Buffett and the Sudan

Much has been written about the recent shareholder vote at Berkshire Hathaway on a proposal for Berkshire to sell it's PetroChina holdings or not, with a stated intent to influence the Chinese government to sell it's oil interests in the Sudan. Warren Buffett did not have to allow this proposal to be voted on, but he did. He opposed it for the following reasons.

1) That Petrochina has no interests in the Sudan. PetroChina is a majority owned subsidary of CNPC, which essentially is an arm of the Chinese government, and CNPC owns and operates the oil interests in the Sudan. Even though they have overlapping boards of directors, CNPC controls PetroChina, not the other way around.

2) Selling PetroChina shares isn't likely to have any affect on the Chinese government. It's unlikely they care who their shareholder base is or what those shareholders say, CNPC controls PetroChina and will do what they want.

3) Even if the previous two arguments were wrong, having the CNPC leave the Sudan doesn't change anything, in fact it could potentially make things worse. Those oil assets aren't going anywhere, the CNPC will be forced to sell them at a fire sale price to another company (which will pay the same royalties to the government) or to the government of the Sudan, which will enrich those responsible for the genocide even more.

The vote was held, the two retired professors were given their say, and the proposal was voted down 98% to 2%. Obviously the Berkshire shareholder base agreed with Warren on this issue. How to solve the problems in Darfur is an issue that reasonable people can differ on, but I haven't encountered anyone who disagrees that something must be done. I believe that if we truly care about ending the genocide, we shouldn't advocate futile and wasteful symbolic acts. We have a duty to lobby for a truly effective policies that will absolutely end the genocide. Frankly, I think Clinton showed us the right approach in Bosnia.

I'm writing today because in all the coverage I've read on Buffett and the disvestiture vote, I found none to be balanced or complete. Specifically, I've never read any discussion or explanation of Buffett's key third point. But as a participant in the financial markets you come to expect this from new stories. They are written quickly by journalists under a deadline who might not have a deep understanding of business. But I do expect a little more from columnists who have the time to research and write well balanced columns.

Sadly, Marketwatch's David Weidner isn't one of them. In this column, he writes several things that are patently untrue, and links to a previous column filled with similar falsehoods.

Specifically one of his first paragraphs.

"Buffett and his followers believe it doesn't matter how you make your money, as long as you give it away when you're dead. Embrace businesses such as PetroChina Co. which arguably is aiding the genocide in Darfur by investing in the Sudanese government's oil explorations -- or risk that extra penny a share in profit."

As Buffett has pointed out, PetroChina has made no investment in the Sudan. And Buffett has never been quoted as saying it doesn't matter how you make your money. In fact, Buffett has been quoted many times as saying there are businesses he'd never invest in, no matter how profitable, because of moral reasons.

"The PetroChina subsidiary in Sudan pays the government for the right to produce oil there"

Once again, PetroChina makes no payments in the Sudan, has no business in the Sudan, well you get it. After a series of similar misrepresentations, David finishes by saying

"Hey, if you could make a few bucks dealing with someone you know is helping hide a serial killer, why say anything? It probably wouldn't help, right?"

This is what you call a straw man argument, and it's an over the top doozy. Buffett isn't making anything in the Sudan since PetroChina generates no revenues and has no business there. There is a more nuanced argument about Buffett's responsibilities, but not one that David is apparently able to make.

The fact that David could release this column says a great deal about MarketWatch's editorial control and fact checking. As a big fan of Herb Greenberg, it almost makes me wonder about his columns. But at least Herb references actual facts when he makes his arguments, I can't ever recall him spewing allegations without providing any support for them.

Dave Weidner apparently has been perturbed at Buffett's behavior for a while. His earlier column attacks Buffett, for of all things, the manner in which he's decided to give away his fortune to charity.

"The 75-year-old is giving away his wealth? Yes, but slowly, over time. He is not putting his or his family's welfare at risk and will not miss any meals, even if he chooses only to famously dine on his burgers and Cherry Coke."

Buffett doesn't own a ranch in Montana, a large yacht, and lives fairly frugally. That part is true. David is arguing that Buffett should have given it all away immediately (even though he's not spending it). Of course, had Warren given away all his wealth in 1970 during his "retirement", the world of philanthropy would be $20M better off. Instead he waited, and we should all be grateful he did. Not only is he nominally giving away nearly $40B, but the amount will grow as he continues to build wealth. It's not unreasonable to expect the final amount to approach $100B. All because he worked hard, and will continue working hard, at building a large estate, not for himself, but for the benefit of his charitable foundations.

After that David attacks Buffett for owning tobacco companies. "Long after the public turned on smoking and health, Buffett infamously explained his investment in the tobacco business: "It costs a penny to make. Sell it for a dollar. It's addictive. And there's fantastic brand loyalty.""

David's actually using a quote of Buffett taken out of context, where Buffett is quoting another person to make the ironic point that it's a great business, but is it one you want to own? Berkshire directly owns no tobacco stocks, and hasn't for a very long time. Buffett actually divested of his shares in RJR over 25 years ago!

More recently he was offered another opportunity to get back in the business.

"Warren Buffett, the chairman of Berkshire Hathaway, remarked to the shareholders in 1997 that he was offered the chance to buy a company that manufactures chewing tobacco. He and Charlie Munger, his vice chairman, knew that it was going to do very well and subsequently it has. They did not, however, go through with the purchase. As Buffett explained, "We sat in a hotel in Memphis in the lobby and talked about it and decided that we didn't want to do it."'

Since chewing tobacco is dramatically safer than cigarettes, I actually think he should have done the investment.

Berkshire's only tobacco holdings as of this writing is a small amount of shares owned by a subsidary insurance company, Gen Re. It's not a significant holding, and it's unlikely that Buffett even manages this portfolio, just as he does not manage GEICO's portfolio (Lou Simpson does).

In the rest of the column, David continues to make wild allegations about Buffett's "ruthlessness" without providing foundation (I.e. Buffett legally canceled a contract). Too many to rebut in this space, I'll just finish with his most egregious effort. Incredulously, David takes Buffett to task for not lying or stonewalling investigators during the AIG investigation. He paints it as Buffett "selling out" his "friend" Hank Greenburg, even though Hank is took the fifth and was fired for his actions. By this point, you just have to wonder what David Weidner 's definition of ethical behavior is. I guess, clearly, that even he doesn't know.

Quick Update On Kaiser

Reverse split price is $36 according to todays proxy. We'll see if any arbitrage affects things, the price hasn't moved.