One month later, 36,000 Berkshire shareholders returned to Omaha to hear Buffett explain his own behavior.
‘I’m Warren, He’s Charlie’
Omaha, Nebraska, April 30, 2011. It is 9:20 a.m., and the movie is over, the lights are up, and Warren Buffett and Charlie Munger have taken their seats at the small table onstage in the cavernous Qwest Center arena. The applause has died down, and the place goes quiet as we wait for Buffett to speak.
Both men look robust, despite a combined age that is pushing 170. And they eat like teenagers: On the table in front of them, along with two microphones and the yellow legal pad Buffett will use to keep track of the questions, are two boxes, one of See’s chocolates and one of See’s peanut brittle. In between is an ice bucket with a couple of Cokes cooling off.
“I’m Warren, he’s Charlie,” Buffett says into the microphone, his voice gruff, friendly, and as grandfatherly sounding as the octogenarian grandfather he happens to be. “I can see and Charlie can hear, so we work well together.” It is the same joke he tells every year, and it draws the same appreciative laughter it always gets.
Buffett says he wants to talk about two things before taking questions: “We’re going to talk about earnings, and we’re going to talk about the David Sokol situation.”
Twelve Katrinas
The earnings discussion is brief, but has some surprising news: Even Berkshire Hathaway’s vaunted insurance businesses sometimes lose money. Buffett explains that Berkshire’s earnings were hurt by insurance claims from the March 2011 Japanese earthquake-tsunami-nuclear meltdown, as well as the massive Christchurch, New Zealand, earthquake a month earlier.
To explain why the Christchurch quake—since overshadowed by the Japanese nuclear disaster—had such an impact on Berkshire, Buffett first asks Munger what the population of New Zealand is.
“I’d say 4 million,” Munger begins, then corrects himself: “No, about 5 million.” (Either way, he was close: it is 4.3 million).
Buffett observes that this means the Christchurch damage is the equivalent of “about 12 Katrinas.” That ability to put large things in vivid, clear perspective is a quick reminder of why Buffett will say, later in the day, that he would like to be remembered not as a financial genius but as “a teacher.”
Still, it is not earthquakes and insurance losses the crowd wants to discuss, and Buffett knows it.
Inexplicable and Inexcusable
“I’d like to just comment for a few minutes on the matter of David Sokol and the purchase of Lubrizol stock,” Buffett says, and the crowd gets really quiet.
He starts by referring to the video clip of his Salomon Brothers testimony we all watched a half hour ago and says that what David Sokol did recalled to his mind what he said of the Salomon traders’ behavior at the time: “It was inexplicable and inexcusable.”
There. For the first time since the news broke, Warren Buffett has said what everyone, deep down, expected him to say. A sense of pride, or gratitude, or relief—or all three—seems to sweep through the crowd. This is the Buffett we thought we knew.
The “inexcusable” part, Buffett continues, is that “Dave violated the [Berkshire] code of ethics, he violated our insider trading rules, and he violated the principles I lay out every two years in a direct personal letter to all of our managers.”
It doesn’t get much clearer than that. But still, Buffett is not done. He wants to get at “the inexplicable part” of what Sokol did.
What is inexplicable, to Buffett, is that Sokol “made no attempt to disguise the fact that he was buying the stock.” Buffett describes how, in the classic insider-trading ring, “People set up trusts in Luxembourg or they use neighbors … or third cousins.” However, Buffett says, “To my knowledge, Dave did nothing like that, so he was leaving a total record as to his [Lubrizol] purchases.”
Furthermore, Buffett says, by way of explaining why he had no inkling what was happening under his nose, Sokol had once turned down the opportunity to make an extra $12.5 million as part of a generous, but ambitious, incentive plan offered by Buffett, insisting on splitting $25 million of the bonus plan 50/50 with his junior partner.
This kind of forthrightness in years past, he says, makes Sokol’s recent behavior doubly “inexplicable.”
“I think 20 years from now I will not understand what causes a man to voluntarily turn away $12.5 million … without getting any credit for it in the world … and then, ten or so years later buy a significant amount of stock the week before he talked to me” in order to make $3 million.
It is not only inexplicable, Buffett says, but it is also sad: “sad for Berkshire, sad for Dave.”
Before opening the floor to questions from reporters and shareholders, Buffett asks Charlie Munger for his thoughts on how to explain Sokol’s behavior.
