Deals wrap: A successor for Buffett?
A fairly unheralded 44-year-old Chinese-American hedge fund manager, with a strong background as a human rights activist, has become a leading candidate to replace Warren Buffett, should he retire as founder and CEO of the $100-billion Berkshire Hathaway fund, according to the Wall Street Journal.
Li Lu, who was a student leader during the 1989 Tiananmen Square protests in Beijing, is the first person to be identified to potentially replace the soon to be 80-year-old Buffett, in what the WSJ story said is “among the most high-profile succession stories in modern corporate history.”
Buffett told the WSJ his retirement plans are not imminent and his job would likely be split after he leaves the company into separate CEO and investing functions. The WSJ story revealed David Sokol, the current chairman of Berkshire unit MidAmerican Energy Holdings, is considered the top contender for Buffett’s CEO role, while Li would potentially serve as one of Berkshire’s top fund managers.
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Recently Facebook founder and CEO Mark Zuckerberg told ABC News’s Diane Sawyer he would only consider an IPO “when it makes sense,” but now Bloomberg, “citing three people familiar with the matter,” reports that may not be until 2012.
The postponement would give Zuckerberg more time to increase users – Facebook just surpassed the 500 million mark – and boost sales which could double to at least $1.4 billion in 2010, according to the sources quoted by Bloomberg.
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Noted: 5-year funk means no office firesales
Despite a looming wave of defaults, sell-offs of European offices at knock-down prices are unlikely, because commercial property prices are likely to tread water for years, rating agency Moody’s says.
in a report on the region’s commercial mortgage-backed bond market, Moody’s said it expects more loan defaults, but doesn’t think commercial property values will “materially recover” for the next five years. (Reuters report here.)
This means that special servicers — the administrators responsible for deciding the future of bust securitisations — “will not pursue immediate sale of the properties … but rather continue to collect the rental cash flows where possible and dispose of the properties under more favourable conditions, which may reduce ultimate losses,” the agency said.
Some foreign buyers have not been put off, with South Korea’s National Pension Service spending 268 million pounds on a pair of prime London office buildings.
Did the Oracle just blink?
It may have only been about two percent of his holdings in the rating agency, but Warren Buffett’s decision to pare back his stake of Moody’s smacks of capitulation after a Manhattan judge ruled that just because they write opinions does not necessarily afford the much-maligned credit grading industry first-amendment protection.
Buffett‘s Berkshire Hathaway said in a filing it had sold 794,388 Moody’s shares on Sept. 1 and Sept. 2, chiseling its holding down to 39,219,312 shares. This isn’t the first time the Oracle of Omaha has seen fit to shave his share of the rating agency. Many will say these incremental measures are not a signal of a loss of faith in the business. But one could argue that the small sales serve less of a financial purpose than they signal slipping confidence. Even Buffett has said Moody’s damaged its brand by providing inaccurate ratings of SIVs, CDOs, CDSs and ETCs — the acronyms of mass financial destruction in the markets’ meltdown.
U.S. District Judge Shira Scheindlin in Manhattan said ratings on notes sold privately to a “select” group of investors were not “matters of public concern” deserving of traditionally broad protection under the First Amendment of the U.S. Constitution. Shares of both Moody’s and McGraw-Hill, which owns Standard and Poor’s, slid in response.
Buffett may yet sense a brighter day on the horizon once the lawsuits are settled. Bond market investors can’t really do without rating agencies, so any improvements to their ability to spot and give appropriately poor grades to cruddy paper could spark a quick turnaround in rating agencies’ fortunes.
Perhaps Warren Buffett simply realized the conflict of interest for a rating organization to have its shares listed in the Stock Exchange…
The rising and falling default rate
Rating agencies Moody’s and S&P regularly publish figures on how many companies have defaulted on their debt, and the numbers are rising fast.
S&P’s latest report, which came out on Thursday, shows the global speculative-grade bond default rate increased to 8.58% in July, up slightly on June, and a massive hike on the record low of 0.79% hit in November 2007.
It is less clear what will happen next. Earlier this year the agencies predicted defaults amongst speculative grade borrowers could reach 20 percent — a huge increase — but now agencies have rowed back and are painting a slightly less bleak picture.
S&P’s new report says the number of “weakest links” — companies with low (B- or worse) ratings on review for a downgrade or with a negative outlook — has declined. This, the agency says, is because the increased number of defaults has knocked out many of these weak credits.
A sliver of silver lining around this grey cloud is that the rate of companies falling into weakest-link territory is lower than the number of companies defaulting, which may suggest the default rate may ease sooner rather than later.
The reopening of the credit markets, and banks’ determination not to write off debts, seems to have slowed the pace of defaults. However, talk of double-dip recessions may mean rating agencies’ earlier, bleaker predictions may end up being proved correct, just over a longer time frame.
Whichever way it finishes, little of this will help rating agencies’ reputation for making accurate predictions.
The security formerly known as a CDO
“O, be some other name! That which we call a rose by any other name would smell as sweet.” –Romeo and Juliet
Debt analysts told an audience at New York University last week that the maligned securities known as collateralized debt obligations can still help diversify investment portfolios and disperse risk when used correctly. But first the markets will have to come to terms with the negative aura surrounding CDOs, which have been blamed for their role in the housing and credit crisis.
“CDOs will be back at some point. They might have a different name…,” Stanford University professor Darrell Duffie said, trailing off to a roomful of laughter at a credit conference sponsored by Moody’s and NYU.
Duffie, president-elect of the American Finance Association, has a suggestion: “CRTs,” or Credit Risk Transfer products. That’s how he referred to CDOs and other securitized products throughout his keynote presentation, “Credit Risk Transfer: Implications for Financial Efficiency and Stability.”
A name is no small thing — just ask author and fund manager Antoine van Agtmael. In 1981, he pioneered investing in what was then known as the “Third World.” But as that didn’t sound very appealing, he created a new term. Ever heard of a little something called “emerging markets?”
