General Re has been found to have done business more than once using so-called “side letters.”
Side letters are inherently dishonest business behavior. They’re intended to fool third parties not involved in the deal-particularly regulators, investors, and other customers and suppliers.
Discovering side letters is like discovering toxic waste at your manufacturing facility – a liability of dimensions not yet visible.
Also, the fact that a company offers side letters at all means explicitly that its management is of a character which is willing to cheat.
Many stockholders may think, “So what, as long as they get the job done and make money? This isn’t the Girl Scouts.”
The “so what” is that side letters create potential tort liability for both parties to the deal.
In Australia, a company called HIH collapsed financially after acquiring FAI Reinsurance, a company to which General Re gave a side letter. The deal with the side letter helped FAI to cook its books. As a result, HIH was misled; its stockholders were misled; they no doubt demand compensation; and they are probably are entitled to it.
A few, seemingly small-potatoes side letters can create a very large path of destruction.
For example, few remember what happened to McKesson Corp. when it bought HBOC in 1998-1999. That was the biggest scandal ever in the stock market until it was eclipsed by Enron, Global Crossing, MCI Worldcom, and Adelphia.
Side deals were at the center of that scandal.
McK’s stock price collapsed from $95 the week before it acquired HBOC to $32 a few months later, when it restated HBOC’s finances. In market cap, it fell from $27 billion down to $9 billion.
And the share price continued to drift down to $18 in the succeeding months as executives were indicted and the details of the dirty deals came out. Today, McK is still only at $37.
What caused that collapse? In the four years before selling itself to McKesson, HBOC faked its finances. Side letters with customers were among the key misbehaviors of HBOC. It used them to inflate revenues.
A difference between HBOC and General Re is that HBOC used side letters to cook its own finances, while General Re allowed others to use its side letters to cook theirs. But tort and criminal liability could make this difference irrelevant: see Arthur Andersen.
McKesson didn’t do anything wrong-except insufficient due diligence in buying HBOC. In that sense, it was in the same position as Berkshire is with General Re.
General Re is now answering investigators’ questions in Australia, Ireland, New York, and, I believe, Indiana.
So regardless of whether Warren Buffett was “involved,” liability is liability.
However, this situation does raise a question in my mind about Mr. Buffett.
It has to do with due diligence when acquiring a company. Assuming that Berkshire’s lawyers and accountants did their due diligence correctly when acquiring General Re, then Mr. Buffett did know, or should have known, that General Re had made side letters a business practice.
In fact, General Re has been found to have issued at least one side letter since being acquired by Berkshire — that is, under Mr. Buffett’s reign. I find it difficult to imagine that he did not know of the practice.
Mr. Buffet has the insight and integrity to tell things they way they are. Some might recall that Mr. Buffet acquired 128 million ounces of the ‘poor man’s gold’ [silver bullion] in 1998. That really bothered the ‘paper money’ mob.
Some might agree with Mr. Buffet’s assessment of the stinking Federal Reserve and the idiot NeoCongress having ruined the value of the U.S. dollar due to outrageous borrowing and spending practices.
The only natural recourse for the Fed thugs and NeoCongressional liars is to turn the attack dogs loose on Mr. Buffet for taking a stand for the otherwise, defenseless American Sheeple…
I find it interesting that Licensing Dewd, Mike Conway & Nick Steffey all structure their sentences in a similar way and use the word “integrity”. It would seem that they are one in the same person.
Mr. Buffet will have his day to answer the questions purposed to him.
Notes,
Do you have any idea what you’re talking about??? Warren Buffet was an acquaintance of my late grandfather and a more stand up guy YOU will never meet. Do you know anything about the man??? He buys businesses that he understands and are in fairly decent shape, invests some capital and lets the current management continue to run the business. He doesn’t go in there and run it himself and he does not micromanage the business.
Let me guess…..you are a Republican and have a problem with the many Democratic causes he contributes to….
“Warren Buffet was an acquaintance of my late grandfather and a more stand up guy YOU will never meet.”
They said that about Charlie McCall, too. Liked by everyone, widely respected, the Grand Old Man of health care information technology.
When McKesson bought HBOC, Charlie became chairman of McKesson because he was The Man.
Alas, Charlie, last I heard, was still under indictment for allegedly being the head of the “side leters” conspiracy at HBOC, which wrecked McKesson’s stock price.
So my question about the immensely reputable Mr. Buffett is: How the hell did he not know about the General Re side letters game, and if he did, what does that say about his integrity?
Chuck…we are not comparing Mr Buffett to any other person except himself. His words and acts are coming back to haunt him.
A shrewd business person takes responsibility… they do not shirk it or transfer the risk onto others.
Words are like bullets once fired they cannot be stopped. Mr Buffett has stated a fact that will affect other people(s) jobs and that is unfair. Yet, we can learn from this and that is don’t be ashamed.
Lisa, Bill is teaching you that there is more to life. There is nothing wrong with making a simiple mistake and taking accountability for it.
It is the fool that thinks he/she did no wrong and actually believing in it.
I’ll believe it when I see it….To discover every mechanism of a business and how it operates is impractical – that is why he likely hires A LOT of advisors, attorneys, etc…
Without persons like this, amassing fortunes of countless billions of dollars, our country would be owned entirely by parties that have a vested interested, if not live, outside the U.S.A.
Assuming the position as CEO your job is to “know every mechanism of a business” and ferret out potential liability exposurers. That is what he is paid to do. Yes, he does have many attorneys/advisors on his payroll….and not one person stepped forward to warn him?? I find that hard to believe.
Who would ever think a man from Poland could affect so many people in a positive way. He has stated in the past that the West is too wrapped up with financial gain. Sometimes, we need to take a step back and re-evaluate.
“Amassing fortunes of countless billions of dollars” by one man does not make the USA. It is the average person that goes to work each day and comes home to kiss their spouse along with child/children. They pay their bills and grow older….We make the USA.
So, I would not be too worried… for our country will survive.
Apparently his lawyerrs, advisors, and importantly himself would want to know all the dealings from A -Z. His stock has been a success , ONLY to good to be true. The RISE up seems questionable. Remember Gates / MSFT scandel of monopolizing the tech industry 8-10yrs ago he too was a wolf in sheeps clothing , PURE GREED. , And I believe still facing the court house walls. Well Gates is one of Buffet’s best BUDS , Birds of a feather , flock together.
Buffet its time you stepped onto the plate. The frontline has been waiting for you to screw up. And it ain’t goona be as simple as a walk across to Wendys!
Sincerely, Simple Simon
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General Re has been found to have done business more than once using so-called “side letters.”
Side letters are inherently dishonest business behavior. They’re intended to fool third parties not involved in the deal-particularly regulators, investors, and other customers and suppliers.
Discovering side letters is like discovering toxic waste at your manufacturing facility – a liability of dimensions not yet visible.
Also, the fact that a company offers side letters at all means explicitly that its management is of a character which is willing to cheat.
Many stockholders may think, “So what, as long as they get the job done and make money? This isn’t the Girl Scouts.”
The “so what” is that side letters create potential tort liability for both parties to the deal.
In Australia, a company called HIH collapsed financially after acquiring FAI Reinsurance, a company to which General Re gave a side letter. The deal with the side letter helped FAI to cook its books. As a result, HIH was misled; its stockholders were misled; they no doubt demand compensation; and they are probably are entitled to it.
A few, seemingly small-potatoes side letters can create a very large path of destruction.
For example, few remember what happened to McKesson Corp. when it bought HBOC in 1998-1999. That was the biggest scandal ever in the stock market until it was eclipsed by Enron, Global Crossing, MCI Worldcom, and Adelphia.
Side deals were at the center of that scandal.
McK’s stock price collapsed from $95 the week before it acquired HBOC to $32 a few months later, when it restated HBOC’s finances. In market cap, it fell from $27 billion down to $9 billion.
And the share price continued to drift down to $18 in the succeeding months as executives were indicted and the details of the dirty deals came out. Today, McK is still only at $37.
What caused that collapse? In the four years before selling itself to McKesson, HBOC faked its finances. Side letters with customers were among the key misbehaviors of HBOC. It used them to inflate revenues.
A difference between HBOC and General Re is that HBOC used side letters to cook its own finances, while General Re allowed others to use its side letters to cook theirs. But tort and criminal liability could make this difference irrelevant: see Arthur Andersen.
McKesson didn’t do anything wrong-except insufficient due diligence in buying HBOC. In that sense, it was in the same position as Berkshire is with General Re.
General Re is now answering investigators’ questions in Australia, Ireland, New York, and, I believe, Indiana.
So regardless of whether Warren Buffett was “involved,” liability is liability.
However, this situation does raise a question in my mind about Mr. Buffett.
It has to do with due diligence when acquiring a company. Assuming that Berkshire’s lawyers and accountants did their due diligence correctly when acquiring General Re, then Mr. Buffett did know, or should have known, that General Re had made side letters a business practice.
In fact, General Re has been found to have issued at least one side letter since being acquired by Berkshire — that is, under Mr. Buffett’s reign. I find it difficult to imagine that he did not know of the practice.
Mr. Buffet has the insight and integrity to tell things they way they are. Some might recall that Mr. Buffet acquired 128 million ounces of the ‘poor man’s gold’ [silver bullion] in 1998. That really bothered the ‘paper money’ mob.
Some might agree with Mr. Buffet’s assessment of the stinking Federal Reserve and the idiot NeoCongress having ruined the value of the U.S. dollar due to outrageous borrowing and spending practices.
The only natural recourse for the Fed thugs and NeoCongressional liars is to turn the attack dogs loose on Mr. Buffet for taking a stand for the otherwise, defenseless American Sheeple…
The attack dogs
I find it interesting that Licensing Dewd, Mike Conway & Nick Steffey all structure their sentences in a similar way and use the word “integrity”. It would seem that they are one in the same person.
Mr. Buffet will have his day to answer the questions purposed to him.
I think Mr. Buffet will be able to both stand up against these inquiries and shine at the same time……
He is far too shrewd of a business man to be compared to persons at AIG, Marsh, etc…
Notes,
Do you have any idea what you’re talking about??? Warren Buffet was an acquaintance of my late grandfather and a more stand up guy YOU will never meet. Do you know anything about the man??? He buys businesses that he understands and are in fairly decent shape, invests some capital and lets the current management continue to run the business. He doesn’t go in there and run it himself and he does not micromanage the business.
Let me guess…..you are a Republican and have a problem with the many Democratic causes he contributes to….
“Warren Buffet was an acquaintance of my late grandfather and a more stand up guy YOU will never meet.”
They said that about Charlie McCall, too. Liked by everyone, widely respected, the Grand Old Man of health care information technology.
When McKesson bought HBOC, Charlie became chairman of McKesson because he was The Man.
Alas, Charlie, last I heard, was still under indictment for allegedly being the head of the “side leters” conspiracy at HBOC, which wrecked McKesson’s stock price.
So my question about the immensely reputable Mr. Buffett is: How the hell did he not know about the General Re side letters game, and if he did, what does that say about his integrity?
Chuck…we are not comparing Mr Buffett to any other person except himself. His words and acts are coming back to haunt him.
A shrewd business person takes responsibility… they do not shirk it or transfer the risk onto others.
Words are like bullets once fired they cannot be stopped. Mr Buffett has stated a fact that will affect other people(s) jobs and that is unfair. Yet, we can learn from this and that is don’t be ashamed.
Lisa, Bill is teaching you that there is more to life. There is nothing wrong with making a simiple mistake and taking accountability for it.
It is the fool that thinks he/she did no wrong and actually believing in it.
I’ll believe it when I see it….To discover every mechanism of a business and how it operates is impractical – that is why he likely hires A LOT of advisors, attorneys, etc…
Without persons like this, amassing fortunes of countless billions of dollars, our country would be owned entirely by parties that have a vested interested, if not live, outside the U.S.A.
Lord I hope that doesn’t happen.
Assuming the position as CEO your job is to “know every mechanism of a business” and ferret out potential liability exposurers. That is what he is paid to do. Yes, he does have many attorneys/advisors on his payroll….and not one person stepped forward to warn him?? I find that hard to believe.
Who would ever think a man from Poland could affect so many people in a positive way. He has stated in the past that the West is too wrapped up with financial gain. Sometimes, we need to take a step back and re-evaluate.
“Amassing fortunes of countless billions of dollars” by one man does not make the USA. It is the average person that goes to work each day and comes home to kiss their spouse along with child/children. They pay their bills and grow older….We make the USA.
So, I would not be too worried… for our country will survive.
Apparently his lawyerrs, advisors, and importantly himself would want to know all the dealings from A -Z. His stock has been a success , ONLY to good to be true. The RISE up seems questionable. Remember Gates / MSFT scandel of monopolizing the tech industry 8-10yrs ago he too was a wolf in sheeps clothing , PURE GREED. , And I believe still facing the court house walls. Well Gates is one of Buffet’s best BUDS , Birds of a feather , flock together.
Buffet its time you stepped onto the plate. The frontline has been waiting for you to screw up. And it ain’t goona be as simple as a walk across to Wendys!
Sincerely, Simple Simon