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The Sokol Affair: How Warren Buffett Killed "Warren Buffett"

Warren Buffett is dead -- long live Warren Buffett. Whatever happens at Berkshire Hathaway's (BRK) annual shareholder rave on Saturday, the Oracle of Omaha's crystal ball is forever tarnished. Not his stock-picking skills, of course; nobody picks 'em better than he does, and maybe no one ever will. Rather, it's Buffett's mystique that is gone.

Note that mystique is different, and far sexier from a shareholder perspective, than "reputation." Bill Gates has a rep. Jeffrey Immelt has a rep. Donald Trump has a brand (which he accessorizes with floppy shoes, air horn and big red nose). What Buffett had for so long was a force-field. It added billions to Berkshire's value and deflected criticism like a waterproof coat repels rain.

It also had the power to profoundly shape perceptions. When Buffett in 1991 famously said, "Lose money for the firm, and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless," he wasn't talking about anything as ambiguous as corporate integrity. He was talking about the aura of integrity. There's a difference.

Myth for hire

For instance, people tend to forget that the firm whose reputation Buffett was swearing to uphold was Salomon Brothers. Buffett had invested $700 million in the investment bank in 1987 -- after it had been busted trying to corner the government bond market. A few years earlier, Salomon had kicked off the derivatives boom. The preeminent financial engineering firm of its time, it was as notorious then as Goldman Sachs (GS) is today.

It was largely Buffett's aura, along with his deep connections in Washington, that kept federal prosecutors from throwing the book at Salomon. Not by coincidence, it was that same force of personality that helped revive Goldman after Buffett pumped $5 billion into the firm in September 2008. If Buffett vouched for a company, after all, how bad could they really be?

Those days are over. I suspect that in years to come, the scandal over David Sokol, the former Berkshire exec and once Buffett's heir-apparent at the company, will be seen as marking the final days of the cult of Buffett.

The end
As MarketWatch's David Weidner has noted, Buffett's sheen had lost considerable luster even before the Sokol affair. In recent years the investor has been accused of everything from exploiting the Sept. 11 attacks to lessen his financial losses to turning a blind eye to corruption at another of his portfolio companies, credit rating agency Moody's (MCO). Said one noted Buffett chronicler this week about Berkshire's upcoming annual meeting.

"The passage of time is hitting home. This year is the end of Berkshire as it used to be," said Alice Schroeder, a former stock analyst who wrote what many view as the definitive biography of Buffett.
"It will never be the same. Even if people think Buffett's not going to address all these issues and the questions won't be as tough as they should be, Berkshire as it used to be is over," Schroeder said.
Berkshire actually hastened this decline on Wednesday by issuing a report that aims to absolve Buffett of any wrongdoing for Sokol's chicanery. It doesn't. The document was prepared with the help of Buffett's own law firm, Munger, Tolles & Olson. That may be necessary to shield Berkshire from the shareholder lawsuits that have already started flying, but it's a flagrant conflict of interest when it comes to clearing Buffett's name.

Even if the investor is ultimately excused of everything except a credulous indifference to his lieutenant cashing in on Berkshire's acquisition of Lubrizol, Buffett is indelibly stained. If Berkshire is to be believed, Buffett was Sokol's dupe. If not, then the alternative seems even more troubling.

Senior moment?
Or maybe it's simply that age has finally caught up with the man (Look, it happens.) Buffett's missteps in his odd announcement of Sokol's resignation, notably praising a guy that Berkshire would later have to take apart, suggest the elderly driver who mistakenly hits the gas when he meant to press the brakes.

And now that the company has lowered the boom on Sokol, it's too late for Berkshire and Buffett to acknowledge that what took place was a serious corporate governance breach and vow to get to the bottom of it. Isn't that what "Warren Buffett," that straight-shooting gazillionaire we've read about in the papers for so long, would've done?

The questions about Buffett will not end this weekend. When the mystique wears off, the questions only grow.

Thumbnail from Flickr user Aaron Friedman; interior image from Wikimedia Commons

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