SOURCE:   Parish & Company

SUBJECT:  Texas Pacific's failed attempt to acquire PGE from bankrupt Enron and Warren Buffett's current attempt to acquire PacifiCorp from Scottish Power.   Why both efforts will fail and how Warren Buffett evolved from being the admired sage of Omaha to running a sophisticated financial shell game in which he now needs to acquire regulated utilities to stabilize an insurance pyramid scheme involving 50 separate domestic and international insurance companies sufferring from aggressive accounting procedures.

Note:  Blog Created September 2007 with Updated Comments
              see billparish.wordpress.com

Copyright and updated October 10, 2005

PORTLAND, Ore., --  Note that substantially all the text listed are small excerpts quoted from the noted media source with interpretations limited to the analysis and commentary section.  References are sorted by date. Also note that most of the references regarding PGE occur prior to March 16, 2005.

Only "official references" accompanied by a valid link to a credible source will be considered for addition. 

Click here to See five minute video of Bill Testifying before the Public Utility Commission on April 28, 2004 regarding Texas Pacifi'c proposed acquisition of PGE.  Note that this direct hard hitting testimony was intended to "wake up" the commissioners and prevent a legal debacle for all parties involved. It is a Windows media file able to be viewed on most PC's running Windows XP but unfortunately not a MAC. Click here to see Bill Thanking Elliott Spitzer for his comments related to Portland General Electric at the TD Waterhouse Institutional Investment Services National Conference in San Diego on February 3, 2005. 

Later during the summer of 2003 the Texas Pacific Group announced its bid to acquire PGE from bankrupt Enron, naming Neil Goldschmidt as Chairman. Shortly before this announcemennt Mr. Goldschmidt's wife Diana voted along with 4 other members of the Oregon Investment Council to invest $300 million in Texas Pacific, making Oregon's public employees the largest single investor in Texas Pacific.  In order to accept the job with Texas Pacific, Goldschmidt resigned his engagement with PacifiCorp yet what was not known publicly at the time was that PacifiCorp itself was for sale.

Many now believe that Buffett was simply waiting for the Texas Pacific deal to close, effectively greasing the regulatory wheels, after which he could purchase PacifiCorp from Scottish power followed by purchasing key service territory from Texas Pacific. TPG would then spin off the remaining pieces to another utillity, pocketing close to $1 billion by its own estimates, in less than 3 years.  Although Texas Pacific stated it would be a long-term owner, executives stock options were set to fully vest in 3 years.  Goldschmidt boasted that this engagement was all about public service yet did not highlight he stood to make almost $10 million in 3 years.

While many have a positive opinion of Buffett, most are unable to answer even the most basic questions regarding what Berkshire Hathaway is and perhaps therein lies Buffett's genius.  Investors think of Sees Candy, Benjamin Moore Paints and Dairy Queen yet such businesses represent a very small part of the overall fund.  Buffett's fund is also largest shareholder in the bond rating company Moody's in addition to extensive media holdings and related advertising budgets in consumer related businesses, giving him enormous media clout and making it almost impossible for mainstream journalists to accurately report what he represents.  Interestingly, seventy five percent of Buffett's gross revenues and net income come from two areas, insurance and financial products (including a massive speculation against the US dollar) and McLane, Walmart's distribution system purchased from WalMart in 2003..

My personal perspective is to wish Mr. Buffett luck yet also advise him that Oregon, after surviving Enron's collapse and its impact on Portland General Electric, Enron's largest operating subsidiary purchased in 1997, is not interested in bailing out another public relations genuis playing a sophisticated financial shell game.  Neither myself nor any of my clients own any Berkshire Hathaway shares or financial interests, direct or indirect, other than standard broad market based index funds, other than one client owning less than 5 shares of its class B stock. 

Berkshire Hathaway's shares trade at about where they were in 1998 and have not paid a dime of dividends, therefore, some shareholders are becoming restless.  Meanwhile, the CEO's of Buffett's various companies are profiting greatly, Buffett himself noting that they all have net worths in excess of $100 million each.    

2005 August 8  Berkshire Hathaway Quarterly 10Q Filing for the Quarter ending 6/30/05 Analysis and Commentary:

1)  10Q Balance Sheet, Printed Page 3:  Berkshire Hathaway shows an asset called goodwill with a balance of $23.2 billion and this amount represents 26 percent of shareholders equity.  This is significant because goodwill is the amount Mr. Buffett has paid in excess of appraised asset values for various busineses.  Prior to 2002, accounting rules required goodwill to be written off ratably over several years.  Now, however, goodwill is only required to be written off if it is deemed "impaired" by management.

In a chapter right out of Enron's playbook, Mr. Buffett has creatively determined that no such impairment has occurred and therefore he has not written off any goodwill since 2001.  What this means is that Berkshire Hathaway's net income is grossly inflated, perhaps as much as $6 billion over the last few years.  In order to verify this observation one need only look at one such company purchased, his reinsurer General RE.

When Buffett bought General RE he had to recognize roughly $12 billion in goodwill yet even after very significant declines in General RE's business subsequent to the purchase, multi billion dollar underwriting losses and resignations from top executives resulting from fraudulent transactions with insurance giant AIG, he stubborly refuses to "write-down" this asset as impaired.  This is rather remarkable because numerous other companies have taken dramatic write-downs, including Time Warner AOL's $50 billion write-down.  Clearly, there appears to be some form of double standard regarding Buffett.

Also noteworthy is the management discussion in the annual 10K report on printed page 46, in which Buffett booked a "one time reduction of $70 million in pension expense at General RE during the third quarter, resulting from the curtailment of certain benefits at the end of 2005."  This dipping into the pension fund via revised assumptions basically allowed Buffett to add $70 million to General RE's bottom line. 

What Buffett is essentially doing is exactly what occurred in Japan, creating deadwood on his balance sheet, coupled with creative accounting,  in order to finance acquisitions and this could lead to disruptions in the financial system.  While many perceieved that Japan had a banking crisis, in reality it was simply an accounting crisis in which assets were not written off but rather held on the balance sheet and used as collateral for loans.  Of course the loans to banks in Japan could not be rapaid because them were based upon phantom assets. In Buffett's case, the acquisition he is now trying to legitimize is the purchase of a regulated utility, PacifiCorp.

2)  10Q Balance Sheet, Page 3.  Cash is listed as $43.2 billion yet the operative word here for an insurance driven company like Berkshire Hathaway is "float."  Unlike Microsoft which has its cash free and clear, Berkshire Hathaway must consider its float because a large part of that cash may indeed go toward settling future insurance claims.

3)  10Q Notes to Interim Statement, Printed Page 9.  Berkshire Hathaway purchased one of the nations largest medical malpractice insurance companies from GE for $825 million. See note on June 6 summarizing NY Times article clarifying that increasing premiums for physicians are not going to settling more claims but rather to profit at insurance companies like Berkshire Hathaway.  This may be good for Mr. Buffett's shareholders yet it seems odd to see him publicly claim that a key problem with rising health care costs is trial lawayers, when in reality the problem is now profits from his insurance companies.  This is particularly relevant given his close ties to Wal-Mart, having purchased Wal-Mart's distribution, McLane, in 2003.  While Wal-Mart boasts about its medical coverage, in reality many employees are now appearing on state Medicaid rolls due to the poor coverage.  One need only ask any practicing physician how they feel about Wal-Mart to verify this claim. McLane now respresents almost a third of Berkshire Hathaway's entire gross annual revenues.  This massive low margin businees is putting pressure on Buffett to create high profits elsewhere.

4)  10Q Notes to Interim Statement, Printed Page 11.  Interest expense on debt held by Berkshire Hathaway, basically a loan made to Mid America, is $81 million YTD at 6/30/2005.  The rate Berkshire Hathaway charges its subsidiary on this roughly $1.5 billion in debt is 11 percent.  Note that I had written a few articles using 11.5 percent and my opologies to management for that small error.  The point is that this rate does seem rather high, which is good for shareholders but not necessarily those customers at MidAmerica's various operating entities who indirectly bear this cost.  

5)  10Q Management Discussion, Item 2, Printed Page 40.  Berkshire Hathaway has lost $926 million YTD speculating on the decline of the US dollar.  Perhaps most unusual about this is that Mr. Buffett did not just go out and invest in foreign bonds but rather purchased speculative foreign currency contracts of more than $21 billion.  Again, this is exactly why Berkshire Hathaway is a bad fit for PacifiCorp and why PacifiCorp and its ratepayers would be the one lending stability, rather than the reverse.  These currency losses represent almost 30 percent of Berkshire Hathaway's entire pre-tax income for the quarter ending 6/30/2005.
 

2005 August 8  Letter to SEC Chairman Christopher Cox and NY Attorney General Eliot Spitzer on Accounting Irregularity at Berkshire Hathaway

8/8/2005

Christopher Cox
Chairman - SEC
450 Fifth Street N.W.
New York, NY 20549

cc:  Eliot Spitzer-NY Attorney General
 
Dear Christopher,

Today I posted a comment on my web site that might be an excellent opportunity for your office to fix a significant accounting irregularity.  Simply put, Berkshire Hathaway needs to come clean on its financial statements regarding how it accounts for goodwill.

Please do consider the following comments in addition to formally and publicly informing Berkshire Hathaway that they are suspended from making acquisitions of assets involving publicly traded companies for 12 months due to this irregularity.

This could indeed bring tremendous credibility to your office given that Buffett seems to be enjoying a double standard on key accounting issues.

Formal Comment:  In Berkshire Hathaway's 10Q filed with your office on Friday August 5, 2005 its balance sheet shows an asset called goodwill with a balance of $23.2 billion.  This amount represents 26 percent of total shareholders equity.

This is significant because goodwill is the amount Mr. Buffett has paid in excess of appraised asset values for various businesses.  Prior to 2002, accounting rules required goodwill to be written off ratably over several years.  Now, however, goodwill is only required to be written off if it is deemed "impaired" by management.

In a chapter right out of Enron's playbook, Mr. Buffett has creatively determined that no such impairment has occurred and therefore he has not written off any goodwill since 2001.  What this means is that Berkshire Hathaway's net income is grossly inflated, perhaps as much as $6 billion over the last few years, because some assets are indeed impaired.  This is having a significant impact on investors given that Berkshire Hathaway is publicly traded and has a current stock market valuation in excess of $125 billion.

In order to verify this observation one need only look at one such company purchased by Buffett, his reinsurer General RE.  When Buffett bought General RE he had to recognize roughly $12 billion in goodwill yet even after very significant declines in General RE's business subsequent to the purchase, multi billion dollar underwriting losses and resignations from top executives resulting from fraudulent transactions with insurance giant AIG, he stubbornly refuses to "write-down" this asset as impaired.

This is rather remarkable because numerous other companies have taken dramatic write-downs, including Time Warner AOL's $50 billion write-down.  Clearly, there appears to be some form of double standard regarding Buffett.

Also noteworthy is the management discussion in the most recent 10K in which Buffett booked a  "one time reduction of $70 million in pension expense at General RE, resulting from the curtailment of certain benefits at the end of 2005."  This dipping into the pension fund via revised assumptions basically allowed Buffett to add $70 million to General RE's bottom line.

What Buffett is essentially doing is exactly what occurred in Japan, creating deadwood on his balance sheet, coupled with creative accounting,  in order to finance acquisitions and this could lead to disruptions in the financial system.

While many perceived that Japan had a banking crisis, in reality it was simply an accounting crisis in which assets were not written off but rather held on the balance sheet and used as collateral for loans.  Of course the loans to banks in Japan could not be repaid because they were based upon phantom assets. In Buffett's case, the acquisition he is now trying to legitimize is the purchase of a regulated utility, PacifiCorp.

Thank you for considering this observation.  I did make a good faith, and some might argue rather creative, effort to enter a dialogue with Mr. Buffett yet was not successful.  Best regards.

Sincerely,
Bill Parish

Analysis and Commentary:  None

2005 August 3  PacifiCorp Deal Arrives at PUC, by Gail Kinsey, Oregonian

"We can guarantee that with Berkshire's backing, PacifiCorp will be sufficiently capitalized," Abel said during a meeting of the Public Utility Commission in Salem.

Marc Hellman, a finance and policy analyst with the PUC, said MidAmerican will have to change its acquisition proposal slightly to reflect the law's repeal but that "it doesn't change the dynamics of the state's review." Oregon regulatory law "is fairly strong," he said. "I don't see (PUHCA) repeal causing dire consequences. We'd be doing the same analysis either way."

The three-member PUC has not yet weighed in on the arguments. Generally, commissioners take about 10 months to complete their review, though the Texas Pacific application took a full year. MidAmerican has asked that a ruling be issued by Feb. 28, seven months away. PUC Chairman Lee Beyer said he would consider the company's request, but he made no promises.

Analysis and Commentary:  What the analysts and utility commissioners are not yet seeing is that the repeal of PUHCA basically transfers oversight from the Securities and Exchange Commission (SEC) to the Federal Energy Regulatory Commission (FERC).  Sadly, FERC has shown, in dramatic fashion with Enron, that it is too heavily influenced by the energy industry.  Most concerning is FERC's capacity to draft rules that could supercede state based rules, making adequate oversight impossible.

Regarding Berkshire Hathaway's capital status, of course it is by its own recognition fundamentally an insurance company and should be so evaluated.  For example, its goodwill, what somecall "deadwood' on its balance sheet  (See quarterly earnings analysis at August 8, 2005 note) representes more than 25 percent of net equity whereas goodwill at Allstate insurance represents only 4 percent of net equity.

Attention Wal-Mart shoppers. Stock up now so that billionaire investor Warren Buffett and his company Berkshire Hathaway can deliver more goods, generate more profits and buy your local utility. Sound ridiculous? Not really.

Berkshire Hathaway Inc. bought Wal-Mart Stores Inc.’s distribution system, McLane Co., in 2003 — it now accounts for one-third of Berkshire Hathaway’s entire gross annual revenues. The profits earned stocking the shelves at Wal-Mart are now helping Buffett buy PacifiCorp, the state’s second largest utility.

Berkshire Hathaway calls itself a “holding company in which the most important business is insurance.” This includes a highly profitable medical malpractice subsidiary that shows Buffett’s standard mode of operation, which is good for shareholders but not consumers. Buffett does acknowledge that his reinsurance business — in essence, insuring insurance companies against catastrophic losses — is very risky. He states that a “single event could produce a loss of $5 billion.”

What seems clear to me, other than the fact that Buffett’s dependence on Wal-Mart and high-risk insurance operations won’t lend much stability to PacifiCorp, is that Buffett wants to be PacifiCorp’s bank. We need only look at MidAmerican Energy Holdings Co., an Iowa-based utility that Berkshire Hathaway purchased in 2000, to see how the “Bank of Buffet” works.

Since being acquired, MidAmerican has borrowed $1.5 billion from Berkshire Hathaway to finance growth and now is paying 11.5 percent annual interest, considerably higher than market rates. What Iowa City ratepayers really got by selling to Buffett is their own personal loan shark.

Oregonians learned a great deal from Texas Pacific Group’s failed effort to purchase Portland General Electric. We learned that former Oregon Gov. Neil Goldschmidt stood to earn more than $9 million in only three years and that his consulting firm’s largest client before the PGE deal was announced was Scottish Power.

We now also know that Scottish Power set in motion the steps to sell PacifiCorp in 2003, about the same time Goldschmidt’s partner, Tom Imeson, was screening Oregon Public Utility Commission candidates, those who would approve the PGE deal, for Gov. Ted Kulongoski.

A cynic might claim the PGE transaction was intended to simply grease the regulatory wheels for Buffett’s PacifiCorp purchase. Texas Pacific then could sell off select PGE properties to Buffett and carve up its power generation assets, and Buffett later could fold in NW Natural.

Although the players have shuffled around a bit after Texas Pacific’s failed bid, not much has really changed. Meanwhile, Buffett enjoys the benefits of Omaha Public Power in his hometown of Omaha, Neb., and rates 20 percent below those charged by comparable private electric utilities.

My advice to the anti Wal-Mart movement is to expand your scope and also take a stake in the future of Oregon’s economic crown jewels, utilities, so that we don’t wake up one morning and see them in Buffett’s private collection along with those Wal-Mart delivery trucks that threaten your neighborhood and local businesses. This will enhance your credibility by moving beyond a single issue, and probably involve the same cast of characters anyway. See complete article online at http://portlandtribune.com/archview.cgi?id=31027 http://portlandtribune.com/archview.cgi?id=31027

Analysis and Commentary:  None

2005 August 1 Urum's Finite Prospects, by Jonathan Laing, Barrons

The Berkshire deal in 2004 invites particular attention, since finite reinsurance transactions have become a target of regulatory scrutiny. That probe by federal and state authorities arose partly from a 2000 deal between American International Group and another Berkshire insurance unit, General Re, that allegedly helped AIG artificially boost its reserves to satisfy policyholder claims. Two former General Re senior executives have pleaded guilty to federal criminal charges, and the investigation is still in its early stage. The inquiry is not known to have touched on Unum.

*JUST AS IN THE AIG-GEN REN DEAL*, the two parties of the Unum-National Indemnity transaction used different accounting treatment for the very same transaction, an unusual occurrence. National Indemnity accounted for the $707 million in cash that Unum sent it as a deposit on its own books. Future Unum claims that National Indemnity will be obligated to pay will come solely from the $707 million deposit and the slow accretion of interest that is built up over the years. Thus, in effect, Unum under this treatment is merely financing its own future claims through Berkshire, even though it will be able to "cede," or send, future claims to National Indemnity.

The attraction of the deal to National Indemnity is that it will be able to bank the $707 million and will have to credit the account only with an interest rate of about 3.5%. Berkshire can pocket any return that National Indemnity makes off the float above that crediting rate. And Buffett, the world's most celebrated investor, could notch annual returns well above that rate even in government bonds.

So could Unum if it just held on to the funds rather than sending them to Berkshire. But booking the payments as loss-transferring reinsurance, the company obtained a number of accounting, if not economic, benefits. For one, Unum puts off for at least a few years having to fully assume the claims cost on the restructured policies for professionals, since roughly 60% of the claims will be shipped off to Berkshire until the accreted total at National Indemnity is exhausted. This will improve Unum's apparent, if not actual, underwriting results while obviously hurting the company's investment income. But Wall Street pays a much higher earnings multiple for a dollar of underwriting income than for a buck of investment income. And today's low-interest- rate environment offers a convenient excuse for substandard investment income.

Likewise by using finite reinsurance accounting, Unum will be able to bolster certain financial metrics that are closely tracked by insurance regulators and Wall Street. The deal will allow it to increase its statutory capital and therefore the amount of new business it can write. This is a result of an item that shows up on its statutory state filings known as "deferred gain on reinsurance of inforce block of business".

Analysis and Commentary:  One might ask, if the insurance regulators can barely understand this, how will the Oregon Public Utility Commission be able to understand.  Of course to date Berkshire Hathaway has only disclosed financial information regarding its Mid-America subsidiary holding company and has provided no detailed information on its insurance and Wal-Mart related operations.

Some local Utah power providers are concerned that repeal of the law will lift consumer protection in place for the past 70 years. Among them is the Utah Associated Municipal Power Systems, a 48-member association of municipal electric utilities and other government units in Utah, Arizona, California, Idaho, Nevada and New Mexico that provide local retail electric or other utility services.

"We oppose the repeal of the Public Utilities Holding Company Act," said Ted Rampton, manager of government affairs, unless the repeal includes some meaningful offsetting mechanism for reviewing holding company mergers. "The act has offered a lot of protection for consumers since it was enacted in 1935," he said. And consumer protection also is the main concern of Kevin Garlick, energy director for the city of Provo. He doesn't expect the repeal to have any major effect on Provo residents, but he worries that consumers may "get marginalized by huge mergers that may result from the repeal."

The city is part of the Utah Municipal Power Agency, a group of six central Utah cities that work together to provide power to residents from a variety of sources. The agency has plenty of capacity to meet demands.

Repeal would turn over regulation of interstate holding companies to the Federal Energy Regulatory Commission. The Securities Exchange Commission now has that authority. More important, investors say, repeal would open investment opportunities in the industry. MidAmerican has long been after Congress to repeal PUHCA. "It keeps capital out of this industry," Weissgall said. "It is simply restricting the flow of capital."

But that argument doesn't seem valid, says a 2004 report by New York credit analyst Jeffrey Wolinsky, for Standard & Poor's, a Wall Street credit and investment analysis company. The need for new generation is low in most areas, the report says. And despite an estimated $56 billion in transmission infrastructure needs, "investor appetite for the debt and equity of companies with stable regulated revenues has not waned," Wolinsky wrote.

Companies may say they want the opportunity to invest in new capacity. But after the power crisis in California in 2000 and 2001, following a partial repeal of PUHCA, Hargis is not so sure they mean it.  When power demand exceeds the supply, wholesale rates go up. That was demonstrated dramatically when energy giants, including Enron, manipulated the energy market during the California crisis. Wholesale power rates in some parts of the West went from $35 per megawatt to $350 for the same amount of power. Repealing PUHCA may make it easier to pass those increased rates on to rate payers, Hargis said.

Analysis and Commentary: None

2005 July 18, 2005:  Risky business: Warren Buffett and PacifiCorp, by Bill Parish, Oregonian Op-Ed

Billionaire investor Warren Buffett is widely respected, but his Berkshire Hathaway investment fund should be prevented from purchasing Portland-based PacifiCorp. Why? Because of the unique risks associated with the fund's relationship to the insurance industry and the giant retailer Wal-Mart.

Together, these two areas of business represent 75 percent of Berkshire Hathaway's gross annual revenues and net profits. The fund has more than 50 domestic and foreign-based insurance companies, including a highly profitable medical malpractice subsidiary, and it readily acknowledges that the reinsurance business -- in essence, insuring insurance companies against catastrophic losses -- is very risky. Buffett's own analysis states that a "single event could produce a loss of $5 billion." Because of this risk, it's actually PacifiCorp that may be bringing long-term stability to such a deal rather than Berkshire Hathaway.

Buffett now also owns Wal-Mart's distribution company, McLane, which he purchased from Wal-Mart in 2003. Today, McLane represents an amazing one-third of Berkshire Hathaway's entire gross annual revenues. Wal-Mart's predatory practices are controversial here in Oregon because they tend to drive out smaller companies that form the backbone of the tax system and support schools and community services. But more importantly, Berkshire Hathaway is a bad fit for PacifiCorp because the fund has too many of its economic eggs in one basket.

While it's purchase of Wal-Mart's distribution system has dramatically increased Berkshire Hathaway's gross sales and provided more stability to its high-risk insurance operations, it hasn't done much for net profits because of the high-volume, low-margin nature of Wal-Mart's business.

And that is almost certainly why Buffett wants a captive regulated monopoly like PacifiCorp. Specifically, he wants to become PacifiCorp's banker so that he can lend money to the utility while charging high interest rates on the loans.

How can we know this? Well, we need only look at MidAmerican, the Iowa-based utility that Berkshire Hathaway purchased in 2000, to see how the Bank of Buffett works. Since it was acquired, MidAmerican has borrowed $1.5 billion from Berkshire Hathaway to finance growth, and it is now paying 11.5 percent in annual interest on those loans, considerably higher than market rates. Buffett would be fattening up the profits for his shareholders on the backs of Oregon ratepayers.

Buffett could also use PacifiCorp as a base to later acquire selected assets of Portland General Electric and/or NW Natural, potentially resulting in significant job reductions and a loss of local control. That might please Berkshire Hathaway's shareholders, including Bill Gates, whose philanthropic foundation collaborated with Neil Goldschmidt and the Texas Pacific Group in its attempt to purchase PGE. But such utility consolidation wouldn't benefit the region, and rate relief would be unlikely.

Few would challenge the level of Warren Buffett's success in the insurance industry and in helping Wal-Mart expand. But he has the comfort of knowing that when he reaches for the light each morning back in Omaha, he pays 20 percent less as a customer of the Omaha Public Power District. And when the light goes on, the Sage of Omaha might just be wondering where the Oregonians are who care about maintaining control of their economic crown jewels like what's been done in Omaha.

Analysis and Commentary:  Remarkably, this opinion piece requested by and printed in the Oregonian does not appear to be in the paid archive whereas other similar pieces do appear in the paid archive.

2005 July 16 PacifiCorp bid gives no rate cut, by Brent Hunsberger, Oregonian

Its lengthy filing with the commission also detailed $1.3 billion of investments it would make in new power plants, transmission equipment and environmental projects across the utility's six-state system. Most would take place in Idaho, Utah, Washington and Wyoming. The energy company offered no rate freezes or rate reductions, arguing instead that its expected cost savings would result in lower rate increases in the future.

Analysis and Commentary:  None

2005 July 15 Warren Buffett Biography, Gide to Investing for Beginners, by Joshua Kennon

Warren Edward Buffett was born on August 30, 1930 to his father Howard, a stockbroker-turned-Congressman. The only boy, he was the second of three children, and displayed an amazing aptitude for both money and business at a very early age.

In 1947, a seventeen year old Warren Buffett graduated from High School. It was never his intention to go to college; he had already made $5,000 delivering newspapers (this is equal to $42,610.81 in 2000). His father had other plans, and urged his son to attend the Wharton Business School at the University of Pennsylvania. Buffett stayed two years, complaining that he knew more than his professors. When Howard was defeated in the 1948 Congressional race, Warren returned home to Omaha and transferred to the University of Nebraska-Lincoln. Working full-time, he managed to graduate in only three years.

Warren Buffett approached graduate studies with the same resistance he displayed a few years earlier. He was finally persuaded to apply to Harvard Business School, which, in the worst admission decision in history, rejected him as "too young". Slighted, Warren applied to Columbia where famed investors Ben Graham and David Dodd taught - an experience that would forever change his life.

Through his simple yet profound investment principles, Ben Graham became an idyllic figure to the twenty-one year old Warren Buffett. Reading an old edition of Who's Who, Warren discovered his mentor was the Chairman of a small, unknown insurance company named GEICO.

In May 1969, he informed his partners that he was "unable to find any bargains in the current market". Buffett spent the remainder of the year liquidating the portfolio, with the exception of two companies - Berkshire and Diversified Retailing. The shares of Berkshire were distributed among the partners with a letter from Warren informing them that he would, in some capacity, be involved in the business, but was under no obligation to them in the future. Warren was clear in his intention to hold onto his own stake in the company (he owned 29% of the Berkshire Hathaway stock) but his intentions weren't revealed.

Two years later, in 1967, Warren asked National Indemnity's founder and controlling shareholder Jack Ringwalt to his office. Asked what he thought the company was worth, Ringwalt told Buffett at least $50 per share, a $17 premium above its then-trading price of $33. Warren offered to buy the whole company on the spot - a move that cost him $8.6 million dollars. That same year, Berkshire paid out a dividend of 10 cents on its outstanding stock. It never happened again; Warren said he "must have been in the bathroom when the dividend was declared".

In 1970, Buffett named himself Chairman of the Board of Berkshire Hathaway and for the first time, wrote the letter to the shareholders (Ken Chace had been responsible for the task in the past). That same year, the Chairman's capital allocation began to display his prudence; textile profits were a pitiful $45,000, while insurance and banking each brought in $2.1 and $2.6 million dollars. The paltry cash brought in from the struggling looms in New Bedford, Massachusetts had provided the stream of capital necessary to start building Berkshire.

A year or so later, Warren Buffett was offered the chance to buy a company by the name of See's Candy. The gourmet chocolate maker sold its own brand of candies to its customers at a premium to regular confectionary treats. The balance sheet reflected what Californians already knew - they were more than willing to pay a bit "extra" for the special "See's" taste. The businessman decided Berkshire would be willing to purchase the company for $25 million in cash. See's owners were holding out for $30 million, but soon conceded. It was the biggest investment Berkshire or Buffett had ever made.

Analysis and Commentary:  None

2005 July 15 Congress moves to ease utility ownership, by Jeff Kosseff, Oregonian

"This is going to be one of the most dramatic changes in our economic history that any of us have seen," Lynn Hargis, a lawyer with consumer group Public Citizen, said of a repeal. "It's going to allow Enrons all over the world to have their fingers in the utilities."  Sen. Ron Wyden, D-Ore., was the only senator to vote against the energy bill in the Senate Energy Committee, and he will be a member of the conference committee. He said a repeal would "fleece the consumer," and he criticized the energy bill as "an invitation for more Enrons and high-fliers who rip off the ratepayers."

Analysis and Commentary:  None

2005 July 15  Berkshire Hathaway (MidAmerica) Initial Application and Petition to the Oregon Public Utility Commission.

Analysis and Commentary:  This 125 document outlines the substantive facts surrounding, and various parties involved with, Berkshire Hathaway's proposed takeover of PacifiCorp.  The law firm listed as representing Scottish Power, Milbank Tweed, also represents Enron's unsecured creditors.  Report available at:  http://apps.puc.state.or.us/edockets/docket.asp?DocketID=12727

Analysis and commentary:  Berkshire Hathaway has hired Stoel Rives to respresent it locally and Scottish Power is represented by Milbank.  It does seem most unusual that Milbank is also representing Enron's unsecured creditors given the City of Portland's interest in purchasing PGE and Scottish Power aggresively opposed any such purchase. Of course it may be in the creditors best interest to sell to the City.  Unfortunately, the City tried negotiating with Steven Cooper when they should have ignored him and gone straight to the creditor's committee.  Cooper, Milbank and his collegues and other related law firms have fleeced the Enron bankruptcy as a fee mill, raking in more than $600 million in legal fees.

2005 July 14 General RE CEO Being Investigates, by Karen Richardson, Wall St. Journal

The 46-year-old Mr. Brandon, a close deputy to Mr. Buffett, took over as chief executive of General Re in 2001. He joined the company in 1989.

The Department of Justice and the Securities and Exchange Commission are examining emails and notes and asking about conversations between Mr. Brandon, Mr. Buffett and current and former General Re and Berkshire executives, the people with knowledge of the inquiries say. Officials are trying to determine what Mr. Brandon knew about the transaction -- and when -- including whether he knew AIG's reason for doing it. They are also trying to determine whether Mr. Brandon knew of an opportunity to end the deal through a so-called commutation, and thus had a deeper knowledge of the transaction.

The transaction, struck in late 2000, helped AIG improve its loss reserves without properly transferring risk to General Re. AIG earlier this year admitted the deal wasn't accounted for properly and restated past earnings to address the matter. Two former senior General Re executives, John Houldsworth and Richard Napier, last month pleaded guilty to the criminal charge of conspiracy to commit fraud in doing the deal with AIG and will be sentenced in December.

General Re originally expected the transaction to be unwound after 24 months, according to documents that New York Attorney General Eliot Spitzer included in a civil complaint filed in June against AIG. While General Re didn't write the 24-month term into the AIG contract, General Re executives referred to the limited term and their intention to commute, or end, the deal after 24 months in internal emails and notes that investigators are examining, the people with knowledge of the inquiries say.

The transaction wasn't unwound in 2002, however. It wasn't until late 2004 that half of the deal was unwound at AIG's request, people familiar with the situation say. A person familiar with Mr. Houldsworth's October 2002 email said that note might reflect only Mr. Houldsworth's understanding of the situation instead of what actually happened, and it isn't clear whether Mr. Brandon had any role in deciding whether to unwind or continue the transaction.

Another document, dated Oct. 31, 2000, suggests Mr. Brandon offered advice on how to structure the AIG transaction. That document, included in Mr. Spitzer's civil complaint, lists in point-form Mr. Ferguson's and Mr. Brandon's suggestions of how to structure the deal, referring to the executives by their initials. After the initials JPB, which several people familiar with the document say refers to Mr. Brandon, are various suggestions including: "May be best to stay away from U.S. companies to avoid large fluctuations in our reported reserves. Use non-U.S. entities. KR Dublin?"

KR Dublin refers to Cologne Re, which eventually took part in the transaction. According to the note, Mr. Brandon also suggested "funds withheld," a method of accounting for some reinsurance transactions that was also eventually employed by General Re in accounting for the AIG deal.

Analysis and Commentary:  One has to ask how a seasoned financial person like Mr. Buffett would accept large deposits from another insurance company without knowing their fundamental character.  Knowing this would be essential in terms of establishing an interest rate based upon expected maturity, etc.

While many speculate on why Buffett allowed these transactions to occur, my feeling is that he is trying to disguise the reality that General RE's goodwill is impaired and should be written down by at least $6 billion.  The notion that a small spread between what Berkshire paid to have these deposits from companies like AIG and the spread on its investments was the primary reason seems a bit naive.

2005 July 1 Oregon Business Magazine, by Bill Parish, Power Play - Warren Buffett, Wal-Mart and PacifiCorp?

Warren Buffet's biggest businesses--insurance and Wal-mart-- are a bad fit for PacifiCorp and local rate payers.

Warren Buffet is a respected and highly successful investor. But his company, Berkshire Hathaway, should not be allowed to purchase PacifiCorp. Berkshire Hathaway subsidiary MidAmerican Energy Holdings has offered $9.4 billion to buy the Portland-based utility from its current owner, Scottish Power.

Berkshire Hathaway calls itself a “holding company in which the most important business is insurance, both primary and reinsurance basis...conducted through more than 50 domestic and foreign-based insurance companies.”

To understand why Buffet wouldn’t be a good steward for PacifiCorp, it’s important to understand Berkshire Hathaway’s unique financial risks as an insurance company, and its unique financial interests as a primary vendor to Wal-Mart. We can also learn a valuable lesson from Buffet's hometown of Omaha, Nebraska, where electric utility rates are 20% below the national average, thanks to its publicly owned utility, Omaha Public Power District.

Berkshire Hathaway pays no dividend and is currently priced at $84,000 per share, roughly the same price as in July of 1998. Even Microsoft, whose founder, Bill Gates, is a Berkshire Hathaway director, now pays a respectable dividend.  Buffet is instead sitting on $45 billion in cash, mostly what insurance companies call “float” to cover future insurance claims.

In the quarter ending March 31, 2005, revenues related to insurance and financial products represented 40% of Berkshire Hathaway's gross revenues and 74% of income before taxes. Buffet acknowledges that the reinsurance business — in essence, insuring insurance companies against catastrophic losses — is very risky.  His own analysis states that a  “single event could produce a loss of $5 billion.”

Other unique Berkshire Hathaway financial risks include Buffet's $21 billion currency bet against the U.S. dollar. He notes that, “We may be wrong and, if so, our mistake will be very public.” Berkshire Hathaway is also the biggest shareholder in Moody's, providing Buffet media clout over all corporations and investment firms.

The second largest revenue producer for Berkshire Hathaway after insurance is McLane, the distribution company for Wal-Mart.  Buffet purchased McLane from Wal-Mart in 2003. It now represents one-third of Berkshire Hathaway's gross revenues but generates just 3.5% of net earnings. In addition to supplying Wal-Mart, McLane also serves 58% of the nation’s convenience stores, including 7-Eleven.

The Berkshire Hathaway fund also owns common stock valued at roughly $38 billion, with large holdings in Coca-Cola, Budweiser and Proctor & Gamble. Yet 75% of operating revenues and net earnings come from insurance and financial products, along with keeping the shelves full at Wal-Mart and strip-mall convenience stores nationwide.

Buffet notes that his biggest mistake was not investing directly in Wal-Mart stock. Still, by owning Wal-Mart's delivery system and investing in some of its biggest suppliers, you could say that Buffet is literally bringing Wal-Mart to a neighborhood near you. A critic might say, "Attention Wal-Mart Shoppers,” stock up now so that billionaire investor Warren Buffet can deliver more goods, generate more profits and buy your local utility."

Wal-Mart is controversial in Oregon and other states because it tends to drive out the small- and medium-sized companies that  form the backbone of the tax system and support schools and community services.

Although purchasing Wal-Mart's distribution system has helped pump up Berkshire Hathaway's gross sales, it hasn't done much for net profits, since this is a high-volume, low-margin business. And this is why Buffet wants a captive regulated monopoly like PacifiCorp. Specifically, he wants to become PacifiCorp's bank.

We need only look at MidAmerican, an Iowa-based utility Berkshire Hathaway purchased in 2000, to see how the "Bank of Buffet" works. Since being acquired, MidAmerican has borrowed $1.5 billion from Berkshire Hathaway to finance growth, and is now paying 11.5% annual interest, considerably higher than market rates. This business model has also worked well for Buffet's $10 billion portfolio of manufactured-home loans, with an average interest rate of 12%. Buffet is smart and tough and that has been good for shareholders, but not for ratepayers back in Iowa City.

The smart move for Buffet would be to use PacifiCorp as a base to later acquire either PGE or NW Natural. That might please Berkshire Hathaway directors, including Gates, whose philanthropic foundation collaborated with the Texas Pacific Group in its attempt to purchase PGE. But such utility consolidation wouldn't benefit the region. Rate relief would be unlikely.

Buffet's clarity and dedication to investors is admirable, yet he has the comfort of knowing that when he reaches for the light switch back in Omaha every night, it is public power that powers the switch.

That may indeed be Buffet's most instructive lesson for Oregon's Public Utility Commission. The PUC and Governor Ted Kulongoski should tune out the consultants and lobbyists, and keep PacifiCorp out of the Sage of Omaha’s hands.

Bill Parish (bill@billparish.com) is an independent fee-based investment manager who previously worked as a CPA and financial analyst.  See complete article at http://www.mediamerica.net/obm2005_07FirstPerson.php   MediaAmerica is the Northwest's largest producer of magazines and custom publications.

Analysis and Commentary:  None

2005 June 25 Selected References Involving Berkshire Hathaway, by Bill Parish

In August 2003, Berkshire acquired mobile home maker Clayton Homes Inc., whose subsidiaries are Vanderbilt Mortgage and Finance Inc. and 21st Mortgage Corp. link to this: http://www.mortgagechronicle.com/home031805.asp

Vanderbilt Mortgage and Finance Inc. has agreed to purchase a $4 billion portfolio of manufactured housing loans from a unit of JPMorgan Chase & Co. link: http://www.mortgagedaily.com/Subprime2004.asp

Citigroup has decided to exit the manufactured home finance market with the selling of its portfolio of related loans to 21st Mortgage Corp, a wholly owned subsidiary of Berkshire Hathaway. www.mortgagedaily.com/PortfolioSaleCitigroup032305.asp

Analysis and Commentary:  Berkshire Hathaway is deep broad connections with most major investment firms and it should have been no surprise that any effort to create a public utility corporation, similar to that in Mr. Buffett's hometown of Omaha Nebraska, would be difficult. 

2005 June 24 MidAmerica Seeks Furthur Mergers, by Gail Hill, Oregonian

So, what company might MidAmerican buy next? Sokol says he doesn't know. "You can only do one at a time," he said. "First and foremost, our attention is on PacifiCorp." Sokol's reticence hasn't stopped analysts and industry observers from naming names and speculating on the speculation. Companies offered up as MidAmerican's next target include Portland General Electric, Portland-based Northwest Natural Gas Co. and NorthWestern Corp. of Sioux Falls, S.D.

James Bellessa, an energy industry analyst with D.A. Davidson in Great Falls, Mont., said NorthWestern Corp. looks like a good fit in size and location. NorthWestern provides electricity and natural gas to 617,000 customers in Montana, Nebraska and South Dakota, territory that would fill in some of the blanks between MidAmerican and PacifiCorp's distribution networks. Northwestern recently emerged from Chapter 11 bankruptcy.

"That combination with PacifiCorp makes sense," Bellessa said. "You begin to paint a picture where they (MidAmerican) could become the significant utility west of the Mississippi."

Analysis and Commentary:  None

2005 June 22 Buffett to Invest More in Energy Sector, by Rebecca Smith, Wall St. Journal

Both men said that even though they support the construction of more low-emission and zero-emission power plants, Berkshire doesn't intend to move without policy-maker guidance. "We're here to participate in the dialogue but not to set policy," said Mr. Buffett, adding that shifting to cleaner sources of generation could be costly.

Analysis and Commentary:  None

2005 June 21 Buffett Outlines Plans for PacifiCorp, Editor, Idaho Statesman

MidAmerican Energy recently announced that it agreed to acquire PacifiCorp from its parent, Scottish Power, for $5.1 billion, plus the assumption of $4.3 billion in debt. The company operates as Utah Power in southeastern Idaho.
Buffett joked that Monday's audience members should urge people to visit the R.C. Willey Home Furnishings store his company owns at the intersection of Franklin and Eagle roads in Meridian.

"But if they're a Geico policy holder, tell them to make sure they drive carefully," he said in reference to another company he controls. Buffett assured his audience that he views the acquisition of PacifiCorp as a long-term investment, not a cash cow to be milked before being sold off. Regulators, while generally receptive to Buffett's homey approach, said they would reserve judgment until they see an official filing on the proposed deal.

"He was very personable. But we don't rely much on luncheon speeches," said Marsha Smith, an Idaho Public Utilities Commission member. "We have to rely on evidence in the filing. Such as whether (the acquisition) is in the public interest, whether it would benefit the ratepayer."

Lee Beyer, Oregon Public Utility Commission chairman, said Buffett's speech did not answer all of his questions.
"But then, I didn't expect it to," Beyer said. Beyer said MidAmerican Energy still has to prove that its deal for PacifiCorp "is a benefit to consumers." He said Oregon regulators recently scuttled a proposed acquisition of Portland General Electric by Texas Pacific Group because of fears that the deal was too highly leveraged. "But with Mr. Buffett, MidAmerican will have some very deep pockets," Beyer said. "So I don't think that's going to be a problem."

Analysis and Commentary:  None

2005 June 7:  Power Connection by Nick Budnick, Willamette Week

Kulongoski's appointment for powerful investment council raises questions. One year ago, allegations of cronyism spurred Gov. Ted Kulongoski to shake up the powerful Oregon Investment Council. Given that action, some are puzzled that he recently put the wife of a friend and major campaign contributor on that same council.

In May, the governor appointed Katy Durant, a longtime commercial real-estate broker, to the council. She is married to Portland hotel magnate Gordon Sondland, who headed Kulongoski's transition team in 2002. Sondland says his only interaction with the governor over his wife's appointment was "when [Kulongoski said] he thought she would be a good appointment, I said I thought...she would be a great candidate."

Council members are unpaid, but appointments to the board, which oversees the management of $61 billion in state and local employee pension funds, is considered a political plum. Durant is largely unknown in investment circles but does possess an MBA in finance and 17 years' experience in real-estate investments-an area making up 6 percent of the OIC's portfolio. State Sen. Vicki Walker, who sits on the committee that confirmed Durant, says of her qualifications, "I wasn't overwhelmed, which isn't a good thing."  Unlike many gubernatorial picks, Durant's appointment went unaccompanied by press releases or media attention. "I was hoping I'd skated right under the radar screen," Durant quipped when contacted last week by WW.

Indeed, Bill Parish, an investment manager who monitors the investment council on behalf of his clients, noticed the appointment only on the Web. For him, red flags went up because of Durant's vice-presidency with Trammell Crow, the commercial real-estate giant-an affiliation that did not show up on the state website. Says Parish, "When there are so many competent men and women available, why would Gov. Kulongoski agree to appoint the wife of someone on the governor's transition team with an obvious conflict?" Durant says she is disengaging from Trammell Crow but has no plans to leave Atlas Investments, an acquisitions and development company she and two other Trammell Crow employees founded two years ago.

Besides chairing the governor's transition, Durant's husband contributed more than $13,000 to Kulongoski's 2002 gubernatorial campaign and meets regularly with the Democratic governor-despite being a registered Republican.  Sondland is a major developer, hotel operator and financier who has as one of his partners Larry Mendelsohn, the former second-in-command at Andy Wiederhorn's Wilshire Financial Services Group. Mendelsohn was convicted last year of felony tax fraud.

Randall Pozdena, a prominent economist and former chair of the OIC, says Durant's appointment is curious given the controversy when Diana Goldschmidt served on the council. During her tenure, questions surfaced about whether her decisions benefited her husband, Neil Goldschmidt, particularly her vote to commit $300 million of state funds in 2003 to a group of Texas investors aiming to buy Portland General Electric. The day after the vote, the Texas group hired Neil Goldschmidt to run the company (see "The $300 Million Emergency," WW, Sept. 22, 2004).

In July 2004, Kulongoski told The Oregonian, "I'm interested in looking at how the board is functioning." He fired Diana Goldschmidt from the OIC two months later. Pozdena says appearances are important: "If your husband or wife is in the business, it's hard for people to imagine that there isn't pillow talk, that you share information that shouldn't be shared."  Mardi Saathoff, the governor's legal counsel, told WW Durant was selected strictly on qualifications: "She's an incredibly sophisticated, intelligent businesswoman."

Durant, for her part, told WW she won't share confidential information, and her interest in the council is altruistic: As she told the Senate committee in May, "It is important for every Oregonian to give back to our state." While Durant is an Oregon resident, her husband is not-legally, at least. They both live in Portland, have offices here, school their kids here and register their cars here. But Sondland maintains a penthouse in Seattle at one of his hotels, where he claims residency for tax purposes.

A number of prosperous Oregon businesspeople maintain residences in Washington to avoid Oregon's income tax. Asked whether this was a factor for him, Sondland declined to respond directly, instead defending his claim of Washington residency as "reflective of the facts." "I was born and raised in Seattle," he added. "I have a lot of ties to that community: We have a place up there, we have business investments up there, my mother still lives there, my sister lives there. I mean, I never left."  See complete story at:  http://www.wweek.com/story.php?story=6478#

Analysis and Commentary:  This article is relevant because the Oregon Investment Council shows no interest in the most basic discussion regarding the future of Oregon's two largest electric utilities which are vitally important to the region's economy.  Instead, the Governor appointed another insider with significant conflicts of interest.  Prior to Durant, the most recent appointee was Dick Solomon.  Solomon has been doing Chair Gerard Drummond's tax returns for years and therefore rather than add independence given two controversial resignations over conflicts of interest, Governor Kulongowski once again a strong new independent member for the five person group that makes key investment decisions for Oregon's $60 billion PERS fund

2005 June 6 Study says malpractice Payout Aren't Rising, by Jenny Anderson, NY Times

When Mike Kreidler was an optometrist in Olympia, Wash., he railed against trial lawyers. He believed that aggressive trial lawyers were the reason he faced rising insurance premiums. Dr. Kreidler, now in his second term as Washington State's insurance commissioner, has changed his mind. He has decided that the problem is not the lawyers - although they have contributed - but also the insurance companies.

A study to be released today by the Center for Justice and Democracy, a consumer advocacy group in New York, may add fuel to that debate. The study, compiled from regulatory filings by insurers to state regulators, finds that net claims for medical malpractice paid by 15 leading insurance companies have remained flat over the last five years, while net premiums have surged 120 percent.  From 2000 to 2004, the increase in premiums collected by the leading 15 medical malpractice insurance companies was 21 times the increase in the claims they paid, according to the study. (The net totals in the study are calculated after accounting for reinsurance.)

Analysis and Commentary:  This is an excellent example of why some now see Mr. Buffett as the king of government pork, very sophisticated in his ability to game the government system and achieve subsidies while at the same time arguing for defecit reduction.

2005 June 1 Power Play, by Allan Sloan, Newsweek

Now, I have to make some disclosures. First, I'll profit if Buffett's purchase of PacifiCorp succeeds, because I have a large personal stake in Berkshire Hathaway through my 401(k) plan, as do some of my Newsweek and Washington Post colleagues. Second, Buffett is a board member of Newsweek's parent, The Washington Post Co. Finally, Berkshire and the Post Co. own substantial stakes in each other.

Analysis and Commentary:  Sloan is a great business reporter and to his credit he fully disclosed his publications relationship to Buffett.

2005 May 29 Electric Shock, The Sale of PacifiCorp, by R. Ballantyne and D. Box, Times of London

Unknown to those outside the company, Russell had commissioned a review of PacifiCorp; in October 2003 a Citigroup note suggested he break up ScottishPower, with PacifiCorp the obvious target.  One fund manager at a top-five shareholder in ScottishPower said: “This ends a rather sorry episode. They paid about $12 billion for something five or six years ago and have basically received $9 billion back and the dollar has moved in their favour in the meantime.

Russell soon found out that America was no pushover, however. PacifiCorp’s first Scottish managing director barely survived the first profit warning. The complexity of dealing with the politics of six different states plus federal regulators compounded a corporate workload already groaning under the pressure of filing rules and three-monthly reporting.  Then came the Californian power cuts, which effectively ended the potential deregulation of the US market that Russell had said was the main reason for entering the market. Even so, until last week, ScottishPower and PacifiCorp seemed joined at the hip. Russell will take it personally. “His pride will be hurt,” said a former colleague, “but he will see the deal through.”

Analysis and Commentary:  None

2005 May 25 Scottish Power Sells Klamath Tribes Down the River, by Dan Bacher, Indybay News

Happy Camp, CA - Klamath Basin Indian Tribes reacted with surprise and disappointment yesterday at Scottish Power's sale of PacifiCorp to billionaire investor Warren Buffet. The Tribes, along with allies in the fishing and environmental community, have been working with the energy giant's subsidiary, PacifiCorp, to find a way to remove Klamath river dams in order to restore dwindling salmon runs.

The Klamath River was once the third most productive salmon river in America, returning as many as 1.2 million adult salmon annually. After nearly a century of dam building, diversions, and logging in the watershed, only 1/10 that number return today.

At this point the Tribes and their allies are looking to make contact with representatives from Buffet's Berkshire Inc. Leaf Hillman said, "Right now, we don't know if Mr. Buffet cares about salmon or Native Tribes, but we plan to find out soon. We are also asking Scottish Power shareholders to do everything they can to block the sale of the company until the Klamath issue
is resolved. At the same time, we need to let investors in Berkshire know what they're getting into."

Analysis and Commentary:  None

2005 May 23 Berkshire Cuts Ties to Ferguson, by Thomas Derpinghaus, Dow Jones Newswire

Berkshire Hathaway Inc.'s General Re Corp. terminated the consulting services of its former chief, Ronald E. Ferguson, after he invoked his Fifth Amendment privilege against self-incrimination in responses to regulators. Berkshire Hathaway said Mr. Ferguson had been consulting General Re and certain of its affiliates since he stepped down as the chief executive of the reinsurance company on Oct. 1, 2001.

Mr. Ferguson invoked his Fifth Amendment rights in questions posed to him by the Securities and Exchange Commission and the Department of Justice in their ongoing investigations of nontraditional insurance products. These products were, until recently, an obscure class of financial transactions that authorities believe some companies have used to manipulate their financial statements. Mr. Ferguson headed up General Re when Berkshire, the investment holding company controlled by Warren Buffett, purchased it in 1998. He stepped down in 2001 after "several years of poor results," The Wall Street Journal reported earlier in May.

Specifically, regulators are looking into a reinsurance transaction between General Re and insurance titan *American International Group* Inc. that took place four years ago and helped lead to the March departure of Maurice R. "Hank" Greenberg as AIG's chairman and chief executive. Mr. Greenberg contacted Mr. Ferguson in 2000 to strike up the deal that is now being scrutinized.  AIG did the deal with General Re to shore up its reserves at a time when investors were worried the reserves were too low.

Analysis and Commentary:  None

2005 May 20 A Finger on the Pulse of Berkshire Hathaway, Editor, SRI Media

Gen Re, a reinsurance giant with worldwide operations, is among Berkshire's largest units. In 2000, it provided a $500 million finite insurance policy that AIG used to improperly dress up its financial statements to bolster AIG's stock price. The scandal led AIG directors to force out their chairman and chief executive, Maurice Greenberg, and AIG has since reported a number of other accounting improprieties.

Greenberg, according to AIG, was directly involved in the finite-insurance deal with Gen Re. But it is not clear whether Gen Re executives knew that AIG improperly booked the deal, which in itself was legal. AIG had called the contract an insurance policy when it was in fact a loan. By mid-May, one Gen Re executive had been notified by regulators that he could face criminal charges, and Gen Re put him and a second executive on leave.

Buffett has been interviewed by regulators, but he has been described as a cooperating witness rather than a target of the investigation.

Analysis and Commentary:  None

2005 April 2  4 Tough Questions for Warren Buffett, by Chris Oster, MSN Moneycentral

1. Why did you allow two of your businesses to get involved in the dicey practice of writing "finite" insurance?

That's because two Berkshire companies, National Indemnity and General Re, are big sellers of what the industry calls finite insurance. To keep it simple: Finite insurance is insurance that carries a limited amount of risk for the company that writes the policy. The problem is that in many cases -- including a policy that Gen Re wrote for American International Group -- there's little or no risk at all for the insurer, which means the policies don't qualify as insurance. That makes them the equivalent of bank loans, which have to be accounted for like loans, not insurance

No one is saying Berkshire used the policies to burnish its own results. Rather, it's that Berkshire is helping other companies fudge theirs. The policy Gen Re sold AIG in 2000, for instance, artificially strengthened AIG's balance sheet. It's that policy -- and how AIG put it to use -- that ultimately led AIG's board to seek the resignation of Chairman and CEO Maurice R. "Hank" Greenberg. Regulators in Virginia and Tennessee are suing Gen Re, saying it sold "sham" policies to a small insurer in Virginia, policies that were meant to make regulators believe the insurer was financially sound when it wasn't.

Buffett hasn't done much to explain why the company is such a big seller of finite insurance, or to defend the legitimate uses of these policies, if there are any. Here's his chance.

2. What sort of due diligence did you do when you paid $22 billion for General Re? Sure, the Gen Re unit has been in the news a lot lately for its role in the AIG policy. But Gen Re was a problem for Berkshire and its shareholders long before Eliot Spitzer came poking around.

Consider this: Between 1998, when Berkshire paid $22 billion for Gen Re, and early 2002, the company had posted $6 billion in underwriting losses. Many of those losses are traced to policies written before the acquisition, policies for which Gen Re has had to put up additional reserves to pay claims and anticipated claims. In addition, some of the finite policies being scrutinized now were written before Berkshire acquired Gen Re. In both cases, the question is this: Why didn't Buffett's team dig a little deeper to discover these problems before putting billions of shareholder money at risk?

"He did not know what he was getting when he bought Gen Re," says Steven Dreyer, who heads up Standard & Poor's insurance-ratings service. Dreyer notes that Gen Re hasn't exactly been a growth engine, either: A decade ago Gen Re was one of the world's two largest re-insurers. "Now it's about 10th."

3. How do you explain the double standard when it comes to your board of directors? The board is independent only if your definition of independent is that not /every/ board member is a family member or a personal friend of Warren Buffett. Consider what happened in 2003, when new governance rules required that a majority of board members be independent from a company's management. Rather than truly comply with the rules, Buffett skirted them, naming onetime neighbor Donald Keough (a former Coke executive) and longtime friend Thomas Murphy (ex CEO of ABC and Disney) to the board. Those additions round out a cozy group of directors that includes Buffett's son Howard and his bridge partner Bill Gates, chairman of Microsoft. (Microsoft owns and publishes this Web site.)

It's odd behavior from a man who, in Berkshire's 2003 annual report, ripped the so-called independent directors of mutual funds for not doing their job to protect shareholders.

4. Are you planning on sending any of that $46 billion in cash back to shareholders? Not all of that money, of course, can be paid out. In order to maintain its insurance units' triple-A ratings, Berkshire needs to set aside some of that money just in case it's needed to pay claims.

Analysis and Commentary:  None

2005 January 17  If It's Ok for Bill and Warren, Jim Larew Op-Ed, Iowa Press Citizen

Buffett founded and re-portedly owns about 40 percent of Berkshire Hathaway which, in turn, is the principal owner of MidAmerican Energy Holding Company which, in turn, is the principal owner if MidAmerican Energy Company -- Iowa City's electric utility monopoly.

In response to petitions signed by more than a thousand eligible Iowa City voters, the results of a Nov-ember referendum may de-termine whether MidAmeri-can's expensive, sweetheart arrangement will be re-placed with a more cost-ef-fective publicly owned electric utility company.

It is not surprising that Gates has joined Buffett on Berkshire Hathaway's Board. After all, they have much in common. Indeed, as these two business icons realize, few places in our economy as-sure mark-ups more consistently than those imposed by privately owned electric utility companies that sell electricity in monopoly-protected jurisdictions.

Indeed, electric utilities owned by governmental en-tities and cooperatives make up more than 69 percent of electric energy delivered to Washington state customers. Gates, of course, is a native of Seattle, home of Seattle City Power, an electric utility company that is owned, operated and regulated by its consumers -- its ratepayers. As a result, Seattle's residential consumers shell out only 6.9 cents per kilowatt-hour, almost a third of Iowa City's 9.3 cents per kwh rate. Similarly, Seattle business owners pay only 6.2 cents per kwh, as compared to Iowa City's commercial rate: 8.3 cents per kwh.

Reach Jim Larew, an Iowa City attorney, at jimlarew@larew law.com.

Analysis and Commentary:  None

2003 August 1 Auditing and Oracle, by Nel Duvall, Eweek

The Oracle of Omaha was in classic form in early May, at his affectionately dubbed "Wood-stock for Capitalists." For three days of worship, 15,000 Berkshire Hathaway shareholders had come to Nebraska to hear Warren Buffett's wisdom on how to place trust and invest money in American companies.

Pausing occasionally for a swig of Cherry Coke, the sharp-witted 72-year-old blasted the lowlifes and criminals who have been unearthed like mealy bugs after a summer storm. "It prevails in almost every place," said Buffett in his no-nonsense style. "And unless there is a countervailing force, it is hard to stop."

He was, of course, referring to the ugly behavior of chief executives, financial officers and other managers of some of the largest U.S. companies. From phony accounting to "obscene" paychecks, Buffett left no doubt that the conduct of corporate America had reached its lowest point in his half-century of investing.

"What we really deplore are the attempts by corporations to solve operating problems with accounting maneuvers," he said in response to shareholders' questions. "It catches up with you, sometimes with disastrous results. You might as well face reality immediately."

Yet, while he may be prophetic, Buffett is not quite the gold standard of good corporate governance his followers hold him up to be. For Buffett, it's often a "do as I say, not as I do," approach to management. He cuts deals without following accepted rules for due diligence, gives Berkshire managers such loose reins that they are able to pile up losses for years before he will take action, and eschews many of the rules and technologies companies are deploying to get a firmer grip on financial reporting.

"There's a difference between how they manage themselves and what they look for in companies they manage," observes George Dallas, managing director of governance services at Standard & Poor's in London.

Buffett argues companies need to be more open with shareholders. Yet he remains secretive about Berkshire Hathaway's public investments and in providing details on the operation of Berkshire's subsidiaries. In annual reports, for example, Buffett doesn't offer individual sales, profits or expenses for each of his 64 companies; he aggregates most of them, making it hard to tell how any one company is doing.

When Buffett takes over a company, he lets the managers run the subsidiaries as they see fit. "They are the Mark McGwires of the business world and need no advice from us as to how to hold the bat or when to swing," he says. But this hands-off policy has allowed some managers to strike out. The $8.3 billion in underwriting losses so far at General Reinsurance is the most glaring example.

Buffett faults many corporate boards for acting as the lap dogs of chief executives. But his own board has been highly criticized by some investor groups and pension fund companies, such as the California Public Employees Retirement System, for lacking independence. Buffett is both chairman and CEO, and his wife and son are directors.

Buffett says corporations should automatically answer vital shareholder questions. However, other than in general terms, he refuses to talk about his designated successor or successors—undoubtedly, the most important question for investors. He also engages in somewhat risky trading practices, such as Berkshire Hathaway's recent purchases of $8 billion in junk bonds, without providing basic data on the companies involved or the terms.

Buffett says CEO pay, which is overseen by board members, is out of control. But he has served as an influential director for some of the corporations that have rewarded their chief executives handsomely. Berkshire is the largest shareholder in Coca-Cola, yet Buffett failed to curb the compensation of CEO Douglas Daft in 2001 that included $48 million in restricted stock and options worth up to $153 million. In his annual report to shareholders in March, Buffett admits this failing: "Too often I was silent when management made proposals that I judged to be counter to the interests of shareholders."

They came to hear what was wrong with corporate America, and Buffett and longtime friend and business partner Charles Munger rose to the occasion. Munger, known for using the odd expletive, saved his strongest criticisms for the accountants who failed to catch (or sometimes even participated in) financial dirty tricks. "The faithlessness of that profession over the last 20 years has been unpleasant to watch," Munger said.

Where Buffett really stands apart, however, is not just in his unwillingness to invest in technology companies, but his unwillingness to invest in technology for his own company as well. While many firms are turning to information systems to meet new accounting regulations, clean up financial reporting and monitor ongoing business changes, Buffett is not. He relies on fax, phone and mail to receive the financial results of his companies.

Berkshire will do whatever is necessary to comply with new regulations, he says. But more technology and more laws aren't needed, he says. Stronger ethics are.

That's noble and desirable but ignores the spectrum of human nature, says Tim Leech, a former director of risk-management services at Coopers & Lybrand, and now president of risk-management software company CARDdecisions. Leech says Buffett could possibly be a mind reader, with Godlike skills to hire only the most capable, honest people, but his own experience as a forensic accountant points to the contrary.

"Most of the people I have investigated and sent to jail for defrauding large amounts of money, their bosses all thought they were the salt of the earth, incapable of doing something like that," he says. "You've got corrupt accountants, corrupt management, corrupt lawyers, corrupt investment dealers that are hyping stocks that they know to be dogs ... the system has gone all to hell."

Institutional Shareholder Services (ISS), a governance advisory service, recently gave Berkshire a score of just 1.5 out of 100 for the quality of its own corporate governance.

The firm considers 61 variables, such as the independence of the board of directors, executive compensation, how frequently outside auditors are rotated, and whether and how much stock officers and directors own. Some factors are scored together with others. For example, ISS says that a board with both a majority of independent directors and all-independent key committees, such as compensation and audit, will get a higher score than if the company had only one of these.

Buffett's low-tech information systems and hands-off management philosophy have at times proven costly. In June 1998, Buffett announced a $21.7 billion deal to buy property and casualty reinsurer General Reinsurance for stock. The acquisition was a good fit with Berkshire's other insurance businesses and provided Buffett with more cash to invest.

General Re came with a $15 billion float, which is money that the company holds against its liabilities but does not own. Buffett has invested the floats of Berkshire's insurance companies to reap much greater rewards than the company has had to pay out in insurance claims.

Buffett did not have an executive dashboard flashing daily alarms about General Re's exposure. Losses that began with a $370 million trickle in 1998 swelled to $1.4 billion in 1999. General Re suffered another $1.4 billion loss in 2000, and while he acknowledged several times that changes needed to be made at the subsidiary, Buffett refused to step in and take control. Instead, he steadfastly expressed faith in the experience and leadership of CEO Ron Ferguson.

While the exact events of Sept. 11, 2001, were close to impossible to foretell, Buffett later agreed that it was the job of a reinsurer to anticipate and correctly price policies to prepare for disasters such as terrorist attacks. Largely as a result of damage to the World Trade Center, General Re reported an underwriting loss of $3.7 billion in 2001. Ferguson decided to retire that same year.

That system amazes most outside observers. Bruce Nearon, a technology expert at the New York State Society of Certified Public Accountants, says a company of Berkshire's size typically has sophisticated financial software consolidating results, such as a suite from enterprise software vendor SAP. Increasingly, he says, outside auditors are being provided with direct access to a company's electronic records so they can more thoroughly trace entries.

The nonelectronic controls over corporate reporting at Berkshire are balanced by a culture that sees only black and white when it comes to accounting. "There is zero tolerance for anything considered unethical or dishonest," Limas says.

*Baseline Goals:*

# Grow stock price 10% a year greater than the Standard & Poor's 500.
# Redeploy each dollar of retained earnings into a dollar of new business or investment.
# Act as example for corporate America in executive compensation and accounting for financial results. Buffett's salary: $100,000 a year.
# Give personal fortune of chairman (currently calculated at $30.5 billion) to charity, upon

Analysis and Commentary:  None

2003 May 5 Buffett Tax Angle on McLane, Editor, Forbes

Buffett also indicated strongly that Berkshire will continue to use its $16 billion in cash and $42.5 billion in additional capital to acquire companies, rather than invest in the stock market. Buffett made it clear he can make a 10% after tax return by acquiring 100% of a company because of substantial tax advantages he did not spell out in detail. McLane Company is expected to return 13% on Berkshire's investment in it; the food service distribution company makes only 1% pretax on $22 billion in revenue.

Analysis and Commentary:  Imagine the type of tax creativity Buffett could use if he acquired PacifiCorp given that currently ratepayers are billed for taxes that are never remitted.

2002 September 4  The New Warren Buffett Way, by Daniel Gross, MSN Moneybox

Of course, Buffett, whose assets are intensely concentrated in the publicly traded stock of Berkshire Hathaway, which in turn has significant holdings in insurance, had a lot more to lose from a September 2001 market meltdown than the rest of us.

What's most surprising about post-9/11 Buffett is that, while it may not be "a different country economically than it was," he is certainly acting like it is. As promised, Buffett has been doing some buying in the past 12 months. But he's not buying stocks in sound, undervalued companies the way he used to, and the way you and I still do. In making several highly publicized investments in struggling public companies, Buffett has departed significantly from his traditional /modus operandi/—and departed in ways that are potentially hazardous to common shareholders. This classic value investor is behaving more like a vulture investor.

Vulture investors are individuals and institutions that come to the aid of, or prey upon, troubled companies. Smart vultures don't simply buy common shares in a company that is trending toward bankruptcy. Instead, they'll lend money at extraordinarily high interest rates, or demand a chunk of equity in return for the loan, or demand to buy stock at a discount to the current market price. Frequently, such transactions cause a dilution of the value of the shares held by existing shareholders and create a situation in which the new investors have better claims on a company's assets and income than do existing common shareholders.

There's nothing inherently predatory about vulture investing. It's one of the iron rules of the marketplace that companies with poor financial prospects wishing to obtain capital simply have to meet more onerous terms than those with sterling balance sheets. But vulture investors, and others who specialize in distressed situations like Carl Icahn, tend to have sharp elbows, which means that common shareholders can get hurt when they move on a company.

In July, Buffett and two other investors bought $500 million in convertible notes from Level 3 Communications, Inc., one of the largest remaining fiber-optics network companies. (Buffett's share totaled $100 million.) The deal boosted Level 3's cash position by 50 percent and bolstered its status. But it came at a stiff price. The notes pay 9 percent annual interest, and the holders can convert the notes, at any time, into common stock at $3.41. The stock now trades at $5.

Buffett's transaction with the Williams Companies, the established energy concern that got into trouble with misplaced bets on energy trading and telecommunications, is more problematic. Williams staved off bankruptcy in July by striking a $900 million loan deal with Lehman Brothers and a unit of Berkshire Hathaway. But you have to dig deep into Williams' 10-Q filing <http://www.sec.gov/Archives/edgar/data/107263/000095013402010079/0000950134-02-010079-index.htm> to find the extraordinary terms of the transaction.

The one-year loan carries an interest rate of 19.824 percent. In addition, Williams committed to pay a "deferred set up fee"—a charge that the company must pay if the company assets underlying the loan are sold, or even if they are not—of at least 15 percent of the loan, or $135 million. Add it up, and Williams will be paying nearly 35 percent in interest and charges for a one-year loan.

While beneficial to Buffett's bottom line, the Williams deal isn't particularly good for Buffett's well-tended image. Karl Miller, an energy investor, told theStreet.com <http://www.thestreet.com/_mktw/stocks/melissadavid/10040280.html> that the transaction, on "loan shark" terms, was a "deal with the devil." Those are probably two epithets that have never been hurled at Saint Warren the Beneficent. And you certainly won't find any mention of lending money to troubled borrowers at 35 percent per annum in the many books extolling Buffett's virtues.

Analysis and Commentary:  None

2001 March 25 Notes from the 2001 Wesco Annual Meeting, by Whitney Tilson, Fool.com

General Re comment from Charles Munger. "It's one of the best reinsurance operations in the world. It has a strong distribution network and culture -- a culture of intelligence and discipline. It sees reinsurance opportunities that Berkshire doesn't. They have a huge advantage being there for so long. Gen Re's competitive advantage is that it's smarter and sees more opportunities." "I don't think its returns in the future will be as good, but a 2-3%/year advantage is a lot over time."

"Reinsurance is interesting. A lot of people get into the business because of the money. Then, reinsurance brokers -- who are very well paid and can make dumb ideas look good -- pitch them business. Boy, is this dangerous! Very smart people can make very dumb investments. Even GEICO and Gen Re get caught sometimes."

2005 March 16  Final Comment Regarding The Future of Portland General Electric and the Defeat of the Texas Pacific Group

Orchestrating the defeat of the Texas Pacific Groups attempt to purchase Portland General Electric provided an excellent opportunity to support a wide range of individuals of all political parties and business affiliations.  During the process I developed a tremendous respect for Sid Lezak, Dan Meek, Erik Sten, Ken Lewis, Joe Smith, Liz Trojan and others. This archive provides a small selected sample of news stories and other correspondence related to this effort.

Although I did make a proposal to similarly orchestrate the creation of a top quality municipial utility, this proposal did not fit with the city's plans for PGE. It is important to therefore state that, although I wish the City of Portland great success in its endeavor to make PGE a municipal utility, I will have no role in this effort, either directly or indirectly, and therefore am unable to support it.  It is also unfortunate that the concept of a private cooperative was never fully developed.

My primary concern with the City's approach is that it appears to be driven by the investment firms wishing to issue bonds to finance the transaction.  We'll just issue revenue bonds seems to be the mantra. Sadly, the City does not see that without first considering alternative financing, such as six public pensions contribution $250 million each for a top quality fixed income investment, the City is risking bankruptcy.  These bond firms will claim that the City will not be liable for the bonds and that they will be taxable yet that is what the Wall Street Journal calls the "dirty secret" of the bond industry, that is municipal bonds being issued that are not true municipals.  Any way you stack it up, the City will be deemed the issuer and this will impact its credit rating, in my opinion, when this creative accounting is fully dealt with.

Today the City of San Diego is called Enron by the sea due to its large unfunded police and fire pension fund.  Portland has a similar problem to the tune of $1 billion and, coupled with other significant financial issues including the "big pipe" sewage project, it is hard for me to understand why a common sense discussion over financing has not occurred.  This is a tremendous disservice to the police and fire workers whose pension could be compromised.  Also complicating this situation is the reality that many top executives at the City come from and have a natural career path to companies involved with the issuance of municipal bonds.  That is natural for all professionals, just as C.P.A.'s go on to be controller's at former clients.

Perhaps the greatest challenge is the reality that a 5 percent commission is earned collectively for each $1 of bonds issued. This consists of the management concession, sellor's concession and broker's commission.  If $2 billion in revenue bonds are issued, that pencils out to $100 million in fees, mostly fees you don't see.  This is a large part of how Argentina was bankrupted in the 1980's and numerous municipalities here in the U.S. in 1994, including Orange County.  Merrill Lynch indeed paid more than $500 million regarding its role in bankrupting Orange County and was also a key player in the long-term hedge fund crisis of 1998 that destabilized the global financial markets.

On a pure tactical level, I stopped supporting the City's efforts on Monday March 14th .  My sense now is that the City will be quickly outmaneuvered and Enron will "spin" new stock to creditors.  This is a very undesirable outcome and should be a wake up call for the Oregon legislature to enact a few new targeted laws to prevent a debacle.  At a minimum, the City should have a contingency plan to deal with the potential for a stock spin.

Special thanks to everyone who contributed to this effort.

Sincerely,
Bill Parish
 

2005 March 16  Email to Mayor Tom Potter, by Bill Parish

cc: Commissioners Erik Sten, Randy Leanord, Dan Saltzman and Sam Adams

Dear Mayor Potter,

When you provided your first interview at cable access regarding your run for Mayor, you may recall my question as one of the joint interviewers, "What is your opinion regarding the future of Portland General Electric?"   I sincerely believed then and still believe now that this could indeed be your legacy as one of Portland's great mayors.

During the process of orchestrating Texas Pacific's defeat I was able to observe many interesting dynamics including the following. These observations are followed by a brief specific proposal to help you make a privately managed municipal utility a reality for Portland.

1)  An intense battle for the future of PGE will occur because its large advertising and public relations budget will give the winner enormous political clout with respect to print and television media.
2)  The City has many fine hard working employees and excellent leadership yet it simply does not have the tactical nor strategic orientation necessary to make PGE a municipal utility.
3) Nigel Jaquiss, Jeff Kosseff, Steve Duin and Jeff Manning deserve special credit for stellar journalism and flushing out the facts regarding TPG's proposal. They can all be trusted to fairly communicate major issues involving the city.
4)  Neil Goldschmidt masterfully used the state's largest utilities, including Pacific Power, PGE and NW Natural Gas, and its education system, including the Portland Public Schools, OHSU and the system of Higher Education, as his power base.  Some might add that good relations with the board managing Oregon's $50 billion in public pension assets might have also helped. With recent changes the City now has an excellent opportunity to bring back a more local centric orientation using PGE as the centerpiece for this effort.
5)  Proposal to orchestrate a Municipal Utility: Have me create an internal blog regarding key issues necessary to close this transaction and support all parties involved. I would not control the process but rather simply support it. The focus would be idea generation and dot connecting resulting from interacting with your legal, financial and other advisers with the specific goal of making PGE the highest quality municipal utility in the country.  This would not disrupt my business as an independent investment adviser but rather simply result in one new client, the city. My fee would be out of pocket expenses paid by the City, $1,500 per week, and a success fee paid by the firm that receives the bond underwriting equivalent to .25 percent of the transaction, payable only after the deal is successfully culminated and key targets met.

Thank you for considering this proposal Tom. This will be my last communication with respect to the future of PGE. Best regards.

Sincerely,
Bill Parish

2005 Power Failure, by Nigel Jaquiss, Willamette Week

On Thursday, the PUC unanimously rejected Texas Pacific's proposal to buy PGE, sounding what is probably the death knell for the deal and also helping to break the grip Neil Goldschmidt has had on this state for 30 years.

When Goldschmidt resigned from his Texas Pacific obligations after last year's sex scandal, the Fort Worth-based buyout firm's proposal had to stand on its own merits, which were few. Texas Pacific compounded the sting of Goldschmidt's departure with an arrogance and clumsiness that belied the firm's brainy reputation.

Texas Pacific's 16-month dalliance with PGE was not a waste of time for Oregonians, however. The firm's own financial legwork preparing for the sale and the work of a few watchdogs revealed how poorly PGE has been run for many years. It also revealed that the utility has generated profits far in excess of the rate allowed by the PUC, leading to the conclusion that the agency has been unwilling-or unable-to protect ratepayers. (Texas Pacific declined to comment for this story.)

"Texas Pacific recognized from the start that this was a political deal and would stand or fall on politics," says utility lawyer Dan Meek. "That's why they chose Neil, who knows nothing about utilities. The PUC proceeding was just window dressing."

"Bonderman and Goldschmidt and Imeson misread this thing from the start," says Larry Tuttle, director of the Center for Environmental Equity. "They didn't have a feel for how knowledgeable people are after years of dealing with Enron. People who didn't know equity from a sheepdog three years ago can now explain Texas Pacific's double-leveraged structure."

Almost immediately, however, problems developed. Local financial adviser Bill Parish, who keeps a close eye on the Oregon Investment Council and the nearly $60 billion in public funds it manages, alerted the press that Texas Pacific's largest investor was none other than the OIC.

Parish also noted that Goldschmidt's wife, Diana, was one of the four appointed board members who controlled the OIC's billions. Just days before Texas Pacific announced its bid for PGE, the investment council had voted to invest $300 million in a new Texas Pacific fund. That vote raised the possibility that Diana knowingly directed money to a group employing her husband-which could violate state law. "Texas Pacific's decision to hire Goldschmidt without resolving the potential conflict shows arrogance, incompetence or both," Parish says. "Whatever the truth was, it gave the appearance of a cozy deal that could enrich a few at the expense of public pensioners."

Unlike Enron, which artfully cultivated allies in its successful 1997 bid for PGE, Texas Pacific earned the opposition of every customer group and interested party across the political spectrum. "With Texas Pacific, it was all or nothing," says Jason Eisdorfer, a lawyer with the Citizens' Utility Board, a ratepayer advocate.

To shore up public opinion, Texas Pacific hired the local ad agency Gard & Gerber to generate an ad campaign featuring business leaders who supported the deal. Those ads backfired. The ad campaign mobilized critics, including a pair of very energetic senior citizens, former U.S. Attorney for Oregon Sid Lezak and retired shipping executive Ken Lewis.

The pair penned op-ed pieces, buttonholed influential Portlanders and begged Kohler to save his reputation by quitting the deal. The state's power elite listened. "Having Ken and Sid on the other side made opposition to Texas Pacific respectable at the MAC Club and the Arlington Club," utility watchdog Meek says. Still, when the PUC wrapped up its nine-month series of hearings and legal arguments in December, many insiders thought the deal would go through.

"In the end, with Goldschmidt in disgrace and his web of power in tatters, the PUC perhaps had no choice but to reject Texas Pacific. As The New York Times noted last week, "An unusual alliance of corporate, consumer and environmental groups-often adversaries-opposed the deal. Only one major electricity customer, The Oregonian newspaper, supported the purchase."

Analysis and Commentary:  Perhaps it is fitting that the last reference goes to Nigel Jaquiss, clearly the reporter who did the most for flushing out the key facts regarding TPG's proposal.  Jaquiss won the Pulitzer Prize for investigative journalism for a series of stories surrounding Neil Goldschmidt, the key player in TPG's proposed buyout of PGE. See complete article at www.wweek.com

2005 March 14  Email from Bill Parish to David Bonderman Suggesting Texas Pacific Withdrawal Its Bid for PGE

bcc: other interested parties

Dear David,

It is unfortunate that your efforts to acquire PGE resulted in such a bitter battle yet at least you now have justification for immediately withdrawing your bid with its formal rejection by the Oregon Public Utility Commission. Perhaps this is good fortune for your firm given the perfect storm of scrutiny that was about to occur.  Please do make this withdrawal official by Friday.

Do also note that in orchestrating your defeat I conducted all my efforts with competence, ethics and integrity. Key to this was supporting a wide range of journalists, industrial and political leaders, regulators, analysts and public power advocates with top quality well researched material. Not material aimed at disparaging you but rather toward finding the truth in your proposal and revealing that it was indeed not a good option for the future of Portland General Electric.

Naturally, Enron will ask that you delay your decision with the hope that in the meantime PUHCA will be repealed and numerous other buyers emerge to compete with the City of Portland.  Do keep in mind however that groups opposed to your efforts to acquire PGE are now informed, energized and ready to accelerate their efforts with the assumption you will appeal the decision. Every day you wait is simply rather foolish.

Again, no hard feelings. You can't win them all.  If in the future one of your deals does indeed make sense for most parties involved and you need a little solid advice on how to orchestrate its culmination don't hesitate to call.

Sincerely,
Bill Parish

2005 March 14  LBO's Are Back, by Michael Santoli, Barrons

On the payoff side, private equity players cashed out of enough investments to return a whopping $36 billion in net cash to their investors in the nine months through September. Though the investors are mainly pension funds and other institutions, wealthy individuals have also been getting in on the action, through their private banks and sometimes directly.

The junk market is so obliging and high yield investors so hungry for paper that LBO firms have been rushing to issue new debt on already leveraged companies they've bought, strictly for the purposes of collecting a cash dividend. There were 77 such dividend recapitalizations last year, worth $13.5 billion, up from $6 billion in 2003 and $2 billion in 2002.

"In the last 18 months," he says, "the stars have really aligned." Initially, the accommodating markets allowed LBO firms to liquidate seasoned investments they'd held through the downturn. "Then people realized they could buy a company, dress it up, do some financing to leverage it up and within six months pay a dividend and in some cases execute a sale," he says.

This describes the dream-like environment that allowed Blackstone Group to earn four times its initial investment in the chemical company Celanese in nine months, sent Kohlberg Kravis Roberts on the way toward tripling its outlay in PanAmSat since August and let Bain Capital enjoy a 30% return in a humble Canadian phone-book printer in four months.

Analysis and Commentary: This article in Barrons supports the basic reality that "private equity" firms like Texas Pacific are nothing more than leveraged buyout firms (LBO's) in disguise in which the bulk of their profits are simply debt piled onto purchased entities, the proceeds of which go directly into the Texas Pacific's pockets in a relabeled form they call "profits."

2005 March 13, Enron: The power and the story, by Jeff Baker, Oregonian

On July 26, 1996, a pumped-up Ken Lay spoke to about 1,000 employees of Portland General Electric. Enron had just announced its plans to merge with PGE, and its CEO wanted everyone in Portland to feel as good about the deal as he did. "We have started something today that everyone in the electric industry, and everyone in the gas industry, is going to remember for a long time," Lay said. "Lay was right, but not for the reasons he imagined," writes Kurt Eichenwald in "Conspiracy of Fools" (Broadway Books, $26, 742 pages). "With the merger announcement, events had been set in motion that, in time, would lead to Enron's first major crime."

Those crimes are detailed in Eichenwald's book, the most comprehensive -- and the most readable -- of the dozen that have come out since Enron collapsed late in 2001. Eichenwald, a reporter for The New York Times who covers corporate fraud, said Lay's comments in Portland came at a time when Enron executives were feeling particularly good about themselves.

"They were riding high," Eichenwald said from his office in Dallas. "They thought they had found some magic elixir for corporate success that would allow them to keep making huge profits forever. They didn't realize that by that time the wheels already were starting to come off. The company was so poorly managed that they didn't know what was really going on." This is one of Eichenwald's big themes: Enron did plenty of crooked deals, but stupidity and hubris finally brought it down. "They could have had twice as much crime and survived if they would have had half as much incompetence," he said.

Analysis and Commentary:  TPG's brand of hubris does not seem all that different than Enron's.  What is truly surprising, however, is that magnitude of their incompetence regarding key decisions, for example designating a public employee, OHSU President Peter Kohler, to be Chairman of PGE.

2005 March 13  Texas Pacific succeeded in uniting opponents, by Jeff Manning and Gail Hill, Oregonian

When Davis and his boss, David Bonderman, showed up at the news conference in November 2003 announcing the deal, with former Gov. Neil Goldschmidt and successful businessman Tom Walsh in attendance and onboard, many viewed it as a done deal. The city of Portland, which had sought to make a bid to buy PGE, appeared to have lost.

But Texas Pacific, for all its skill and experience, continually tripped itself up. It angered much of the Oregon Investment Council and gave birth to months of conspiracy theories when in October it successfully persuaded the council to authorize a $300 million investment with the firm. Diana Goldschmidt, Neil Goldschmidt's wife, was a member of the council, giving rise to accusations of self-dealing and conflicts of interest. Texas Pacific partners declined to comment for this story.

Texas Pacific's inability to come to terms with the PUC staff or any intervenor group may have been the buyout firm's fatal error. All three commissioners -- Lee Beyer, John Savage and Ray Baum -- were relatively new to their appointments and had never dealt with a merger application before. In late December, with all the evidence in and final review at hand, they were left to sort through 15 feet of documents and countless hours of testimony without a road map.

"Universally, from the start, we felt uncomfortable with the proposal on the table," Beyer said of the Texas Pacific plan. "We tried to figure out a way to do conditions, but we'd do one condition, then have to change another. Soon, you're rewriting the application. "In some ways it was very frustrating," he continued. "We finally said, 'We can't do this; it's not our job to do this.' " The commissioners began crafting the denial. Ultimately, they agreed with the business and consumer groups. The risks were too great, they reasoned, and the benefits to customers too small.

"Electricity issues used to be a calling card for Oregon," said Julie Brandis, legislative representative for Associated Oregon Industries. "We have these low rates. Come to Oregon. What the rate hikes did was it made people take electricity off the back burner. People paid attention to who was buying PGE because they knew it mattered now."

Analysis and Commentary:  An excellent article by Manning and Hill. It is good to see Manning and Hill collaborating given the unique demands of covering this situation. Manning is one of the Oregonian's lead "investigative" reporters while Hill has been covering the OIC PGE "beat."

2005 Enron holds PGE fate again, by Ted Sickinger, Oregonian

On Thursday, Oregon utility regulators emphatically rejected the Texas Pacific investment firm's offer to buy PGE. Immediately afterward, Enron said it needed to review the decision before deciding its new course. The company previously said it would distribute new shares of PGE stock to creditors if the sale to Texas Pacific fell apart. Such a move would enable PGE to change hands without a new round of state regulatory reviews. But Enron's creditors might balk, preferring cash from a sale to stock in a newly independent PGE.

One suitor came calling Friday when Portland Mayor Tom Potter telephoned Enron chief executive Stephen Cooper. Portland, like other potential public purchasers, could buy PGE without state regulatory approval. Potter said the call was short. Cooper told him that Enron is still under contract with Texas Pacific. The contract expires May 18. Until then, or until Texas Pacific walks away and releases Enron from the contract, Enron cannot negotiate with other bidders. "We agreed to keep communicating, and that was it," Potter said.

Meanwhile, Texas Pacific has 60 days to ask the Public Utility Commission to reconsider its decision or appeal the decision in court. It also could file a revised application. Enron and Texas Pacific declined to comment Friday.

When and if the contract is terminated, Enron can bargain with other suitors, according to testimony by Enron's representatives before the Legislature in January. Aside from the city, state lawmakers and a consortium of PGE customers and business leaders are considering rival bids.

The alternative for Enron, one that its bankruptcy judge has approved, is to distribute new PGE stock to creditors. According to Enron representatives, the earliest the distribution could take place is the fourth quarter of 2005. That gives interested buyers six months to convince Enron that a cash offer is preferable and doable in short order. "We think we have a window," said City Commissioner Erik Sten, who is leading Portland's buyout effort.

Dan Vidas, a bankruptcy attorney with Dunn Carney Allen Higgins & Tongue in Portland, said most creditors will likely prefer a sale because it would put cash in their hands. While most observers say PGE has a strong financial position, its stock might not immediately list on a public exchange, making it harder to trade. And its price might limp along as the Bankruptcy Court settles disputed claims and the company works out outstanding liabilities. On the other hand, a sale creates a finite pool of dollars, with none of the opportunity for growth that stock provides.

Potter said Friday that the city would have a lot of work to do before making any formal bid. It would need to hire new lawyers, financial advisers, bankers and engineers to structure a deal and investigate PGE's assets and liabilities. The city worked with investment banker Goldman Sachs in earlier negotiations. It had hired engineering consultant R.W. Beck. And it was working with law firm Ater Wynne until the firm dropped the city and signed on to represent Texas Pacific. Merrill Lynch is likely to try to woo the city, because the banker that previously advised the city has moved to Merrill from Goldman. Sten said the city would look for a legal team that brings deep experience in complex mergers and acquisitions.

All of the outside expertise would quickly get expensive. Sten and Potter said the city could discuss its options for a couple of weeks before needing to spend significant money, but the City Council probably would consider a resolution to authorize that spending in coming days.

No firm estimate of that spending is available. But Brian Doherty, a partner with Portland law firm Miller Nash who helped form a public entity in 2002 to bid on PGE, said the estimate of due diligence work back then ranged from $2.5 million to $4 million. Northwest Natural Gas Co., which also has tried to buy PGE, and Texas Pacific each spent far more.  "You need to be pretty serious about going forward," Doherty said.

If Enron doesn't sell the company, it will wait for the Bankruptcy Court to approve enough creditor claims to permit distribution of at least 30 percent of the new PGE stock. Enron then will distribute shares to holders of the allowed claims proportionately. The remainder of the stock would be held in a reserve for disputed claims and disbursed periodically as new claims are allowed. More than 25,000 claims were filed in Bankruptcy Court against Enron, totaling more than $800 billion. By January, the Bankruptcy Court had resolved about 10,000 of them for about $20 billion. Even in the event that stock is distributed to shareholders, the city and other interested buyers could make a tender offer for both distributed and reserve shares.

Analysis and Commentary:  Sickinger answers many key questions in this excellent article. So much of the coverage regarding TPG has seemed to lean on press releases yet here Sickinger flushed out many important detailed facts.

2005 March 11 Oregon Regulators Reject Utility's Sale to Buyout Firm, by David Cay Johnston, NY Times

Oregon's utility regulators voted unanimously on Thursday to reject a $2.3 billion bid by a private equity firm, the Texas Pacific Group, for the state's largest utility, saying the firm had "failed to establish" that the deal would be in the public interest.

The chairman of the Oregon Public Utility Commission, Lee Beyer, said that "the potential harms or risks" to customers of the utility, Portland General Electric, "outweigh the potential benefits." He said the financing of the deal, including $700 million of additional debt as well as concerns that Texas Pacific would own the utility only for a short time, were major factors in the decision.

The fate of Portland G.E. has attracted attention beyond Oregon, in part because it is owned by the Enron Corporation, now operating under bankruptcy protection. Indeed, it was the only energy-producing asset that Enron actually owned. But the deal has also been considered important as a test of whether private equity firms, which by their nature do not publicly disclose their finances, could win regulatory approval to buy utilities.

Oregon's governor, Theodore R. Kulongoski, issued a statement saying he would support any owner who ensured low utility rates and reliable service, a crucial issue for the high-technology industries that Oregon has attracted over the last three decades. A bill to ease the path for a public takeover is moving through the State Legislature in Salem. The commission would have no oversight role if the city acquired the utility, Mr. Beyer said.

An unusual alliance of corporate, consumer and environmental groups - often adversaries - opposed the deal. Only one major electricity customer, The Oregonian newspaper, supported the purchase.

The decision in Oregon was the se