wake of Berkshire’s investment, Munger’s stake skyrocketed in value.

Munger’s recusal, on the other hand, seems pretty weak tea. As BYD’s chief cheerleader and Warren Buffett’s right-hand man, it’s pretty much impossible to see how he could effectively recuse himself from discussions: his input had already been made and clearly understood by the time that any formal investment decision took place.

Which brings me back to the question of why Munger feels the need to trade for his personal account in the first place. Why create an unnecessary opportunity for what seems in hindsight to have been a huge conflict of interest? And why was Munger’s personal stake in BYD never disclosed until Sokol blurted it out on CNBC Thursday? It certainly looks as though he felt that he had something to hide.

*Update: Fortune’s Gunther, in the comments, says that there was a sidebar in the print issue of the magazine which never made it online. And that sidebar said this:

Warren Buffet may be BYD’s most famous investor, but Li Lu, whose company LL Investment Partners owns 2% of BYD, has quite a story of his own. Born in China in 1966, Li Lu was raised by foster parents after his were forced into labor camps during the Cultural Revolution. As a 10-year-old, he barely survived an earthquake that killed 250,000 in the city of Tangshan. Then things got really interesting: Li Lu became a leader of the pro-democracy movement that organized protests in Tiananmen Square in 1989, appeared on China’s Twenty-One Most-Wanted List, and escaped to New York, where he was embraced by the human-rights community and earned three degrees from Columbia. After stints at Allen & Co. and DLJ, he met Charlie Munger through friends and started his own investment fund; Munger, the Berkshire vice chairman, is his largest investor. Li Lu, who is not allowed to travel freely in China, politely declined to be interviewed by Fortune. When asked about Li Lu’s story, BYD CEO Wang Chuan-Fu says: “That’s past history. Today, Mr. Li and I share the belief that the best way to help China move forward is to make BYD a world-class company.”

A close reading here would seem to show that Munger did have a stake in BYD, via LL Investment Partners — although it’s far from clear, and certainly there’s no indication when Munger invested. But this is even more subtle than Sokol’s passing mention to Buffett that he owned shares in Lubrizol.

Update 2: The WSJ’s Susan Pulliam had more detail in July 2010, saying that Munger invested some $50 million with Li Lu in early 2004, who rapidly invested a lot of that money in BYD. She continues:

In 2008, Mr. Munger persuaded Mr. Sokol to investigate BYD for Berkshire as well. Mr. Sokol went to China and when he returned, he and Mr. Munger convinced Mr. Buffett to load up on BYD.

There’s no mention of Munger recusing himself from that decision in any meaningful way; the WSJ now says that Berkshire policies bar “trading in shares of companies in which Berkshire might invest”, without publishing the memo, giving the exact language, or saying whether Munger is covered by it.


A pretty significant difference in the facts relating Munger’s investment in BYD is that he had invested in BYD “for years” before mentioning it as a potential acquisition for Berkshire and then recused himself from Berkshire’s consideration. At the time Munger invested in BYD, it likely wasn’t large enough to be a feasible investment for Berkshire Hathaway.

http://www.bloomberg.com/news/2011-04-05  /munger-says-he-told-buffett-of-byd-sta ke-stayed-out-of-berkshire-s-talks.html

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