The Sage Of Omaha Warren Buffet

The Oracle of Omaha’s Latest Riddle
By TIMOTHY L. O’BRIEN

OMAHA

WHEN Berkshire Hathaway shareholders gather here in three weeks for their annual meeting, they will be treated to another homespun video starring the company’s chairman, Warren E. Buffett. This year’s plot is still a secret, but Mr. Buffett’s co-star in last year’s video was Arnold Schwarzenegger, the governor of California.

Mr. Schwarzenegger appeared in Army fatigues and took Mr. Buffett – who may be the Charles Atlas of investors but who has the musculature of a chipmunk – through a grueling workout to punish him for criticizing inequities in California’s property tax system. At the end of the video, Mr. Buffett graces the cover of a fitness magazine, sporting six-pack abs and rippling biceps, much to the governor’s surprise.

Amid the self-deprecating humor and sly winks at the Berkshire family of companies, Mr. Buffett’s annual meetings, which attendees fondly call the Woodstock of American capitalism, are about much more than money. Each gathering is also a tutorial overseen by Mr. Buffett, a man widely regarded as a financial genius, a model for corporate integrity and someone who has spent his 74 years trying to integrate personal values such as honesty, trust and openness with the business, political and public worlds around him.

"What Warren’s trying to do with his life is to teach a grand lesson: the right way to run a business and the right way to live a life," said Charles T. Munger, Berkshire’s vice chairman and one of Mr. Buffett’s closest friends. "A lot of people are coming to Omaha to reinforce the right way to live and the right way to run a company. I jokingly refer to it as a catechism."

Tomorrow morning, the Buffett catechism will come under scrutiny in New York. The Justice Department, the Securities and Exchange Commission and New York’s attorney general, Eliot Spitzer, have asked Mr. Buffett to meet with them in Manhattan to discuss a wide-ranging investigation of insurance industry practices, some of which involve a Berkshire subsidiary. Mr. Buffett is a witness in the investigation, not a target, and several people involved in the inquiry said that there was no evidence that Mr. Buffett had either authorized or had knowledge of any malfeasance.

But the investigation has forced Mr. Buffett, who has amassed a personal fortune that Forbes pegs at $41 billion, to respond to questions about accounting shenanigans and corporate subterfuge, practices that he has long railed against. People close to Mr. Buffett also say the investigation has left him fearful that his sterling reputation – built patiently and purposefully during five decades as a professional investor – will be sullied by events that have largely taken him by surprise.

Others around Mr. Buffett, in Omaha and elsewhere, acknowledge the potential risks that the investigation poses to his legacy, but they remain convinced that his accomplishments are so singular and authentic that he need not worry.

"The chance that Warren Buffett wanted to make a little extra money out of a subsidiary that is a freckle of Berkshire’s earnings is just madness," said Mr. Munger, 81, whose law firm is representing Mr. Buffett in the inquiry. "I’ve been around him all these years. He’s not that stupid and he’s far too honorable."

"We also believe candor benefits us as managers: The C.E.O. who misleads others in public may eventually mislead himself in private." – Warren E. Buffett,

Berkshire Hathaway

Owner’s Manual

The offices of America’s second-richest man are at the corner of 36th and Farnam Streets, overlooking this city where he was born and educated and where he married, raised his children, mourned his wife’s recent death and still resides.

In the building’s basement, Stan Docekal has cut Mr. Buffett’s hair for about 13 years, usually on Saturday mornings. The barber says he likes to give him the space he needs to relax, read his mail and avoid the telephone.

Upstairs, on the 14th floor, a hallway in Berkshire’s modest headquarters is adorned with wildlife photographs taken by Mr. Buffett’s son Howard. Trinkets from Berkshire companies and investments fill a glass case in a small, quiet waiting room: a toy dog with a copy of The Buffalo News in its jaws; two dolls dressed in Victorian clothing and holding See’s candies; toy race cars stamped with the logos of Geico Insurance and Fruit-of-the-Loom; a small bottle of Coca-Cola; a Wells Fargo stagecoach. One shelf displays a red and white University of Nebraska football helmet, signed by the players. A little plaque on another shelf advises that, "A fool and his money are soon invited everywhere."

THE walls in and around Mr. Buffett’s office are crowded with photographs of baseball players. In one picture, the Hall of Fame flamethrower Bob Gibson pitches a puffball to an eager Mr. Buffett. Next to a picture of Ted Williams is a chart outlining the slugger’s favorite batting zones; like Mr. Buffett, Mr. Williams prided himself on waiting for the perfect pitch. A photograph of Mr. Buffett’s father, Howard, a onetime stockbroker and four-term Republican congressman, dominates a wall behind his desk.

Scattered in humbly appointed offices elsewhere on the floor, a staff of 17 people makes up the nerve center of a corporation that employs about 130,000 people and last year earned $7.3 billion on revenue of $74.3 billion. In a bright and airy corner office a few hallways from Mr. Buffett’s office, his daughter Susan oversees a charitable foundation that donates generously to public school programs, a cause the Buffett family has supported for generations.

"Mr. Buffett has not forgotten his roots and his public school background," said John Mackiel, superintendent of Omaha’s public school system. "The essence of profound insight is simplicity and Mr. Buffett has a simple, down-to-earth style that endears him to everyone in Omaha. He treats everyone here in a friendly, courteous manner."

Like anyone here who follows the news, Mr. Mackiel is aware of the insurance investigations that have recently washed upon Berkshire’s shores. "Everyone in Omaha is paying a lot of attention to these events," he said. "I believe that Mr. Buffett has been confronted with a challenge and he has risen to that challenge."

Regulators and law enforcement officials in the United States and overseas are investigating how complex products known as finite reinsurance have been used to fortify anemic financial statements or to mask problems at struggling companies. Insurers typically buy reinsurance to protect themselves from outsized losses, and a Berkshire unit, the General Re Corporation, is a major reinsurer that figures prominently in investigations here and abroad.

General Re sold products to the American International Group in deals that investigators said allowed A.I.G. to enhance its financial statements. The deals led to the ouster of A.I.G’s strong-willed chairman, Maurice R. Greenberg, and have brought Mr. Buffett into the glare of the investigative spotlight.

But according to several insurance industry executives, a memo and an e-mail message indicating that Mr. Buffett had extensive prior knowledge of the A.I.G. transactions were produced by Ronald E. Ferguson, a former General Re chief executive who had an incentive to mischaracterize the extent of Mr. Buffett’s involvement in the deals. A person with direct knowledge of the communications between Mr. Buffett and Mr. Ferguson said that no such e-mail was ever sent to Mr. Buffett and that Mr. Buffett never passed judgment on the deal’s propriety.

Mr. Ferguson, these executives say, was responsible for initiating the transactions with Mr. Greenberg. Other General Re executives who worked for him in Dublin doctored paperwork for the deals, according to investigators and insurance executives. But investigators say the motives for doing so remain unclear. A regulator suggested that the reason may have been to make the transaction appear to comply with accounting standards. Mr. Ferguson could not be reached for comment.

A person with direct knowledge of Berkshire’s dealings with the authorities disputed a news account on Friday that said Mr. Buffett authorized the disclosure of information that implicated Mr. Greenberg in wrongdoing. Those sorts of decisions, the person said, were up to Berkshire lawyers, not to Mr. Buffett.

While Mr. Buffett has not been accused of any malfeasance, his well-known preference for hiring managers he believes in, and for giving them broad autonomy to make their own operating decisions, appears to have backfired in this case.

Mr. Buffett has also been slow to scour General Re’s ranks since problems at the unit surfaced publicly three years ago. That is a contrast with the forceful way Mr. Buffett has dealt with scandal in the past. In 1991, he was named interim chairman of Salomon Brothers, a major Wall Street investment bank, in the wake of a Treasury trading scandal, and he wasted little time showing troublemakers to the door.

Then again, Mr. Buffett was an outsider coming into Salomon Brothers; General Re is a company he acquired, with a management team that is part of the Berkshire empire.

Although Mr. Buffett is best known for multibillion-dollar returns on investments in Coca-Cola, The Washington Post, Gillette and other concerns, Berkshire is a holding company that includes major insurers like Geico, National Indemnity and, of course, General Re.

General Re, however, has long been a thorn in Mr. Buffett’s side. Since Berkshire acquired it in late 1998, the company has experienced financial and regulatory problems. Mr. Ferguson stepped down as chief executive almost three years to the day after Berkshire bought the company – a very short tenure for a Berkshire manager.

ON Jan. 6, the same day that Mr. Spitzer’s office issued a subpoena to Berkshire and General Re as part of the investigation into insurance improprieties, Mr. Buffett sent a memo to all of his managers and to his board.

"The current investigation of the insurance industry underscores the importance of the message that I regularly send to you in my (more or less) biannual memo: Berkshire can afford to lose money, even lots of money; it can’t afford to lose reputation, even a shred of reputation," Mr. Buffett wrote. "You and I are the guardians of that reputation. And in the long run we will have whatever reputation we deserve.

"There is plenty of money to be made in the center of the court. There is no need to play around the edges," Mr. Buffett added. "I trust you to make these calls yourself. But if at any time you want to check your thinking against mine, just pick up the phone."

"A small chance of distress or disgrace cannot, in our view, be offset by a large chance of extra returns."

Warren E. Buffett, 1989

The Nebraska Furniture Mart, a Berkshire company that is a mainstay of the Omaha economy, sells a cushy, reliable mattress and box-spring set known as "the Warren." It is displayed in the middle of one of the store’s warehouse-sized showrooms. A poster on a nearby wall shows Mr. Buffett lounging across his eponymous mattress in a suitcoat and tie, beaming at the camera.

"It’s the epitome of brand marketing to have 100 percent credibility and that’s what you get when you have Warren’s name on it," said Robert Batt, Furniture Mart’s executive vice president. "Our customers say that if his name is on it then it must be great. Like him, it’s made in Omaha.

"Warren always says it takes 60 years to make a great reputation and you can lose it in 60 seconds," Mr. Batt added. "We live by that saying, and you know what? So does he. People here give no credence to any of these investigations."

Mr. Batt is hardly alone in rushing to Mr. Buffett’s defense as the investor’s legacy comes into play. In Nebraska’s halls of academe, Mr. Buffett’s name is legend, and local professors say it will remain that way. "Everybody’s watching this investigation because we’re all so in awe of Warren – not because of his money but because of his value system," said Fred Luthans, a business professor at the University of Nebraska in Lincoln, where Mr. Buffett was an undergraduate. "Based on 38 years of being a management professor and following him through the years, I have no doubt about his integrity."

Professor Luthans and Bruce Avolio, the director of the Gallup Leadership Institute in Omaha, have written an upcoming book, "The High-Impact Leader," that outlines the qualities that make for top-drawer corporate leadership. Both men said that they intentionally avoided naming specific chief executives as role models because many leaders come in and out of vogue. Mr. Buffett is the one exception to their rule, and they single him out in their book because of his "authenticity."

"What we think is important about his character is that he’s from the heart of the heartland on the Great Plains," Professor Luthans said. "He is a plain-spoken but genuine person, completely aware of himself and grounded in a core value system of ethics."

Another Buffett constituency remains unwavering in its support: the investors. John Cleary, an 81-year-old Omaha resident who once worked for Mr. Buffett’s father in Washington, is a member of the lucky circle of people who turned their funds over to Mr. Buffett when he began managing money in 1956.

The rule of thumb is that $10,000 invested with Mr. Buffett in 1956 would be worth a staggering $350 million today. Mr. Cleary, a retired lawyer, declined to say how much money he has made with Mr. Buffett, other than that he has enjoyed an "astronomical" return. "His mother and father were just the best there was and his integrity was at the highest level," he said of Mr. Buffett. "I have never doubted that Warren has lived his life in exactly the same way as his parents. These investigations don’t matter at all to anyone here."

Mr. Buffett has had local doubters, however. During the technology boom and the Internet bubble of the 1990’s, critics called his investing acumen into question. Mr. Buffett famously avoided buying technology stocks, other than Microsoft, because he said he didn’t know how to value them properly or how to select which company would emerge as a leader from yet another epochal change in the American economy.

Some investors in Omaha and elsewhere labeled him a dinosaur who was out of touch with changing times. Then the stock market bubble burst. Mr. Buffett’s disciplined approach to investing in undervalued stocks with clear market advantages and superior management was reaffirmed.

Those who work for Mr. Buffett said that the insurance investigations represented a similar tempest passing across the Berkshire landscape. The inquiries and the negative press surrounding them will eventually blow past Mr. Buffett, they said, possibly implicating others but leaving his reputation intact.

"The fact of the matter is that the Berkshire name puts enormous trustworthiness and clout behind you," said Susan M. Jacques, chief executive of Borsheim’s, a local jeweler that is a Berkshire company and is a popular stop for shareholders at the annual meetings. "You can’t ask for anyone with more honesty and integrity. Warren has walked the talk for 74 years."

OF course, Mr. Buffett, like anyone, has flaws. Some people close to him say he can be so single-minded that he is hesitant to take counsel from a broader group of advisers. He has no public relations staff to help him manage his response to the insurance inquiries, and he is relying on Mr. Munger’s law firm for all of his legal advice. Some people close to him say that these decisions may limit his dexterity as the investigations unfold.

Few doubt the sharpness of his mind. His bridge partner, Bill Gates, certainly doesn’t. Mr. Buffett has forged a close friendship with Mr. Gates, the Microsoft chairman and the only person richer than him in the United States. Mr. Gates, who is 25 years Mr. Buffett’s junior, joined Berkshire’s board in December.

Yet Mr. Buffett can sometimes come across as an absent-minded professor. Several months ago, for example, he and Mr. Gates dined together at Gorat’s, a local restaurant that serves Mr. Buffett’s favorite steaks. When the two men went to the parking lot to get into Mr. Buffett’s new car, Mr. Buffett couldn’t negotiate its elaborate security system, leaving the two billionaires stranded in the lot. Mr. Buffett had to call a cab to take Mr. Gates to the airport.

Friends and neighbors in Omaha say that they find Mr. Buffett’s quirks endearing – and that none of the issues that have surfaced in the investigation will have any bearing on his reputation for integrity. They say they are confident that Mr. Buffett will present his argument forcefully and clearly to regulators and law enforcement officials when he meets with them, and that he doesn’t really need anyone in Omaha storming the barricades on his behalf.

"We have Sarbanes-Oxley because too many people in corporate America have run amok, but that’s not Warren," said Mr. Batt of the Furniture Mart. "He stands as a giant in corporate America. He doesn’t need anyone to defend him."

Copyright 2005 The New York Times Company | Home | Privacy Policy | Search | Corrections | RSS | Help | Back to Top

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