Back to Parish & Company Home Page

SOURCE:   Parish & Company
Copyright and Updated August 8, 2005

Note:  This page has is no longer updated and has been changed to the following 

                                     Berkshire Hathaway Attempt to Acquire PacifiCorp

Preliminary Review References  Analyzing Berkshire Hathaway's  Proposed Acquisition of PacifiCorp

Disclaimer Note:  The following references are taken from official public and media related websites.  Please do let me know if you see any errors to that they may be immediately corrected.  Much appreciated.

PORTLAND, Ore., --  Warren Buffett's Berkshire Hathaway subsidiary MidAmerica has submitted an application to acquire PacifiCorp, Scottish Power's largest subsidiary headquartered in Portland, Oregon for $9.4 billion.  The purpose of this reference summary is to document key news stories, SEC filings, Public Utility Commission filings and other references for financial analysts, journalists, utility regulators and other interested parties.  Following each reference will be a brief analysis and commentary section. The references are ordered by date and can be easily searches using key words. Although Copyrighted, all requests to reprint this information will be granted provided that this original source is cited.

Based upon an analysis thus far, Parish & Company will not support Mr. Buffett's proposed acquisition due to significant accounting irregularities at Berkshire Hathaway and the absence of adequate financial market controls given the recent repeal of the Public Utility Holding Company Act (PUHCA). Obviously Buffett is under considerable pressure given that his fund does not pay a dividend as Microsoft does, even though such dividends are now 50 percent tax free, and investors in his fund have an effective overall growth in assets since 1998, 7 years ago, of zero.

Also noteworthy is that Buffett's hometown is served by the Omaha Public Power District (OPPD), a well managed utility whose annual report can be accessed at

2005 August 8  Berkshire Hathaway Quarterly 10Q Filing

Berkshire Hathaway's quarterly 10Q report for the quarter ending 6/30/05 was filed with the SEC on August 5, 2005 and may be accessed via the following link:

The annual 10K report for the year ending 12/31/04 can be accessed at the following link from the same SEC maintained website.  Note that the annual report can be an excellent supplemental analytical tool given that it has more detailed disclosures.

If either of these links do not work, readers can go to the SEC site and see the reports listed on the following page. Note that selecting the HTML version is best.:

Analysis and Commentary:  A few highlights from the 10Q report include the following:

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 10K, see other report, 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 its 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.

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 Notes to Interim Statement 12, Printed Page 19.  Underwriting gains at General RE are only $43 million, prior to other expenses, again highlighting, in conjunction with this activity since 2001 that it is time for Mr. Buffett to write-off at least half of the remaining goodwill on the books from this purchase.  An amount that could exceed $5 billion.

6)  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


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.

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.

2005 August 3:  Official Response from Pat Hearn Regarding Ethical Complaint Filed Involving
Katy Durant (See July 31 listing)

Dear Mr. Broussard:

This is in response to your July 31, 2005 correspondence received by the Oregon Government Standards and Practices Commission (GSPC) concerning Katy Durant of the Oregon Investment Council (OIC).  Your correspondence alleges the following:

"Durant is in violtion of important state ethical rules for the following reasons:  it appears that her financial disclosures with yoru office wre not complete and she may not officially be a resident of the State of Oreogn.  In addition, as a commissioned real estate broker for Trammell Crow, one of the nations's largest publicly traded real estate development firms constantly intersecting with Oregon PERS $3 billion investment portfolio, this is a clear conflict of interest."

The information provided in your correspondence is insufficient for the GSPC to take action at this time for the following reasons:

1.  The GSPC has no record of Ms. Durant having ever filed "financial disclosures" with this office.  The only disclosure that a member of the OIC would file with the GSPC is an Annual Verified Statement of Economic Interest (SEI), which is filed only by persons who hold office on April 15 of each year.  It is my understanding that Ms. Durant was appointed to the OIC after April 15, 2005.

2.  The GSPC has no jurisdiction related to the residence requirements that may apply to various public officials.

3.  The existence of a given set of circumstances, such as Ms. Durant being a member of the OIC and also affiliated with Trammell Crow, does not create a conflict of interest under Oregon Government Standards and Practices law as set forth in ORS Chapter 244.  Conflicts of interest arise only when a public official takes action in an official capacity that could be or would be to the financial benefit or detriment of the public official, relative of the public official or a business with which the official or a relative is associated.

Your previous corresopndence will be kept on file and will be considered with any future correspondence that may be submitted by you.  Please do not hesitate to contact this office if we may provide furthur clarification or be of other assistance.

L. Patrick Hearn
Executive Director

Analysis and Commentary:  It seems remarkable that Durant, given the resignations of Diana Goldschmidt and Gerry Bidwell due to conflicts of interest, would not voluntarily complete the financial disclosure and make public whether or not she is a tax resident of Oregon or Washington.  Since this position was left vacant on the council for several months, it is most odd that just after the filing deadline she was added to the council.

2005 August 2 Portland Tribune, by Bill Parish, Wal-Mart buys help in utility bid

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

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:  TOne might ask, if the insurance regulators can barely understand this, how will the 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.

2005 July 31:  Complaint filed by Bruce Broussard Regarding Katy Durant's Participation on the Oregon Investment Council

Bruce Broussard
1863 North Jantzen Avenue
Portland, Oregon  97217
Tel:  503-701-0457


Patrick Hearn
Government Standards and Practices
100 High St., SE, Suite 220
Salem, OR 97301-3607
Phone: 503-378-5105

cc:  Christopher Cox, SEC Chairman

Dear Patrick,

In May 2005 Katy Durant began serving as a member of the Oregon Investment Council (OIC), the group responsible for managing Oregon's $60 billion in PERS assets.  Durant has significant conflicts of interest and should resign immediately.  Oregon PERs, the nations 8th largest pension fund, is not currently regulated by the Securities and Exchange Commission and therefore it is up to your office to ensure proper rules are followed.

Durant is in violation of important state ethical rules for the following reasons: it appears that her financial disclosures with your office were not complete and she may not officially be a resident of the State of Oregon. In addition, as a commissioned real estate broker for Trammell Crow, one of the nation's largest publicly traded real estate development firms constantly intersecting with Oregon PERS $3 billion investment portfolio, this is a clear conflict of interest.

State Treasurer Randall Edwards did commission a "best practices" review of the OIC, of which he is a member, last fall and it concluded there were no problems regarding the independence of the council, even though the newest member, Dick Solomon, did not disclose he had been doing OIC Chair Gerard Drummond's tax returns for 20 years, prior to being added to the council.  The public's perception is now that the OIC is an insider's club without adequate independence and oversight.

Unfortunately, Solomon made no effort to block Durant's participation on the council. He also lacks investment management experience and was directly involved in the decision to choose Oppenheimer over Vanguard as the key vendor for the Oregon College Savings Plan.  He and Treasurer Edwards, also on the college savings board at the time, in effect sold out Oregon's parents by leaving them with a much higher cost lower quality plan.  Although I am not suggesting Solomon should be removed from the council, it is clear now that he is not suited to be its Chair.

Remarkably, even though State Treasurer Edwards is fully aware that Durant is a broker for Trammell Crow, Durant's bio on the OIC's web site lists another firm. Trammell Crow is a top high profile real estate develoment firm involved in major projects all over the country and its own statement of ethical conduct on its website also clearly indicates Durant's participation on the OIC is not appropriate. One small example is that Tramell Crow was a key partner with Bechtel and Neil Goldschmit's consulting group in the development of Cascade Station here in Portland.

Enclosed is a Willamette Week article discussing this situation along with a copy of Trammell Crow's web page listing Durant as a commissioned real estate broker. The incoming Chair of the Securities and Exchange Commission is copied on this letter along with various local media in the event they wish to contact you directly.

Your immediate attention to this most important matter is requested, especially given that Chair Drummond's term officially expired on May 31, 2005 and State Treasurer Edwards does not appear fit to recognize even the most basic ethical standards necessary to maintain the integrity of this important organization serving Oregon's 300,000 PERS participants, including yourself.

Most appreciated.

Bruce Broussard

Analysis and Commentary:  See Hearn response in August 3, 2005 note.  It is interesting that the latter part of the complaint was not even recognized in the response.

2005 July 27 Oregon Investment Council (OIC) Monthly Meeting, Audio Transcript in Which Katy Durant called on to Resign

Today the Oregon Investment Council which manages Oregon's $60 billion in PERS assets, the nations 8th largest such fund, met and public comments were taken in which Bill Parish called for the council's newest member, Katy Durant, to resign due to controversy regarding inadequate financial disclosures, potential lack of Oregon residency for tax purposes and potential conflicts of interest as a commisisoned real estate broker for Trammell Crow.  Click here to here the two minutes of testinomy.  Note that the voice inquiring whether State Treasurer Randall Edwards was still participating on line is that of Chair Gerard Drummond. Here is the link and note that this is an MP3 file able to be read by most audio programs:: 20050727oicmeet.mp3

Analysis and Commentary:  None

2005 July 24  Repealing utility regs may drive up rates, by N. Nokkentved, Utah Daily Herald

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:  None

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:

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 ( is an independent fee-based investment manager who previously worked as a CPA and financial analyst.  See complete article at   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:

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:

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.

Analysis and Commentary:  Berkshire Hathaway is deep broad connections with most major investment firms and it should have been no surprise that they would be boxed out on their attempt to create a municipal utility.  city of portland had no chance, berk big deals with banks

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:

Analysis and Commentary:  None

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:  None

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

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 <> 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 <> 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,

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."

Analysis and commentary:  None


Bill Parish
Parish & Company
10260 SW Greenburg Rd., Suite 400
Portland, OR  97223
Tel:  503-643-6999  Fax: 503-221-3161