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Saturday, May 30, 2009

SAN FRANCISO EXAMINER: Bidders aiming for chance to eat with Warren Buffett

By: Will Reisman
05/29/09 8:00 PM PDT

Bidding for a lunch: An annual auction to sit down with powerful investor Warren Buffett starts next month, with proceeds from the event benefitting the Glide Memorial Church in San Francisco. (AP File Photo)

SAN FRANCISCO — He’s worth nearly $37 billion, is responsible for some of the most influential investing methods in the world and commands an almost messianic following, but deep down Warren Buffett is still a kid at heart.

That description comes from a Mohnish Pabrai, a Southern California investor who had the chance to grab lunch with Buffett last year — an opportunity that will soon be extended to someone else. An annual auction to sit down with the powerful investor starts next month, with proceeds from the event benefitting the Glide Memorial Church in San Francisco.

Along with his friend, Guy Spier, Pabrai put up $650,000 to meet his idol as part of the charity, which has raised $4.3 million for Glide, a local nonprofit organization that serves low-income residents. Having put up the highest bid for the event in 2007, Pabrai, his wife, two daughters, and Speir sat down with Buffett for a lunch in New York City last June.

“My two daughters ordered hamburgers, and Buffett told them that anything they left on their plate, he would eat,” said Pabrai, who is based out of Orange County. “It was amazing that, even at 78, he still is very childlike and innocent, yet also an absolutely brilliant man.”

Pabrai said he talked with Buffett for three hours during their lunch together, with topics ranging from managing philanthropy foundations to how much one should leave for a tip after dinner.

“I had someone videotape the lunch for me,” said Pabrai. “And I watched it later and realized we talked about 54 different subjects.”

Buffett agreed to do the charity with Glide 10 years ago, and the auction quickly became so popular that it moved to eBay in 2003.

Last year’s winner, Hong Kong man Zhao Danyang, spent $2.1 million for his lunch with Buffett. When bidding starts June 21, Pabrai said he expects this year’s total to exceed that, despite the woeful economy.

“We’ll never have another Buffett, and the number of potential lunches with him is declining with each year,” said Pabrai. “It’s like meeting Einstein or Galileo, so I think you’ll see people putting up $2 million, $3 million, or even $5 million to meet him.”

The higher the bid, the more it will benefit Glide, which is seeing a surge in interest because of the current economic crisis, according to the organization.

“Mr. Buffett’s generosity and longtime commitment to Glide’s work is amazing,” said the Rev. Cecil Williams, Glide’s founder.

“These times are especially hard for people at the lowest income levels. We put 100 percent of the charity auction proceeds into the community — feeding the poor, providing clothes, shelter, affordable housing and free health care to those who need it most.”

About the auction:

  • What: Warren Buffett Lunch Charity Auction
  • When: Bidding starts at eBay at 7 p.m. on June 21. Bidding closes June 26 at 7 p.m.
  • Why: 100 percent of the charity benefits the Glide Memorial Church
  • Last year’s winning bid: $2.1 million, by Zhao Danyang

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MOTLEY FOOL: Investment Greats: Charlie Munger

Published in Investing Strategy on 29 May 2009

Warren Buffett may steal the headlines but his business partner is an exceptional investor in his own right.

While Warren Buffett is the the public face of the phenomenally successful Berkshire Hathaway, he is always eager to credit his second in command, Charlie Munger, with much of that success.

Munger may be less well known, and even though he gives fewer interviews than Buffett, he is not nearly as self-deprecating: "I have a black belt in chutzpah. I was born with it." When someone has his understanding of the world, why be shy about it?

Background

Born in Omaha, Nebraska in 1924 -- nearly seven years before Buffett -- Munger joined the army and spent some of World War II working in their meteorology section in Alaska. He then got a degree from Harvard Law School and became an attorney in California.

He had a keen interest in investing, which he took up full time in 1965. Through the 1960s and 1970s he and Buffett, whom he first met in a restaurant in their home town in 1959, worked together on a number of deals, including the purchase of See's Candies in 1972.

It was not until 1978 that he officially joined Berkshire Hathaway as Vice-Chairman. He is also head of Wesco Financial, based in California, in which Berkshire Hathaway has a majority stake; his annual shareholder meetings are almost as closely followed as those of Berkshire, earning him the moniker 'the Oracle of Pasadena'.

Investment style

Munger believes in using all the tools at one's disposal, combining elements of psychology, mathematics, business, and so on, in making decisions, otherwise we are hampering ourselves. "To the man with only a hammer, every problem looks pretty much like a nail."

He is particularly scathing of academics who behave "like truffle hounds", exceptionally adept in their own areas of expertise, but unable to integrate the various disciplines. "If you want to go through life like a one legged man in an ass-kicking contest, why be my guest. But if you want to succeed, like a strong man with two legs, you have to pick up these tricks, including doing economics while knowing psychology."

And it's in the area of investment psychology that Munger really shines. His Psychology of Human Misjudgement speech at Harvard Law School, first brought to my attention by fellow Fool writer Alun Morris, outlines 24 modes of distorted thinking that afflict investors. Unless you believe we are all rational information-processing machines, this is essential reading.

He warns us not to mistake a bull market for skill, as so many novice investors have done over the years to their detriment. "Bull markets go to people's heads. If you're a duck on a pond, and it's rising due to a downpour, you start going up in the world. But you think it's you, not the pond."

As you might expect from a partner of Buffett's, he advocates buying the right companies and then sitting tight. "You do better to make a few large bets and sit back and wait. There are huge mathematical advantages to doing nothing."; or more colourfully: "If you buy a few great companies, you can sit on your ass".

And like his partner, he has little respect for the efficient market hypothesis, and has described the capital asset pricing model as an obscenity. "People calculate too much and think too little."

To some extent, though, his preferences can be a bit riskier than Buffett's, and it was he who persuaded Buffett to invest in the Chinese electric car maker BYD.

Current opinions

In the automotive sector, Munger has proposed combining the 'big three' auto makers into one business, writing off their debts, and seeing if they can cobble together a viable business. As regards the industry, he has even expressed concerns for Toyota.

Munger is not generally in favour of bailing out industries and businesses, but he supported the bank bailout as he saw no other choice. Although a supporter of the Republican Party (in contrast to Buffett), he is in favour of increased regulation.

He is vehemently against the ethanol initiatives, which he regards as pricing food out of the range of poor families, and also opposes cap-and-trade carbon policies as insane.

At the age of 85 I think it's fair to say that Munger will not be replacing the 78 year old Buffett at the top of Berkshire Hathaway, but as he said a couple of weeks ago, "Sometimes I feel my sole function is to show shareholders that they'll get another good seven years out of Warren". On that occasion at least, he was being far too modest.

More: Charlie Munger's Thoughts On Just About Everything

Books: Poor Charlie's Almanack

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NATIONAL JEWELER: Recession spurs consolidation, new consumer mindset

'Luxury shame' creates concern about product origin, impact

By Michelle Graff
May 29, 2009

Las Vegas--The economic downturn has reduced the demand for diamonds, eliminating players at all points along the supply pipeline, from the mines to the stores.

But a thinned-out pipeline can only mean opportunity for those who remain, according to two seminars given on Thursday in Las Vegas amid the JCK and Couture jewelry shows.

In the first seminar, "Top Five Diamond Issues," speaker Rob Bates, a senior editor at JCK magazine, detailed how the downturn has impacted all segments of the market, from high-end retailers such as Tiffany and Co., where same-store U.S. sales dropped 34 percent in the first quarter of 2009, to mall jeweler Zale Corp., which saw same-store sales slide 20 percent in the third fiscal quarter of 2009.

"I don't want to portray too negative of a portrait, but we are in a serious situation that's impacted a lot of people," he said.

The outcome of all of this, Bates said, will be greater consolidation, pointing specifically to the example of the Richline Group, the Warren Buffett-owned entity that has been buying up distressed jewelry brands. Bates predicted that Richline could become one of the larger players in the industry in a couple of years.

In April, Richline purchased brands, including Krementz and Darling Diamonds, once manufactured by the now-defunct The Colibri Group. Richline bought the brands from online retail auction site Bidz.com, which purchased them at auction.

And in May, Andin International, a New York-based manufacturer and supplier of colored-stone and fine diamond fashion jewelry, joined the Richline Group.

In a seminar titled "The Diamond Pipeline" held in the afternoon, industry analyst Ben Janowski, of Janos Consultants, also noted the consolidation in the industry, particularly on the retail level, where the recession has reduced the number of U.S. retail jewelers by 1,500.

While that is bad news for those forced to close their doors, both Bates and Janowski noted a cultural shift that could benefit those retailers still open for business: Today's consumer is more socially and environmentally aware than consumers of the past.

Janowski said "luxury shame," a phenomenon where people are more hesitant to buy and display ostentatious pieces, is on the rise.

Today's consumers, he said, generally are more concerned with the origin and impact of the products they buy.

Bates said due to the recession, consumers are looking for "excuses" not to buy things, and the societal issues surrounding diamonds, specifically the issue of "blood" diamonds, might cause consumers to shy away from the stones.

This sentiment among consumers has led to the rise of products such as the branded "Made in Botswana" diamonds and presents an opportunity for retail jewelers to reframe the debate about diamonds and tell a better story about the stones to drive sales.

"We're experiencing a new era of the consumer mindset," Bates said.

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Friday, May 29, 2009

CNBC: What's Up With Warren Buffett and Carl Fredricksen?

By: Alex Crippen

Executive Producer

Published: Friday, 29 May 2009 | 10:53 AM ET

Warren Buffett (left), Carl Fredricksen (right)
Warren Buffett (left), Carl Fredricksen (right)

Is there a connection between Warren Buffett and Carl Fredricksen?

Buffett is a 78-year-old billionaire and financial sage who flies in a private jet when he leaves his Omaha home.

Fredricksen is a 78-year-old balloon salesman who takes his midwestern home with him when he goes flying.

They're both characters, but Carl is fictional.

He's the star of Up, Disney/Pixar's latest animated film. It's out today and getting very strong reviews.

Ed Asner
Ed Asner

I can't take the credit, or the blame, for noticing the resemblance. That goes to Caitlin McDevitt at Slate's The Big Money, who light-heartedly suggests it "may be more than a coincidence."

She asks, "Could someone at Pixar be equating Buffett's predictions to a lot of hot air?"

Perhaps the usually "grounded" Buffett will become unhinged by the economy's troubles, sending him "spiraling uncharacteristically out of control."

One key difference: Carl's creators describe him as a "grouchy old man" while Buffett always seems to have a smile on his face.

They say Carl is physically modeled, at least partially, on the actor Ed Asner, who provides the voice of the character.

Other cited influences: the late actors Walter Matthau and Spencer Tracy.

You be the judge.

Walter Matthau
Walter Matthau

Spencer Tracy
Spencer Tracy


















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REUTERS: Greenlight's Einhorn shorting Moody's

By Joseph A. Giannone

Fri May 29, 2009 5:09am EDT

NEW YORK (Reuters) - Shares of Moody's Corp (MCO.N) fell sharply on Thursday after hedge fund manager David Einhorn, who correctly questioned the health of Lehman Brothers four months before its collapse, disclosed he was shorting the venerable ratings agency.

Einhorn, whose Greenlight Capital managed $5 billion (three billion pounds), said on Wednesday the parent of Moody's Investors Service undercut the value of its primary business -- assigning grades to bonds -- after giving AAA ratings to insurer AIG (AIG.N), mortgage banker Fannie Mae (FNM.N), bond insurer MBIA Inc (MBI.N) and other companies later revealed to be badly overextended.

Moody's has also come under fire for granting its top rating to mortgage-backed securities and derivatives later found to be built on sketchy, subprime loans.

"If your product is a stamp of approval where your highest rating is a curse to those that receive it, and is shunned by those who are supposed to use it, you have problems," Einhorn told some 1,200 hedge fund executives at the annual Ira Sohn Investment Research Conference.

Moody's shares fell as low as $25.69, its lowest in more than a month, before trading down 5.5 percent at $26.58 on Thursday afternoon. Options traders also reacted to the bearish comments.

"Given the nature of our business, which is to offer forward-looking opinions about future credit risk, the role of independent public opinions about market participants such as Moody's is well understood by us," said Moody's spokesman Tony Mirenda. "Moody's opinions are a valuable source of information and continue to be widely sought by market participants of all kinds."

DAVID VS WARREN

The bearish view sets up a battle between Einhorn and legendary investor Warren Buffett, whose Berkshire Hathaway Inc (BRKa.N) is Moody's largest shareholder. For now, the market is lining up behind the boyish hedge fund manager with a growing reputation for spotting overvalued companies.

"Investors are piling up bets that shares in Moody's will fall at least 22 percent over the next six weeks," said Andrew Wilkinson, senior market analyst at Interactive Brokers Group.

Wilkinson said buying in July $20 strike puts more than doubled to 65 cents per contract. Overall, puts have outpaced calls by 4.5 to 1 during the first half of Thursday.

"Investors appear to be taking their cue from his theory that the ratings business model is flawed and the services of these companies are redundant, Wilkinson said.

Einhorn contends that investors have learned not to rely on Moody's, which for years has been criticized because it earns fees from the companies it rates. And after the mortgage market melted down in 2007, Moody's came under fire for giving top grades to bonds and derivatives backed by subprime loans.

"The truth is that nobody I know buys or uses Moody's credit ratings because they believe in the brand," he said at the conference, which raises funds for the treatment and cure of paediatric cancer. "They use it because it is part of a government-created oligopoly and, often, because they are require to by law."

Even Buffett, Einhorn added, has said he does not rely on credit ratings when making investments.

Yet Einhorn noted that equity investors still believe in the agencies. Moody's shares trade at a rich 19 times estimated earnings, he said, though he said the company has a negative net worth of $900 million.

Moody's had long been a favourite among investors because the limited number of firms approved by the U.S. government to rate debt lets these firms generate fat profit margins. McGraw-Hill Cos Inc's (MHP.N) Standard & Poor's and Fimalac SA's (LBCP.PA) Fitch Ratings are Moody's rivals.

Immediately after his presentation, Einhorn told Reuters he began thinking about Moody's and the quality of credit ratings in 2002, when fellow activist William Ackman started shorting MBIA. He declined to say when he began shorting Moody's, only noting it was a "considerable" amount of time ago.

Regulators and lawmakers for years talked about reforming the ratings system, questioning the issuer-funded business model that critics say conflicted with the interests of investors who buy company debt, municipal bonds or asset-backed securities. Einhorn called for sterner measures.

"Why reform them if we can get rid of them?" he said. "Are we waiting for then to blow up the Lunar economy as well?"

Einhorn used the Ira Sohn event seven years ago to announce a short position on business lender Allied Capital Corp (ALD.N), questioning the values it assigned to assets and sustainability of its dividend. Allied, which in February defaulted on a credit line and in March suspended its dividend, recently announced its fifth straight quarterly loss.

And at last year's conference, Einhorn set off a firestorm when he boldly accused investment bank Lehman of understating its losses on real estate assets and for not holding enough equity capital.

After weeks of heated denials, Lehman raised $6 billion of capital to offset mounting write-offs. Within four months it filed the biggest bankruptcy in U.S. history.

In related news, Einhorn closed the book on his Allied transaction and made good on a promise to donate the firm's profits from the trade to charity.

He announced that Greenlight would donate $2.5 million to Tomorrows Children's Fund, on top of $1 million donated to the charity four years ago, as well as $1.8 million each to two government watchdog groups: the Centre for Public Integrity and the Project on Government Oversight.

(Reporting by Joseph A. Giannone; Additional reporting by Doris Frankel in Chicago and Jon Stempel in New York; Editing by Richard Chang, Dave Zimmerman, Tim Dobbyn)

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WALL STREET JOURNAL: It Was Two Views on Moody's: Mr. Einhorn's vs. Mr. Buffett's

By TENNILLE TRACY

Bearish traders piled into Moody's after a well-known hedge-fund manager said he had sold the company's stock short.

Trading in Moody's quickly zipped to six times the normal level, with investors picking up 5,000 calls that allow them to buy the company's stock and 23,000 puts that allow them to sell it, according to Trade Alert.

Investors made a beeline for near-term put options, attempting to take advantage of the day's 4.5% decline or to speculate on future weakness in the stock. They scooped up batches of June $26 puts, paying $1.25 on hope the stock slips below $24.75 before June 19.

Moody's closed the session at $26.89, rebounding from an intraday low of $25.68.

Fueling the day's action was news that David Einhorn of Greenlight Capital, a hedge-fund manager who vocalized concern about Lehman Brothers before it collapsed, had sold Moody's stock short.

The news prompted a wave of selling in Moody's shares, despite the fact that Berkshire Hathaway's Warren Buffett owns a substantial stake in the rating firm, marking a powerful vote of confidence in the stock.

"When you come out short on a stock that [Mr. Buffett] owns, you're probably shorting against one of the brightest investors out there," said William Lefkowitz, an options strategist with vFinance Investments. "That takes a lot of guts, and I think that gives people more confidence in what he's saying."

In Savient Pharmaceuticals, meanwhile, the bulls appeared to be dominating the activity in near-term contracts. They gravitated toward June $5 calls and June $7.50 calls, for example, taking positions that work best if Savient rises.

There were sellers of July $10 calls, however, which suggests there is limited upside to the stock. Savient closed at $5.75, losing 2.5%.

Savient is seeking approval from the Food and Drug Administration for a new drug for gout patients. An advisory committee, appointed by the FDA, is scheduled to review the drug on June 16.

Elsewhere, there was noteworthy volume in two exchange-traded funds -- one that follows home builders and another that follows gold companies.

In the SPDR S&P Homebuilders ETF, investors showed a preference for bullish contracts, picking up 119,000 calls and 16,000 puts. Within the first few minutes of the session, one investor adopted a massive "call spread" in the fund's September contracts -- buying September $15 calls and selling September $17 calls. Priced at 20 cents, the position makes money if the ETF climbs above $15.20 by mid-September.

The transaction took place a few minutes before the Commerce Department reported a minor increase in single-family home sales in April, which failed to meet the expectations of economists surveyed by Dow Jones.

The home builders fund closed at $11.75, dropping 2.4%

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BLOOMBERG: Goldman Shareholders Suffered as Blankfein Earned $43 Million

By Ian Katz

May 28 (Bloomberg) -- Citigroup Inc. Chief Executive Officer Vikram Pandit weathered almost six hours of grilling from shareholders at the bank’s annual meeting on April 21. He had a lot of explaining to do: The company lost $27.7 billion in 2008 and stayed afloat only with help from a $45 billion government bailout.

Even as his bank was floundering, Pandit in 2008 earned $38 million in salary and stock, No. 3 among the best-paid CEOs of the top 50 U.S.-based financial companies, according to data compiled by Bloomberg. In February, Pandit told a congressional committee that, starting in 2009, he would take just $1 in annual salary until the bank is profitable again. “I get the new reality,” he said.

In the question-and-answer session at the annual meeting, one investor joked, “If you come work for me, I’ll double your salary.” Pandit, 52, standing onstage with Citigroup Chairman Richard Parsons at the Hilton New York, bristled. “I don’t want to work for you,” he said and changed the subject.

Never has pay been a more sensitive topic for the chiefs of large financial institutions. The global economic crisis, last year’s series of taxpayer-supported bailouts and a series of tense congressional hearings have made executive compensation a daily focus of the network news.

“This attack on executive pay is more severe than previous ones,” says Samuel Hayes, professor emeritus of investment banking at Harvard Business School. “The severe economic decline is being blamed squarely on Wall Street, and the huge pay packages are seen as an outrage.”

Blankfein No. 1

Lloyd Blankfein, CEO of New York-based Goldman Sachs Group Inc., was No. 1 in the ranking after earning $42.95 million in salary and stock awards. The ranking includes CEOs who held their jobs for at least 10 months in 2008 (How We Crunched the Numbers). Kenneth Chenault, CEO and chairman of American Express Co., was No. 2, with total pay of $42.75 million. Chenault’s pay package included $8.57 million in salary and other direct compensation, with the rest paid in stock options and restricted shares.

Chenault, who has run New York-based Amex since 2001, topped a ranking of financial CEOs providing the least value for the money they earned, according to Bloomberg data. That ranking is based on Amex’s stock return for 2007 and 2008 -- down 69 percent -- combined with Chenault’s pay over the same period per million dollars of corporate assets.

Some of his 2008 pay, and that of other financial CEOs, was in stock options that are underwater -- meaning the stock price as of today was lower than the price at which they were issued.

Buffett’s Value

The financial executive providing the most value for the money was Warren Buffett, CEO and chairman of Omaha, Nebraska- based Berkshire Hathaway Inc., 58 percent of whose assets are in insurance. Buffett paid himself an average of $175,000 a year in 2007 and 2008 and was awarded no bonus and no stock options.

He owns 33 percent of Berkshire’s Class A shares, which were valued at $31.5 billion on May 27.

Berkshire Hathaway was the single biggest holder of Amex stock as of March 31, with 13 percent of the shares outstanding.

Buffett, 78, blames out-of-control executive pay on boards of directors who accede to CEO demands for multimillion-dollar compensation packages.

“Half of the directors I’ve met on corporate boards don’t know anything about business,” Buffett told shareholders during Berkshire’s annual meeting in May. “They are not going to do anything that not only gets them kicked off that board but that reduces their chances of getting on another one.”

Up to Boards

Ultimately, it will be up to corporate boards, not the government, to put controls on executive pay, and it is by no means clear that they are willing to do so, says Stephen Davis, a senior fellow at the Millstein Center for Corporate Governance and Performance at the Yale School of Management.

“There’s a real question as to whether what we’re seeing is for show in the middle of a crisis, or is part of a long-lasting change,” Davis says. “What would really show that boards are serious is if they have dialogue and outreach with their shareholders, and there’s little sign of that so far.”

Davis is also principal of Madison, Connecticut-based consulting firm Davis Global Advisors.

Mark Borges, a principal at Compensia Inc., a San Jose, California-based pay consultant, says there was never a better opportunity for boards to take strong action to rein in pay. “But I don’t think it’s realistic to say it’s all going to turn on a dime,” he says. “It will depend on the backbone and gumption of the board compensation committees, and that will depend a lot on personalities.”

Denying Bonuses

Pay for financial executives became a public issue the moment in October 2008 that then-Treasury Secretary Henry Paulson decided to make a direct investment in the biggest banks. In that month, the Treasury paid $125 billion to buy preferred shares in nine U.S. banks under the Troubled Asset Relief Program. The total number of TARP-assisted banks eventually swelled to almost 600.

In February of this year, President Barack Obama signed a $787 billion economic stimulus bill, one section of which deals with compensation of TARP beneficiaries. It denies bonuses to the top five best-paid executives at banks that get $500 million or more in bailout funds and to the 20 next-best-paid employees at those firms.

Employees can receive long-term restricted stock if the value isn’t more than one-third of their total compensation.

The law also imposes a ban on TARP banks making “golden parachute” exit payments to the five highest-paid executives or any of the next five best-compensated employees. A golden parachute is defined as any payment -- except for those covering services performed or benefits accrued -- to a “senior executive” leaving a TARP-funded company for any reason.

‘Wink and Nod’

It’s unclear whether the law covers only executives or also other highly paid employees such as traders, says Alan Johnson, managing director of New York-based compensation consulting firm Johnson Associates Inc. Johnson says the Treasury may leave the rules deliberately vague to give companies some flexibility on pay.

“I think the Treasury would love to do a wink and a nod,” he says.

In mid-May, four executives of financial companies told Bloomberg News they expect the administration to loosen the pay restrictions. One said they would disappear by year-end.

Even so, Treasury Secretary Timothy Geithner told Bloomberg TV on May 21 that the Obama administration was formulating a plan to better align pay with performance and would roll it out within weeks. He said Wall Street must adopt a broad set of standards to discourage the kind of risk taking that led to the financial crisis.

‘Substantial Changes’

“I don’t think we can go back to the way it was,” Geithner said. “We’re going to need to see very, very substantial changes.”

In an April survey of 2,326 people by Hamden, Connecticut- based Quinnipiac University, 81 percent of those polled supported restrictions on pay at companies receiving government aid, and almost one-third also backed limits at other firms.

Scrutiny of their compensation and perks by the White House and Congress has some banks scrambling to pay back the TARP money.

“Firms want to send a signal to their customers that they’re healthy and prosperous and not have the pay restrictions,” Johnson says. “They don’t want the perception or reality of government interference in business decisions.”

JPMorgan Chase & Co., Morgan Stanley and Goldman Sachs all applied to refund a total of $45 billion to the Treasury in mid- May, people familiar with the matter say.

Paying Back TARP

“We’re very well capitalized and expect to repay the TARP money soon,” Blankfein told shareholders at the company’s May 8 annual meeting. Goldman sold $10 billion in preferred shares to the Treasury in October.

Overall, pay for the highest-ranking financial executives is dropping. Average compensation for the Finance 50 CEOs who were in their jobs throughout 2007 and 2008 fell 25 percent in 2008 to $9.8 million from $13 million a year earlier, according to Bloomberg data.

Even as the captains of Wall Street lose millions of dollars in compensation, they’re paying to keep the employees they see as revenue producers. Goldman Sachs designated $4.7 billion in compensation expenses for the first quarter of its fiscal year, or more than $168,000 per employee, up from $125,000 for the same period a year earlier. Those numbers don’t precisely reflect what each worker receives because they include items such as severance costs and amortization of stock awards.

Poor Performance

The CEOs of the top 20 financial companies in the ranking all chalked up pay packages in excess of $10 million, in a year when the performance of their commercial and investment banks and insurance companies was uniformly poor.

“The disparity between pay and company performance is as large as I’ve seen in my 33 years in this business,” says Frank Glassner, managing partner of Veritas Executive Compensation Consultants LLC.

The highest-paid U.S.-based CEO was Bruce Wasserstein, head of investment firm Lazard Ltd., with headquarters in Bermuda and principal offices in New York, Paris and London. He was awarded a total of $133 million in salary and stock awards in 2008 as part of a new contract, $96 million of which was a special retention award not scheduled to vest for five years.

Lazard shares returned negative 28 percent in the 12 months ended on May 27. Lazard was excluded from the Bloomberg ranking because it’s based offshore.

Lawmaker Questions

No. 1 Blankfein’s $43 million in salary and stock awards came as Goldman Sachs’s stock recorded a loss of 65 percent in total return in fiscal 2008. In 2009, it was up 67 percent as of yesterday, and down 18 percent over 12 months. No. 2 Chenault’s American Express shares returned negative 64 percent in 2008 and then returned 29 percent in 2009 as of yesterday’s market close.

Bonuses for financial company employees were the target at a House subcommittee hearing in March, when lawmakers questioned Edward Liddy, CEO of American International Group Inc., about AIG’s payment of $165 million in bonuses and retention payments to about 400 employees.

AIG has received a bailout package of up to $182.5 billion from the U.S. Treasury to stave off default on tens of billions of dollars of obligations from credit-default swaps, contracts to protect against or speculate on the default of bonds and other securities.

Liddy, former CEO of insurance firm Allstate Corp., is working for $1 a year. He told the AIG board on May 21 that he would step down as soon as the directors find a replacement.

The AIG bonuses earned the company a rebuke from Obama, who in February called them “inappropriate.”

‘Irresponsibility and Arrogance’

That same month, House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, lit into Northern Trust Corp., which got $1.6 billion in federal funds, for going ahead with a conference and golf tournament in Los Angeles.

“This behavior demonstrates extraordinary levels of irresponsibility and arrogance,” Frank and 17 other Democratic members of the committee wrote to Northern Trust CEO Frederick Waddell, No. 43 in the ranking, with compensation totaling $3.24 million.

“The populist urge is going to have a great impact on how we run our companies,” says Pearl Meyer, senior managing director of New York-based compensation consultant Steven Hall & Partners LLC, which advises financial companies on pay issues. “I fear the unintended consequence will be the loss of good people we need. How long do you want to be regarded as a scoundrel?”

The New Reality

The Millstein Center’s Davis says one way to defuse the pay issue is for financial CEOs themselves to institute reforms. One that has begun the process is Blankfein. At Goldman Sachs’s annual meeting, he laid out a set of compensation principles to shareholders.

No one in a risk-taking role should be compensated based only on his or her own profit-and-loss numbers, he said, adding that “contracts or evaluations should not be based on the percentage of revenues generated by a specific individual.”

Blankfein himself earned the great bulk of his $43 million in 2008 pay in stock. His salary and other nonstock compensation was $835,943, and he received no bonus. According to the company’s proxy, his $42.1 million in 2008 restricted stock was compensation for Goldman Sachs’s 2007 profit of $11.6 billion, a record for a securities firm. Blankfein, like Pandit of Citigroup, gets the new reality. He will receive no stock options or restricted stock in 2009.

‘Greedy in Hindsight’

“Much of the past year has been deeply humbling for my industry,” Blankfein told a group of institutional investors in Washington in April. “The loss of public confidence from failing to live up to the expectations that we created will take years to rebuild. Worse, decisions on compensation and other actions taken and not taken, particularly at banks that rapidly lost a lot of shareholder value, look self-serving and greedy in hindsight.”

CEOs of the 10 banks that took the most money from TARP got paid $160 million last year, according to Bloomberg data. Together, Blankfein, Pandit and Jamie Dimon of JPMorgan Chase got $117 million of that.

The great bulk of Pandit’s $38 million in 2008 pay was a $35 million, stock-and-options signing bonus awarded to him when he took the CEO job in December 2007.

Dimon’s a Bargain

Dimon earned an average of $32 million a year in 2007 and 2008, yet still provided relatively good value for the money, according to Bloomberg data, which ranked him No. 3 out of 36 CEOs in that category. That’s because JPMorgan stock did comparatively well -- its return for the two years was -30 percent compared with a fall of 66 percent for the Standard & Poor’s 500 Financials Index -- and because the assets of the firm are so huge. They were $2.2 trillion as of the end of its 2008 fiscal year.

Measuring pay per million dollars of assets and taking stock performance into consideration, Dimon provided greater value than Robert Wilmers, CEO and chairman of M&T Bank Corp., who made an average of $850,000 in 2007 and 2008.

American Express’s Chenault topped the Least-Value list after the company’s stock fell 69 percent in 2007 and 2008 even as his annual compensation for both years topped $40 million.

“Ken did not receive a bonus for 2008, and he did not receive a restricted stock award,” American Express spokeswoman Joanna Lambert said in an e-mail. “He did receive an option award with a value of about 10 percent below the prior year. He took a 10 percent salary cut. He did receive a long-term award that will pay out only if the company meets performance targets over the next two years.”

Least-Value List

American Express announced on May 18 that it would eliminate 4,000 jobs, in addition to the 7,000 it cut in October.

Dowd Ritter, CEO of Birmingham, Alabama-based Regions Financial Corp., was No. 2 on the Least-Value list. His 2007 and 2008 pay averaged $10.6 million while the total return of his company’s stock was -76 percent. A spokesman says that Ritter’s pay numbers are distorted by a $12.3 million restricted stock award in 2007 linked to the 2006 merger of Regions Financial with AmSouth Bancorp, of which he used to be CEO.

Ritter’s 2008 pay was $3.8 million.

Pandit and 13 other CEOs at the top 50 firms were excluded from the Best Value/Least Value ranking because they hadn’t held their positions for two years. Stephen Lilienthal, former CEO of Chicago-based CNA Financial Corp., was excluded because $13 million of his $14.3 million in 2008 pay was severance.

Lowest-Paid CEO

Some CEOs live or die by their stock price. Richard Fairbank of McLean, Virginia-based banking and credit card company Capital One Financial Corp. has taken no salary or bonus since 1997. And after being awarded $17.1 million in stock in 2007, he chose to take none in 2008.

That made him the lowest-paid CEO in the ranking, with his $68,000 in compensation consisting solely of allowances for health care, transportation, home security and insurance. In 2001, Fairbank was the highest-paid financial company CEO, earning $69 million, all of it in stock awards, according to Bloomberg data.

Even as financial executives back away from their immense pay packages, the assault from the government continues. The Obama administration has begun discussions with federal regulators about how to create new compensation limits for executives of financial institutions -- whether or not they’ve received money from TARP.

‘Wrenching Shift’

Those looking for a government-orchestrated ratcheting down of bank CEOs’ pay are likely to be disappointed, Harvard’s Hayes says. “Our economic system isn’t amenable to a sudden, wrenching shift from entrepreneurship to centralized government control,” he says. “The philosophical roots of this country are simply against that.”

When the crisis abates, the Millstein Center’s Davis says, responsibility for setting reasonable pay limits will once again fall on boards of directors. “The future of pay rests with whether shareholders have been burned enough to keep their eyes trained on board performance,” Davis says. “Boards have to do a better job of tying pay tightly to performance.”

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BLOOMBERG: Einhorn Shorts Moody’s, Says System Should Be Dropped


By Josh Fineman

May 28 (Bloomberg) -- David Einhorn, the hedge-fund manager who bet against Lehman Brothers Holdings Inc. four months before the firm collapsed, is shorting Moody’s Corp., whose flawed ratings on asset-backed debt helped fuel the credit crisis.

“Even Moody’s largest shareholder, Warren Buffett, has said he doesn’t believe in using ratings,” Einhorn, 40, said in a speech last night at the Ira W. Sohn Investment Research Conference in New York. “We are short Moody’s.”

Moody’s, whose founder created credit ratings in 1909, reported a 25 percent profit drop last month as the recession sapped demand for debt grades. Rating companies have been criticized by the European Union, members of the U.S. Congress and the U.S. Securities and Exchange Commission for ignoring conflicts of interest and risks that contributed to the worst financial crisis since the Great Depression.

Einhorn, who runs New York-based Greenlight Capital Inc., said regulators could improve the stability of financial markets by eliminating the formal rating system. He titled his speech “The Curse of the AAA.”

Moody’s, which climbed 40 percent on the New York Stock Exchange this year before today, fell $2.36, or 8.4 percent, to $25.79 in composite trading at 10:27 a.m., the biggest drop in more than three months. Investors who sell short borrow shares with the expectation that they can be repurchased at a lower price to pay back the loan.

‘Vital Source’

Moody’s spokesman Anthony Mirenda said the company’s research and credit opinions play an “important role” in the markets. “Moody’s opinions are a vital source of information and continue to be widely sought by market participants of all types,” Mirenda said in an interview.

Greenlight, which Einhorn started in 1996, manages about $5.1 billion in assets. The firm’s Greenlight Capital LP fund gained 4.4 percent in the first quarter, after losing 23 percent last year. Greenlight has returned an annual average of 20.8 percent from its Greenlight Capital LP fund since its inception.

“The truth is that nobody I know buys or uses Moody’s credit ratings because they believe in the brand,” Einhorn said. “They use it because it’s part of a government-created oligopoly and often because they are required to by law.”

Buffett, the chairman and chief executive officer of Berkshire Hathaway Inc., said earlier this month that assigning ratings to debt and other securities “is still a good business.” Berkshire owns about 20 percent of Moody’s shares.

Relying on Ratings

Still, Buffett said he doesn’t rely on the major credit rating companies to make his own investment decisions.

“We do not think the people of Moody’s, Standard & Poor’s, Fitch or anyplace else should be telling us the credit rating of a company,” Buffett said May 2 when Berkshire had its annual meeting in Omaha, Nebraska. “We don’t believe in outsourcing investment decisions.”

Einhorn said opinions like that undermine the rating companies’ business models.

“If your product is a stamp of approval where your highest rating is a curse to those that receive it and it’s shunned by most who are supposed to use it, you have problems,” he said.

Einhorn criticized Lehman’s accounting during a speech at last year’s conference. Four months later, Lehman filed the largest bankruptcy in U.S. history. Einhorn said Lehman hadn’t disclosed its holdings of collateralized debt obligations properly and wasn’t valuing its commercial mortgage-related assets based on market prices.

Last night’s conference raised $5 million for cancer research, compared with about $3 million last year.

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N.Y. TIMES BLOG: Prominent Short Seller Puts Moody’s in His Sights

Moody's

David Einhorn, the hedge-fund boss that made a prescient bet against Lehman Brothers before its spectacular collapse last year, has revealed another short-selling target: Moody’s, the credit rating firm.

Speaking on Wednesday night at the Ira Sohn Investment Research Conference in New York, an annual charity event where attendees get investment tips from the pros, Mr. Einhorn said he believes that ratings firms like Moody’s made too many missteps during the boom times by doling out perfect credit ratings on firms and products that have turned out to be junk.

“If your product is a stamp of approval where your highest rating is a curse to those that receive it, and is shunned by those who are supposed to use it, you have problems,” Mr. Einhorn, who runs the New York-based hedge fund Greenlight Capital, told attendees, according to Reuters.

Berkshire Hathaway, run by the legendary investor Warren Buffett, owns about 20 percent of Moody’s, and its Moody’s stake was one of the things Mr. Buffett was asked about at last month’s shareholder meeting.

Mr. Einhorn declined to say how long his fund had been selling Moody’s short — or placing a bet that its share price would fall — but he told Reuters he took the position a considerable time ago. Shares of Moody’s were down nearly 7 percent Thursday. A spokesman for Moody’s wasn’t immediately available for comment, Reuters said.

Mr. Einhorn may have found it easier to target Moody’s, rather than rivals such as Standard & Poor’s, because Moody’s is a pure-play ratings company, whereas S&P is housed inside the McGraw-Hill media empire.

In any case, he told the crowd on Wednesday that regulators could improve the stability of financial markets by eliminating the rating systems used by the likes of Moody’s and S.&.P., which charge issuers to rate their products.

“The truth is that nobody I know buys or uses Moody’s credit ratings because they believe in the brand,” he said in his speech, entitled “The Curse of the AAA.” “They use it because it is part of a government-created oligopoly and, often, because they are require to by law.”

Mr. Einhorn used the same stage last year to announce he was betting against the investment bank Lehman Brothers. At the time, the firm had yet to announce any major write-downs and was generally considered to be healthy compared with rivals such as Merrill Lynch. His bet turned out to be profitable, as the company’s stock withered to zero when the company filed for bankruptcy protection four months later.

Cyrus Sanati


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REUTERS: MidAmerican's Sokol sees U.S. housing staying weak

Thu May 28, 2009 1:02pm EDT

By Joseph A. Giannone

NEW YORK (Reuters) - David Sokol, chairman of Berkshire Hathaway Inc's (BRKa.N) MidAmerican Energy Holdings and a contender to succeed Warren Buffett, warned that the U.S. housing market still has a ways to go before bottoming out.

Sokol, who leads one of the largest U.S. power utility and energy pipeline companies, also heads up HomeServices of America Inc, the second largest U.S. real estate brokerage, title and mortgage lending firm.

MidAmerican's brokerage operates in 28 of the largest U.S. markets, and Sokol said the supply of housing still far outstrips demand. In the meantime, the economy is sluggish, with Sokol seeing unemployment rates exceeding 10 percent.

"As we look at the economy, I have to be honest: we're not seeing the green shoots," Sokol said at the annual Ira Sohn Investment Research conference, which drew some 1,200 hedge fund executives to hear top investors share trade ideas.

"That's not surprising to us. It took us 11 years to get into this mess where it is. We went into the emergency room last fall and by January the banking system and economy generally were in intensive care, and we'd expect it to stay there for some time," Sokol said.

If anything, the glut of housing supply could grow larger as a new wave of foreclosures and pending sales breaks on the market.

"We think the official statistics of 10 to 12 months' backlog is actually nearly twice that amount," he told the gathering, which raises funds for the treatment and cure of pediatric cancer.

"There is an enormous shadow backlog of about-to-be foreclosed homes and of individuals who need to sell but have time, and there are already six (for sale) signs on their block," he said.

Assuming the economy does not worsen, he said: "It will be be mid-2011 before we see a balancing of the existing home sales market." He defined "balanced" as a six-month backlog.

The weak prospects for existing home sales, he added, means delays for any rebound in new home construction and for the broader economy.

(Editing by Gerald E. McCormick)

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Thursday, May 28, 2009

SEATTLE TIMES: New CEO: Gates Foundation learns from experiments

The Bill & Melinda Gates Foundation spent billions of dollars exploring the idea that smaller high schools might result in higher graduation rates and better test scores. Instead, it found that the key to better education is not necessarily smaller schools but more effective teachers.

Associated Press Writer

SEATTLE —

The Bill & Melinda Gates Foundation spent billions of dollars exploring the idea that smaller high schools might result in higher graduation rates and better test scores. Instead, it found that the key to better education is not necessarily smaller schools but more effective teachers.

Some people might cringe while recounting how much money the foundation spent figuring this out. But the foundation's new CEO, Jeff Raikes, smiles and uses it as an example to explain that the charity has the money to try things that might fail.

"Almost by definition, good philanthropy means we're going to have to do some risky things, some speculative things to try and see what works and what doesn't," Raikes said Wednesday during an interview with The Associated Press.

The foundation's new "learner-in-chief" has spent the nine months since he was named CEO studying the operation, traveling around the world and figuring out how to balance the pressures of the economic downturn with the growing needs of people in developing nations.

The former Microsoft Corp. executive, who turns 51 on Friday, joined the foundation as its second CEO after Patty Stonesifer, another former Microsoft executive, announced her retirement and his friends Bill and Melinda Gates talked Raikes out of retiring.

In the past decade, the foundation has given away nearly $20 billion, mostly in global health, global development and U.S. education.

It has been ramping up its giving since Warren Buffett, head of Omaha, Neb.-based Berkshire Hathaway, announced in June 2006 that he would make annual donations of about $1.5 billion to the foundation, with the money to be distributed in the year it is donated.

Raikes is also from Nebraska, where he grew up on the family farm near Omaha. He and his wife, Tricia, formed the Raikes Foundation in 2002 to support youth development, education and community issues in the Seattle area.

He hasn't lost his easygoing manner during his transformation from business leader to nonprofit CEO.

One of the things he's learned is the foundation must take a different direction with its education grants. The most effective path, he said, is to support good, effective teachers.

Between 2000 and 2008, the foundation spent about $2 billion toward improving America's high schools and another $2 billion for scholarships, primarily for low-income and minority students.

It saw graduation rates go up in many foundation-supported schools. But it didn't see significant improvements in student achievement or in the number of students who left high school ready to enroll in college.

Raikes said the responsibility for social innovation often falls on nonprofit organizations because the private sector doesn't see the profit margin in it and most citizens don't want the government speculating with their tax dollars.

The foundation plans to continue to experiment with its education policy.

"We're going to try some things and I'm quite confident that some things will succeed and I'm quite confident that some things will fail," Raikes said.

He noted that half of the more than 1 million students who drop out of school in the United States each year are from just 100 school districts.

What can make a difference for those kids? Raikes wants to find out.

The foundation also is investing money to improve data collection in public schools - in part, to better find out what works - and to help community colleges improve graduation rates.

Raikes talked of a study of the Los Angeles Unified School District after an initiative to reduce class sizes led to a liberalization of rules on who could be hired to teach.

The district found that whether a teacher had a certificate had no effect on student achievement.

Raikes said the district found that putting a great teacher in a low-income school helped students advance a grade and a half in one year. An ineffective teacher in a high-income school held student achievement back to about half a grade of progress in a year.

The Harvard researcher who studied the Los Angeles district, Thomas J. Kane, now works for the Gates Foundation as deputy director of education for data and research.

Kane and others will be figuring out how to use foundation money to define effective teaching, how to attract good teachers and help them improve, and how to reward them so they stay in the classroom, Raikes said.

"We really have to focus classroom-by-classroom," said Jim Morris, chief of staff at the L.A. district. "Every teacher matters just like every student matters."

The district recently examined its schools that had high student achievement despite poverty and a high percentage of students learning English as a second language, and found the schools have a lot in common, Morris said.

They have high expectations for kids, strong professional development for teachers, administrators who use data to guide teachers and learning, a group of teachers who work together to improve classroom learning, and a strong parent group.

But Morris said the key is excellent teachers. Everything else successful schools do is to support those teachers and what they do in the classroom, he said.

Because of the economy, the L.A. district is contemplating teacher layoffs, like most districts across the nation. Morris said it is trying to shrink central office staff and cut corners elsewhere to keep as many teaching jobs as possible.

Los Angeles Unified has about 37,000 teachers and expects to lay off between 2,100 and 2,500 before the next school year, he said.

---

On the Net:

Gates Foundation: http://www.gatesfoundation.org

L.A. Unified School District: http://notebook.lausd.net/portal/page?-pageid33,48254&-dadptl&-schemaptl-ep

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