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Monday, May 31, 2010

ABC NEWS: Buffett, Moody's CEO Rate a Date on Market Crisis

NEW YORK (Reuters) - Legendary investor Warren Buffett appears this week before a commission searching for the causes of the 2008 financial crisis, to provide his assessment on the role a much-maligned credit rating industry played.

Buffett, who runs Berkshire Hathaway Inc , and Raymond McDaniel, chief executive of Moody's Corp , will appear Wednesday as the Financial Crisis Inquiry Commission examines credit ratings and how investors use them.

The congressionally appointed commission, chaired by former California treasurer Phil Angelides, is examining causes of the worst financial crisis since the 1930s.

It has held hours of closed-door interviews, and hearings featuring some of Wall Street's biggest names, like a fiery Goldman Sachs Group Inc CEO Lloyd Blankfein and a defensive Robert Rubin, once ensconced at Citigroup Inc .

Wednesday's hearing in New York will bring together two men at opposite ends of the investor popularity spectrum.

There is Buffett, the investor icon with a near-Teflon ability to resist criticism. Nonetheless, despite his frequent public appearances, Buffett resisted testifying until he got a subpoena.

Berkshire owns a 13 percent stake in Moody's, but has pared it from nearly 20 percent over the last year.

And then there is McDaniel, who runs a company to which criticism sticks like Velcro. Five other current and former Moody's officials will also testify, including whistleblower Eric Kolchinsky and Brian Clarkson, who drove Moody's expansion in structured products before being replaced in 2008.

Moody's, McGraw-Hill Cos' Standard & Poor's and Fimalac SA's Fitch Ratings are widely criticized for fuelling the crisis by assigning unreasonably high ratings for too long, and then downgrading them too fast. Many subprime and other risky securities lost all or much of their value.

"The question is, can we get a better handle of what was going on, and were the securities really misunderstood?" said George Cohen , a University of Virginia law professor. "The bigger issue is whether we ought to change the entire system."

Critics say the agencies' model of having issuers pay for ratings is rife with conflict and corrupts their assessments.

Hoping to ease pressure on issuers to shop for ratings and agencies to award high marks, the Senate voted on May 13 to create a board overseen by the U.S. Securities and Exchange Commission to assign rating agencies to initially assess debt issues.

It also voted to require regulators to develop their own credit standards rather than rely solely on agencies.

Angelides was not immediately available for a comment.

CONTRADICTIONS

Buffett has long relied on seeming contradictions in justifying his attitude toward rating agencies.

On the one hand, he loves the business model. There is not much competition, the need for capital is virtually nil, and the agencies are essentially a toll booth for companies needing to raise cash: Without ratings, no money can be raised.

Yet Buffett told tens of thousands of shareholders at Berkshire's annual meeting on May 1: "We have never paid any attention to ratings for bonds at Berkshire. We don't think we should farm out, outsource investment judgment."

This is a variation of the surprise argument Buffett used to defend marketing of securities by Goldman, which led to an SEC fraud lawsuit. Buffett said investors should do their own credit homework, and not worry who might bet against them, or what someone else thinks of any securities' credit quality.

"He's on several different sides of the issue," Cohen said. "He might say the system could be better, but that as long as the system is the way it is, he wants to make money from it."

Berkshire had no comment on what Buffett plans to say, including plans to address wider economic or business ills.

McDaniel has more at stake from ratings reform, given that more than two-thirds of Moody's revenue comes from ratings.

He told a Senate subcommittee on investigations on April 23 there were "a number of things that in hindsight I wish we had done differently, absolutely." Among these were an insufficient focus on macroeconomic housing trends, and a shortfall in cross-disciplinary expertise in rating committees, he said.

Moody's in April handed over documents to Angelides in response to the commission's first subpoena. A month earlier, it received a "Wells notice" indicating possible SEC civil charges over its failure to downgrade some European debt after learning a computer glitch caused inflated ratings.

McDaniel exercised some stock options the day the Wells notice was received. Moody's spokesman Michael Adler said this exercise resulted from participation in a prearranged plan that "includes pre-determined time and price triggers."

(Reporting by Jonathan Stempel; Editing by Tim Dobbyn)

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Saturday, May 29, 2010

REUTERS: Berkshire confirms Buffett subpoenaed to testify

NEW YORK May 28 (Reuters) - Berkshire Hathaway Inc (BRKa.N)(BRKb.N) confirmed on Friday that Warren Buffett will testify under subpoena before a U.S. panel examining the causes of the 2008 financial crisis.

Buffett, 79, rebuffed earlier requests by the Financial Crisis Inquiry Commission to submit to voluntary questioning, resulting in Tuesday's subpoena, Berkshire said.

Carrie Kizer, an assistant to Buffett, confirmed the accuracy of a Fortune magazine article on Thursday that revealed the subpoena and Buffett's resistance to testifying.

Buffett, Moody's Corp (MCO.N) Chief Executive Raymond McDaniel, and five other current and former Moody's officials will testify on June 2, as the commission examines credit ratings and how investors use them.

The Congressionally appointed commission is examining the causes of the worst financial crisis since the 1930s and is trying to find flaws that could be remedied through reforms. It is slated to issue a report by Dec. 15.

Moody's is the parent of credit rating agency Moody's Investors Service. Berkshire had a 13 percent stake in Moody's as of March 31, regulatory filings show.

Buffett is the world's third-richest person, with most of his fortune coming from Berkshire. He has since 1965 run the Omaha, Nebraska-based conglomerate, which now has roughly 80 companies and tens of billions of dollars of investments. (Reporting by Jonathan Stempel; editing by Andre Grenon)


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Friday, May 28, 2010

FORTUNE: Warren Buffett to testify under FCIC subpoena after resisting commission's request

Carol Loomis, senior editor-at-large


FORTUNE -- When Warren Buffett testifies before the Financial Crisis Inquiry Commission next Wednesday, it will be because he was subpoenaed. If you don't know how a subpoena works, this one begins with capital letters, "YOU ARE HEREBY COMMANDED to appear and give testimony."

As Buffett characterizes it, "This is an offer you can't refuse."

And to all that there's naturally a backstory -- a very interesting one at that.

On May 12, Buffett, the CEO of Berkshire Hathaway (BRKA, Fortune 500), received a letter from the FCIC's executive director, Wendy Edelberg, saying that his views on a variety of subjects would be of "great value" to the Commission. The subjects, the letter said, would range from (but not be limited to) "the use and misuse of derivatives instruments, regulatory shortcomings, too big to fail, rating agencies and the shadow banking system."

To start the process, the letter said, the commission would like first to arrange a "private interview" where Buffett's views could be explored. And then, it continued, "we may request that you appear before the Commission at a hearing."

The letter said that arrangements for all this could be worked out with the general counsel of the commission, Gary Cohen.

Buffett had by that time watched some of the Commission's hearings and knew that the witnesses had mainly been people implicated in the crisis -- bankers, notably -- or charged with regulating it out of existence.

Knowing that he was in neither camp and doubtful that his testimony would indeed be of "great value," he decided to say no to this surprising invitation.

So, at his request, his assistant, Debbie Bosanek, called Cohen and said -- as she paraphrases it -- that "Mr. Buffett appreciates the invitation and is flattered by it, but he has a full plate with Berkshire and just can't do it."

Cohen was not pleased, to put it mildly. Ignoring the word "request" in the first letter, he told Bosanek sternly that "this was not an invitation but more of a command performance." He said that another letter -- "worded differently" -- would be coming.

There followed two more rounds of letters from Cohen. The first, on May 17, was indeed worded differently but signaled its general conciliatory tone by a heading that said, "Re: Renewed Request of the Financial Crisis Inquiry Commission."

Only at the letter's end did the threat come through: "We would prefer not to use compulsory process to secure your cooperation, and are sure that it will not be necessary."

But ah, it was. Buffett could by then see the likely end of this argument. But he was also determined to stick to his belief that the "private interview," followed by hearings, would neither be beneficial to anyone nor a good use of his time. So Buffett told Cohen in a phone call that he would not be volunteering to testify -- and if that meant a subpoena was in the cards, let it happen.

The subpoena -- that command in capital letters -- came on May 25. But the continuing, urgent wish of the commission to avoid coercion was contained in an accompanying letter, also dated May 25, that "respectfully" requested Buffett's testimony at a hearing on June 2 in New York City.

Had Buffett accepted the respectful request, the subpoena would have become irrelevant. But he did not accept, and the subpoena was therefore automatically served.

The subpoena and the accompanying May 25 letter made it clear that the topics Buffett was originally asked to speak about had narrowed. The announced subject of the June 2 hearing is "Credibility of Credit Ratings, the Investment Decisions Made Based on Those Ratings, and the Financial Crisis."

The connection between Buffett and credit ratings is Berkshire's longtime ownership of stock in that industry's biggest independent company, Moody's. Sitting at the witness table with Buffett will be Moody's CEO, Raymond McDaniel.

The only other scheduled witnesses that day are five additional people from Moody's.

The very last part of the June 2 hearings title is echoed in the letter to Buffett, in which he is told he will be asked to give his views on "the most significant causes of the financial crisis."

Indeed, yesterday three men from the commission, including Cohen, came to Omaha and did the "private interview" with Buffett. They began by asking him about credit rating companies and then verged into all of the other subjects mentioned in the first letter to him.

Buffett told this writer -- a longtime friend of his and a Berkshire shareholder -- that he liked the men and enjoyed talking to them. Two (not including Cohen) brought books for him to autograph and also indicated they might come to next year's Berkshire annual meeting.

Buffett said that answering the questions of the three reminded him of doing the same at that meeting, a process he has always enjoyed.

Provided that the commission members ask intelligent questions and don't try to grandstand, this writer predicts that Buffett will enjoy the hearings as well. I also predict that, despite his doubts about this matter, the commission will gain from hearing his views. Most people do.

After the hearing has concluded on Wednesday (and, no, this is not a joke), Buffett is set to make a quick getaway to Sing Sing Prison in Ossining, N.Y., where a graduation ceremony is being held for prisoners who have completed their college education. Buffett's sister, Doris, a philanthropist, will join him at Sing Sing, where she has done charitable work. To top of page

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CNBC: Warren Buffett Forced to Testify Before Financial Crisis Commission

Published: Thursday, 27 May 2010 | 11:56 PM ET
By: Alex Crippen

Warren Buffett
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Warren Buffett

Warren Buffett's appearance next week before the Financial Crisis Inquiry Commission is a "command performance," after he was subpoenaed to testify at a hearing focusing on the credit rating agencies.

Berkshire Hathaway is Moody's largest shareholder, although Buffett's company has been reducing those holdings in recent months. Several Moody's executives, including its current CEO, will also be answering questions.

Fortune's Carol Loomis reports tonight (Thursday) that the Commission had to resort to what Gary Cohen, the FCIC's general counsel, called a "compulsory process" after Buffett turned down several invitations to be questioned.

Loomis a long-time Buffett friend, editor of his annual letter to Berkshire shareholders, and a Berkshire shareholder,

She quotes Buffett as saying, "This is an offer you can't refuse."

Loomis writes that Buffett decided to politely decline the Commission's initial request on May 12 for a "private interview" and possible follow-up appearance at a hearing. The letter to Buffett said his views would be of "great value" to the panel:

"Buffett had by that time watched some of the Commission's hearings and knew that the witnesses had mainly been people implicated in the crisis -- bankers, notably -- or charged with regulating it out of existence.

Knowing that he was in neither camp and doubtful that his testimony would indeed be of 'great value,' he decided to say no to this surprising invitation."

A May 17 "renewed request" from the Commission included the line, "We would prefer not to use compulsory process to secure your cooperation, and are sure that it will not be necessary."

After Buffett told Cohen he would not appear voluntarily, he received another "respectful request" on May 25, accompanied by a subpoena that said he had been "COMMANDED to appear and give testimony."

Loomis says Cohen, and two other FCIC representatives came to Omaha Wednesday for a preliminary "private interview" that covered the credit rating companies and other subjects associated with the financial crisis.

Buffett tells Loomis that he "liked the men and enjoyed talking to them." The two men accompanying Cohen brought books for him to autograph.

She concludes, "Provided that the commission members ask intelligent questions and don't try to grandstand, this writer predicts that Buffett will enjoy the hearings as well."

Current stock prices:

Berkshire Portfolio

Berkshire Class B: [BRK.B 73.35 --- UNCH (0) ]

Berkshire Class A: [BRK.A 109625.0 --- UNCH (0) ]

Moody's: [MCO 20.88 --- UNCH (0) ]


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THE DETROIT NEWS: Daimler teams with BYD to build electric cars

Christine Tierney / The Detroit News

Daimler AG and China's BYD Co. signed an agreement today to establish a joint venture to develop electric cars in China.

The two automakers will invest $86 million initially to design the electric vehicles under a new brand that will be jointly owned.

The agreement to establish a 50-50 venture, Shenzhen BYD Daimler New Technology Co., formalizes the plans the companies announced in March.

The venture will draw on Daimler's expertise in electric vehicle architecture and BYD's know-how in battery technology, the German automaker said in a statement.

BYD, backed by U.S. billionaire Warren Buffet, is new to the car-making business but is a leading producer of batteries.

"Together with Daimler, we are making excellent progress identifying opportunities to utilize the strengths of both companies to create a new brand of electric cars in China," Wang Chuanfu, chairman of BYD, said in a statement.

The Chinese government is pushing for the development of clean, alternative technologies to reduce pollution and reliance on imported oil.

The Beijing authorities have designated cities in China that will be first to have the battery-charging infrastructure necessary for electric cars. They are expected to outline incentives soon.

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Thursday, May 27, 2010

REUTERS: Buffett, Moody's CEO to testify to crisis panel

WASHINGTON
Wed May 26, 2010 7:21pm EDT

(Reuters) - Warren Buffett, the chief executive of Berkshire Hathaway Inc, will testify next week before the U.S. panel examining the causes of the deep financial crisis.

The Financial Crisis Inquiry Commission, a Congressionally appointed panel charged with writing by the end of the year a full account of the crisis, said Buffett will testify with Moody's Corp Chief Executive Raymond McDaniel on June 2 in New York.

The hearing will look at the credibility of credit ratings, and the investment decisions made based on those ratings, the panel said in a release on Wednesday.

Credit rating agencies have been accused of contributing to the global financial crisis by assigning inflated ratings to subprime mortgage-related products.

Buffett earlier this month defended credit rating agencies as an investment, including stakes by Berkshire Hathaway.

He told Berkshire's annual meeting that rating agencies "made the same mistake" that he, politicians, mortgage brokers and others did in overestimating the health of the

housing market.

During the first quarter of this year, Buffett further reduced his stake in Moody's, which stood at about 13 percent as of March 31.

Buffett said at the annual meeting on May 1 that the agencies, which also include McGraw-Hill Cos' Standard & Poor's and Fimalac SA's Fitch Ratings, have scant capital needs and have strong pricing power.

Buffett will be one of the biggest names to appear before the 10-member panel, which is modeled after the Pecora Commission that probed the 1929 Wall Street crash.

In the past few months, the commission has also heard from Goldman Sachs CEO Lloyd Blankfein, JPMorgan CEO Jamie Dimon, former Federal Reserve Chairman Alan Greenspan and former Bear Stearns CEO James Cayne.

It must deliver its findings to Congress and President Barack Obama by December 15.

Also scheduled to testify on June 2 are current and former Moody's executives, including Nicolas Weill, the group managing director for Moody's Investors Service, and Brian Clarkson, former chief operating officer for Moody's Investors Service.

The full list of witnesses can be found at: here

Credit rating agencies are facing tough reforms in the financial regulation legislation moving through Congress.

The Senate version of the bill would have the government set up a clearinghouse to match rating agencies on a semi-random basis with debt issuers.

That could ease pressures the agencies face to assign rosy ratings to securities issued by the firms that hire them, backers said.

Another provision in the Senate's legislation would require federal regulators to develop their own standards of credit-worthiness rather than rely solely on assessments from rating agencies.

Shares of credit rating agencies dropped when the Senate approved the measures on May 13, but it is unclear whether they will make it into the final bill, which must be melded with a version passed by the U.S. House of Representatives.

(Reporting by Karey Wutkowski; Editing by Tim Dobbyn)

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Wednesday, May 26, 2010

FORBES: Buffett Tried To Block Derivatives Back In 1982

Robert Lenzner, 05.25.10, 05:30 PM EDT

The meltdowns of 1987 and May 6's flash crash might never have happened if he'd succeeded in getting Congress to listen.

"In my judgment, a very high percentage, probably at least 95% and more likely much higher, of the activity generated by these contracts will be strictly gambling in nature." --Warren Buffett to Hon. John Dingell, March 5, 1982

The history of the volatile stock market, Wall Street's obscene profits and the risks of a systemic financial breakdown might have been radically altered if Warren Buffett, then a successful but not widely recognized investor, had succeeded in convincing Congress not to approve the first derivative contract, for the most widely used stock market index, the Standard & Poor's 500 Index.

Forbes has obtained a copy of Buffett's March 5, 1982, letter to Rep. John Dingell, D-Mich., laying out the risks to the nation that were, of course, largely ignored. In the letter Buffett modestly refers to his background, referencing his previous 25 years spent as a financial analyst, and 30 years "in various aspects of the investment business." He adds, "I currently have the sole responsibility for an equity portfolio that totals over $600 million." It sounds prosaic now: $600 million!

In an effort to impress Dingell, Buffett encloses several articles "that relate to my experience in the investment field." Today Berkshire Hathaway ( BRK - news - people ) has assets of over $300 billion and a market value of $150 billion. Buffett himself is worth $47 billion

In the 1982 letter Buffett argued that the "propensity to gamble is always increased by a large prize versus a small entry fee, no matter how poor the true odds may be. That's why Las Vegas casinos advertise big jackpots and why state lotteries headline big prizes." By small entry fee he was referring to the cost of buying or selling an option or futures contract on the S&P 500 index, a small fraction of the index's market value.

"In securities," Buffett argued "the unintelligent are seduced by low margin requirements through which financial experience attributable to a large investment is achieved by committing a relatively small stake." Harking back to the wild markets of the 1920s when the boom in stocks was accentuated by 10% margins, Buffett warned that "10% down payments" are simply a way around the margin requirements and will be immediately perceived as such by gamblers throughout the country." In ending the four-page letter Buffett warned that "the net effect of high-volume futures markets in stock indices is likely to be overwhelmingly detrimental to the security-buying public and, therefore, in the long run to capital markets generally."

Had Buffett prevailed with Congress in 1982, the 23% meltdown of October 19, 1987, would never have taken place in such a volatile fashion. It was the sale of S&P 500 futures contracts in Chicago that caused sellers in the 500 stocks underlying the index to panic and dump stocks as fast as possible.

That would have been true on May 6, 2010, as well, the trading session in which the so-called "flash crash" triggered a stampede to sell and the most extreme liquidity gaps probably ever seen in the stock market. At 2:17 p.m. May 6 a $7.5 million S&P 500 option trade was placed with the S&P index at 1,145. Just six minutes later the S&P 500 E-mini futures (ESMC Index) plummeted to 1,050, a drop of 9.4% from its previous close. For the next 14 minutes "the activity in the derivatives markets triggers a flurry of sales that puts additional downward pressure in the market," reports Nomura Securities in its May market report.

The SEC found that the "precipitous decline in stocks (and the subsequent recovery) followed very closely the drop (and recovery) in the value of the E-mini S&P 500 futures (which tracks the normal relationship between futures and stock prices for the broader market.)" Here's what Buffett told CNBC just prior to May 6: "We validated an S&P 500 contract, which let people gamble in untold numbers on tiny margins, all the while maintaining 50% margins with the Fed. It was crazy. But, we took the safety net of high margins away from the stock market and nobody said a word."

Indeed, even after the Wall Street reform bill is passed there will still be dangerous leverage in the system. Extreme leverage ought to be prevented for individuals speculating in the market. But as Buffett says, "It's more fun having a casino."

Rep. Dingell did answer Buffett's letter and the two became good friends. Ironically, Buffett ultimately has made substantial use of derivatives profitably for Berkshire Hathaway, even though he is often quoted as describing them as "weapons of mass destruction."

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THE AUSTRALIAN: Buffett fan and fund manager Justin Beeton stocks up on Baby Bs

FUND manager and Warren Buffett fan Justin Beeton has launched three new funds, including his second to invest in the "Oracle of Omaha's" New York Stock Exchange-listed Berkshire Hathaway.

Mr Beeton's Sydney investment firm JB Global is hoping to raise up to $150 million, or $50m per fund, and says it is getting strong interest for the Berkshire Hathaway and US real estate funds.

The company also launched a new S&P/ASX 200 fund yesterday, with all three closing on June 26. JB Global raised $58m in March for its first Berkshire Hathaway fund, investing in the company's B-class shares, also known as "Baby Bs". The cheaper Baby Bs last traded at $US70.30 ($86.69), much lower than Berkshire A-class shares at about $US106,000, after Mr Buffett in January split them 50-to-one to make them more accessible to retail investors. "I still think the company is great value at these levels," Mr Beeton said. "We were pretty successful (last time) and there were investors that heard about the investment after the close date, so we've got an issue of demand from those investors to justify putting it together."

Mr Beeton, who used to work in capital protection at Macquarie, said the Dow Jones US Real Estate Index, which the real estate fund plans to invest in, is down 60 per cent from its 2007 highs and the US economy and market sentiment "seems to have bottomed".

Investors in the fund must borrow 100 per cent of a minimum of $50,000, with interest pre-payable at 3.3 per cent.

The loan is non-recourse and provided by the Royal Bank of Scotland. "Even if it just rebounds over the next three years, half of what it's fallen, that's huge gains," Mr Beeton said. The interest rate for the Berkshire Hathaway and ASX 200 fund is 4.95 per cent, but Mr Beeton said all funds had the same currency and capital protection structures.

"We've hedged out the currency risk and provided capital protection provided by RBS, so there's no chance of investors losing their capital," he said.

Investors can claim quarterly redemptions and contingent coupons of up to 8.1 per cent are payable on performance.


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Tuesday, May 25, 2010

FORBES: Why Is BYD Topping The Tech Charts?

May 24, 2010 - 4:41

G.E. Anderson

G.E. Anderson is a China specialist, former CFO, and PhD Candidate in Political Science at UCLA. His research focuses on state-owned enterprises, corporate governance and China's auto industry.

Is it possible to succeed in tech without really trying? Okay, perhaps that isn't a completely fair characterization of BYD's business, but the Buffett factor looms large over BYD's shareholder returns since he invested in the Chinese battery-turned-auto maker.

Bloomberg BusinessWeek released its annual Tech 100 list, and look who's on top: BYD--listed above such tech giants as Apple, Amazon and Google. And with revenue growth of 50% and shareholder return of an astounding 246%, it's no wonder that BYD tops the list. Apple, Amazon and Google, while performing well, can only dream of such growth in their much larger revenue bases.

So BusinessWeek's list would then appear to be biased in favor of smaller companies. Still, we shouldn't be surprised to see a company known for the world's first production plug-in hybrid (the F3DM) and an electric car that can go 190 miles on a charge (the E6) find a spot at the top of the list. Given the world's passionate search for alternatives to the internal combustion engine, cars such as these must be flying off the lots, right?

According to BusinessWeek's list, BYD had revenue of $5.8 billion in 2009. According to BYD's 2009 Annual Report, 53% of that revenue came from automobiles (the other 47% from the manufacture of batteries and mobile phone handsets). So BYD must have sold over $3 billion worth of "new energy vehicles," right?

Not even close.

So far, the F3DM plug-in hybrid has been used extensively by taxi and government fleets in BYD's native Shenzhen, but just last week, BYD revealed that so far, only 13 F3DMs have been bought by individual consumers in China. That's 13. Not 13 million or even 13,000. Just 13.

In all fairness, Chinese consumers are probably waiting around for the government to announce how much its subsidies will be for "new energy vehicles" before they start to buy the F3DM en masse.

What about the E6 electric car? So far, about 40 of these have gone into service as taxis in Shenzhen, but none have been sold to consumers. (Though BYD plans to introduce the E6 in the US later this year.)

So where did BYD's $3.1 billion in revenue from automobile sales come from? Traditional gasoline-powered cars. BYD's F3--the gasoline powered version of the F3DM--was the single best selling sedan in China last year.

The company at the top of BusinessWeek's Tech 100 list still makes the bulk of its revenue from selling very old, very polluting technology. Its other two revenue sources, handsets and batteries, are really nothing unique. Dozens of other companies from Nokia to Motorola to Samsung crank out the same thing.

While BYD's revenue and profit growth are real, how can we justify their 246% shareholder return in 2009? Two words: Warren Buffett.

When someone with the stature of Warren Buffett buys a stock, this is a clear signal to the markets that the underlying company is worth a serious look. In the case of BYD, Warren Buffett and his team have evaluated the technology of BYD and see tremendous future value, so while that value has yet to materialize in terms of actual customers buying actual high-tech cars, BYD's stock is a bet on that future.

Unfortunately, given the 246% return over the past year, we can probably assume that much of BYD's future possibilities are already baked in to the stock price. If you aren't already on board, it's probably too late.

______________

This article was also posted at ChinaBizGov.

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Monday, May 24, 2010

NEW YORK MAGAZINE: Unwarrented


As financial reform stumbles across the finish line in Washington, D.C., we can only hope that it will have some real, lasting effect—that it will somehow make those greedy investment bankers act a little more responsibly when they’re gambling with the global economy. As responsible and principled, say, as Warren Buffett, with his folksy, timeworn approach to putting money to work.

We might hope for that, but we might not want to. While the soon-to-be octogenarian still cracks a corny joke or two while running Berkshire Hathaway, out of far-off, unsullied Omaha, he’s a citizen of Wall Street at heart. In some ways, he might be even more extreme, because his outsize reputation means he often gets a free pass on behavior that others get called out on.

Consider Buffett’s $5 billion investment in Goldman Sachs in September 2008. On the surface, it made a lot of sense. First, the news of such an investment could help put an end to the post-Lehman carnage on Wall Street. It did. And second, he had the storied firm over a barrel, extracting a juicy 10 percent coupon on the preferred shares they created for him in their moment of need.

He’d made this play before: He invested in Salomon Brothers in 1987 when the firm was on the run from Ron Perelman (things later got so hairy that Buffett had to step in and run the Salomon temporarily, an experience he termed “far from fun”). But with Goldman, it’s pretty clear who got the better of whom. Buffett got his 10 percent, sure. But Goldman rented the credibility of the world’s most reputable investor for a relative song—what’s $500 million a year in exchange for one’s continued existence? He even defended of the firm’s practices earlier last month, when the Goldman pile-on was in full force. (Perhaps it was mere respect. They got him; therefore they must be good. If you can dunk on LeBron …) But let’s not get too complicated. Untie it all, and it’s pretty simple: As one of Goldman’s largest investors, Buffett is, de facto, Goldman.

The Wall Street Journal reported on April 26 that Buffett was lobbying Nebraska senator Ben Nelson to grandfather Berkshire and its $63 billion derivatives portfolio from any new rules, specifically those that might force the company to reserve collateral to cover potential losses. Recall that this is the guy who called derivatives “financial weapons of mass destruction.” But they’re only dangerous, apparently, in lesser people’s hands. (The great Buffett? Posting collateral? How dare they.) Some of Buffett’s derivatives positions are outright bets on the direction of the market, the kind that can suddenly be worth nothing if he’s wrong. In other words, gambling. With shareholder money. Now where have we heard of that before?

Perhaps most damning to his cultivated image of being above it all is the fact that until last year, Berkshire Hathaway was the largest shareholder of rating agency Moody’s Investors Service, with a full 20 percent stake. It’s hard to think of any market participant that fell down harder on the job during the late housing bubble than the rating agencies, all in pursuit of the growing stream of fees from investment banks demanding that they put lipstick on their subprime pigs. Moody’s surpassed $73 a share in early 2007; it’s around $21 now. And yet, Buffett’s reputation took no similar hit.

The question is if it should have. Look beyond Buffett’s old-timey outsider shtick, the circus of an annual meeting, the notion that all he does is drink Cherry Coke and play online bridge with Bill Gates, and he’s just another Wall Streeter. Like any rational being, Buffett went where the money was (Moody’s), bought on the cheap (Goldman), and tried to protect his own interests (lobbying against derivatives reform.) Just like the rest of them. Only he’s better at it than they are.

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Warren Buffett Wealth: Principles and Practical Methods Used by the    World's Greatest InvestorWarren Buffett Wealth: Principles and Practical Methods Used by the World's Greatest Investor by Robert P. Miles
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