Dear Mr. Buffett_ What an Investor Learns 1,269 Miles From Wall Street - Janet M. Tavakoli [134]
46 Alan Sloan and Roddy Boyd, “The Lehman Lesson,” Fortune, 13 September 2008.
47 Jason Kelly and Jonathan Keehner, “Lehman’s Survival Hinges on Fuld’s Reluctant Sale of Fund Unit,” Bloomberg News, 11 September 2008.
48 Carrick Mollenkamp, Susanne Craig, Sernea Ng and Aaron Lucchetti, “Lehman Files for Bankruptcy, Merrill Sold, AIG Seeks Cash,” Wall Street Journal, 16 September 2008. Lehman filed for protection under Chapter 11 of the U.S. Bankruptcy Code. This is an attempt to ensure an orderly liquidation. Lehman said the filing did not include broker-dealer subsidiaries (or other LBHI subsidiaries or Neuberger Berman Holdings LLC). Neuberger Berman is operating as usual. Its assets are segregated from Lehman Brothers.
49 Bank of America press release, “Bank of America Buys Merrill Lynch Creating Unique Financial Services Firm,” 15 September 2008. Bank of America will exchange .8595 shares of Bank of America common stock for one Merrill Lynch common share.
50 Nicholas Varchaver, “What Warren Thinks...” Fortune, 28 April 2008, p. 59.
51 Bradley Keoun, “Accounting Rule Defying Common Sense,” Bloomberg News, 8 June 2008. If accounting weren’t bizarre enough, as of January 1, 2008, firms can record an increase in revenue when the price of their own bonds declines, and this “revenue” has been used to net off against losses, so the losses reported by investment banks and monoline insurance companies look less damaging than they would have otherwise appeared.
52 Yalman Onaran,“Banks Keep $35 Billion Markdown Off Income Statements,” Bloomberg News, 19 May 2008. By May 2008, Bloomberg estimated that tens of billions more in writedowns would have shown up on balance sheets if the losses had not been offset by the decline in the price of investment banks’ debt. The theory is that if the bonds are redeemed at a lower price, it is a net benefit to the company. That is only true, however if a firm has the ability to buy the bonds due to an increase in revenues or other means without strain in some other area. If you want to report the maximum revenues due to a decline in the value or your debt, go into bankruptcy. Now your debt will only be worth your recovery value, if any.
53 Warren Buffett has long been a critic of pension rate assumptions, and he made similar comments on CNBC March 3, 2008. Even pension fund accounting can be very misleading. Often rates used by pension funds are mandated, and Warren thinks they are too high. Berkshire Hathaway owns some public utilities, and although he would like to use a lower rate for pension fund assumptions, the lowest rate is 6.5 percent. At least that is lower than the 8 percent rate much of the rest of the financial world uses.The rate difference may not seem that much at first glance, but for long term funds like pension funds, it is an enormous difference. For example, $100,000 compounded at an annual rate of 6.5 percent for 30 years is $661,436, but compounded at 8 percent, it is $1,006,265. If Warren Buffett thinks 6.5 percent is too much to promise—meaning pension funds are not kicking in enough to make their future payments—do you think the rest of the world will do a better job using an assumed rate of 8 percent?
54 Berkshire Hathaway 1990 Annual Report 3.
55 Josh Hamilton and Erik Holm, “Buffett’s Berkshire Says Net Declines on Insurance, Derivatives,” Bloomberg News, 3 May 2008.
56 Berkshire Hathaway 2007 Annual Report, 16.
57 Ibid.
Chapter 11: Bond Insurance Burns Main Street
1 Jody Shenn, “FGIC Sees No Need to Honor Agreement with IKB, Calyon,” Bloomberg News, 26 March 2008. On March 12, FGIC, a bond insurer, filed