Buffett Biographer Schroeder Rips Buffett, Annual Meeting

Alice Schroeder, author of the recent biography The Snowball: Warren Buffett And The Business of Life (2008), harshly criticized Buffett and the annual meeting on two counts in a piece yesterday for Bloomberg: “Buffett Turns Into One More Corporate Bubble”, Alice Schroeder, Bloomberg, May 5.

First, Schroeder claims the meeting has lost its thrill and become a mob circus:

It used to be worth the cost of flying to Omaha, Nebraska, for Warren Buffett’s annual lovefest, the Berkshire Hathaway Inc. annual shareholder meeting where you got information available nowhere else.

Buffett warned of the systemic risk of derivatives as long ago as the 1993 meeting.  In 1996, he and sidekick Charles Munger gave a lesson on what makes a bank successful: management that highlights return on assets and efficiency above all else. Minding these lessons would have saved investors a lot of money during the financial crisis.

Today the seasoned professional investors who attend are there out of loyalty, or to piggyback on the meeting and promote their own businesses.  Younger money managers come because it’s a chance to see it before it’s gone.  Few of these people expect to glean amazing insights.  The thrill is gone.

The meeting has become overvalued, like a stock gobbled up by the dumb money piling in at the late stages of a bubble.

Second, she harshly criticized Buffett for his strong defense of Goldman:

Another reason the meeting offers fewer gems is that it has grown contentious.  This year, two difficult issues popped up: Berkshire’s $5 billion investment in Goldman Sachs Group Inc. and Buffett’s lobbying in Washington for a special exemption to a bill regulating the derivative deals that Buffett struck shortly before the financial crisis.

Buffett could have used his position to offer moral leadership and influence the political debate on financial- services reform.  Instead, he gave a vigorous defense of Goldman Sachs.  He justified the technical legality of Goldman’s actions outlined in the Securities and Exchange Commission fraud suit, and was persuasive on the sentimental reasons for why he likes the company.

Going Downhill

Then it went downhill. If Lloyd Blankfein had a twin brother, Buffett said, he would support him as chief executive officer of Goldman.  Yet he said Blankfein didn’t tell him about Goldman’s Wells notice, which informed the firm that it was the target of an SEC probe.  Even though Berkshire discloses all its Wells notices, he said it was immaterial in Goldman’s case.

Berkshire is getting 10 percent interest on $5 billion of redeemable preferred stock and warrants that strike at $115, and Buffett seems struck blind by the money.  He said Goldman’s woes will abate, and they will.  But he doesn’t seem to understand that this episode will be a permanent mark on its — and his — record.

The comments of Munger, Berkshire’s vice chairman and a man who is incapable of being disingenuous, threw into relief the way that Buffett seemed to be clinging to legalities rather than showing sensitivity to the public’s anger at Goldman’s callous behavior toward taxpayers and investors.  There is a difference, Munger said, between being ethical and following the letter of the law.  While he said he would have voted with the two SEC commissioners (out of five) who objected to suing Goldman, he wasn’t championing the firm’s behavior either.

Just Get

What I wanted Buffett to say was what he has said in similar situations about news of corporate culpability: Get it right, get it fast, get it out.  March down to Washington, Lloyd, sit down with SEC Chairman Mary Shapiro and say, Madam Chairman, what would you like us to do?  Thank you, we’ll get right on it, and we apologize to the taxpayers and investors.  If she says, Your successor takes over July 1 and must not be a former trader, just say, OK.

That kind of principle-based thinking was missing throughout much of the meeting.  It is now necessary to parse Buffett’s words like any other CEO’s.

What makes this so odd is that Buffett pledged cooperation with Schroeder in writing her biography, including access to files, 2000 hours together (including 300 recorded) and a letter assuring potential interviewees that he was cooperating with her.   And Schroeder wrote in the Bloomberg piece that she actually skipped this year’s annual meeting.  Clearly, there has been some sort of a falling out between the two.  For example, see “The Backstory on the Buffett Book”, Jeffrey Trachtenberg, The Wall Street Journal, August 23, 2008, W1.