Thursday, April 14, 2005

Re: Truth and Warren Buffett

----- Original Message -----

From: "Damato, Anthony A"
To: "Dean Lawrence R. Velvel"
Sent: Wednesday, April 13, 2005 11:55 PM
Subject: Re: Truth and Warren Buffett

I too would like to believe that Warren Buffet is a paragon of honesty. But I take it that Dean Velvel does not know the man, and I don't either. I only know what I read. And although the things that Mr. Buffet's friends, associates, and subordinates say about him are well-said
and have a ring of authenticity about them, I have no firm basis for knowing whether those things are true or just spin. But here are some things I am fairly confident in believing.

First, I believe that Mr. Buffet does his homework. He has made a good living knowing the insides and outsides of the companies he considers buying. Second, any detail he doesn't know about a company will be reported to him by his army of researchers and their lawyers who work
for Berkshire Hathaway. Third, Mr. Buffet knows a great deal about the insurance business. He has substantial investments in that business. He and his lawyers and researchers collectively should know to the dime where all the money flows into AIG, how much of it "sticks" to the executives in the company, how much of it flows out to insured persons, and how much ends
up in the company's asset portfolio.

These three postulates lead to a reasonable presumption: that if fraud was going on in AIG, Mr. Buffet knew about it. Let's look at a recent case that you might find to be analogous to this one. Bernard J. Ebbers, CEO of WorldCom, was indicted for fraud. Although he founded WorldCom and was its biggest shareholder, and although he had a reputation like Warren Buffet's for attention to details, his defense to the indictment was that he had no idea that this fraud was
happening. Scott D. Sullivan was his chief accounting officer who reported to him. Sullivan testified, for the prosecution, that he had numerous meetings with President Ebbers, that he informed Ebbers of all the accounting tricks that were going on, and that Ebbers told him what, when, and how to proceed. In short, the jury heard diametrically conflicting testimony. It was also told that Sullivan had lied on previous occasions, and that he had turned state's witness to cut a favorable deal for himself. Whom should the jury believe: Sullivan, or that nice and
honest-looking Mr. Ebbers?

Here's where Dean Velvel's and my life experiences play a role in shaping the way we interpret events. We are both skeptics. We don't invariably take things at face value. We don't necessary think that a person is lying now who lied in the past. My view is that Ebbers' defense was ridiculous. OF COURSE he knew what was going on in his own company. He knew what was going on no matter what Sullivan testified. I might even suspect that Ebbers placed Sullivan
in the middle so that no other person in WorldCom could testify that he or she ever informed Ebbers about the fraud. That way, with just Sullivan serving as the conduit, Ebbers retained some semblance of deniability. He could always say, to a future gullible jury, that Sullivan was lying from day one when Ebbers hired him.

Now, this may be the ONLY defense Ebbers has. So necessarily he and his lawyers have to play it for all it's worth. They have to crucify Sullivan if they can. They have to convince the jury that they should put their common sense aside and simply regard this as a case of who was telling the truth--Ebbers or Sullivan. Etc. Etc. But I respectfully suggest that even if this is the only defense Ebbers has to the indictment against him, that fact doesn't make it a credible defense.

Warren Buffet's position is similar in several obvious respects. He claims that his time was too valuable for him to engage in researching the "small" matters that were going on at AIG. Fraud was somehow beneath his notice (perhaps because he is so bloody honest that he would not recognize fraud if it stared him in the face). And Buffet has another defense as well: would he risk Berkshire Hathaway's and his own future reputation for the sake of squeezing some extra bucks out of AIG? Of course not, he says. He would be stupid if he took such a risk, and surely everyone knows he is not a stupid man. The "deniability" that Ebbers unsuccessfully projected to the jury was Sullivan's dishonesty. The "deniability" that Buffet is projecting to the public (hopefully to fend off prosecution, to discourage prosecutors from going after him) is his reputation for honesty, a reputation trotted out by all his friends, subordinates, lawyers, and flacks. Are these two types of deniability so different from each other?

Buffet's other defense is that he would indeed be stupid to risk so much on making a few extra bucks. But consider: greed is a very powerful emotion. Buffet may not be content in being only the second richest man in America. And we don't know how many previous deals involved
fraud if no prosecutor investigated them simply because of the assumption that Buffet would never do such a silly thing. It's possible he has been doing silly things like this all along.

I don't hope that this investigation turns out to reveal that the emperor Buffet has no clothes. I didn't like it when I found out that Santa Claus didn't exist. Maybe, as one as passionately opposed to dishonesty and hypocrisy as Dean Velvel, but also someone slightly more skeptical than he, I'm less willing to accept what I read about the investment "genius" from Omaha. All I really know about him is what others say about him in the newspapers and media, and not the truth-content of what they say.

-- Tony D'Amato

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