I’m sure I’m in the small minority in thinking that Hamburg should be cuffed upside the head.
His letter accomplishes nothing good for Berkshire. He really has to learn to pick his battles. If he’s going back-talk his local cops, he should save it for when it really, really matters. And even then he should hold his tongue. The SEC’s letter stipulated a public (EDGAR) response, and also left the door open for a phone call. Grumbling should have been kept to the phone call, if at all.
In Berkshire’s world, the SEC are the local cops. We all know they are lazy, incompetent to the point of negligence, sensitive to criticism, vindictive, and petty. We also know that like all cops ‘they don’t make the rules, they only enforce them.’ Well maybe not regularly or consistently, but that’s their defense.
Complain prominently and publicly about the SEC’s heavy-handed treatment of your buddy Greenberg? Go ahead. See what happens when you ask them to give your own boy, Brandon, a little slack. Didn’t matter whether he was involved in anything, they ran him out of town with a vengeance for being at the scene. The cop tells you to tidy up out in front of the store, you don’t back-talk and think you’re going to get away with it - no matter what they’re getting away with across the street.
This ‘rule’ is nothing to us. It was almost never invoked until 2009, when it was dusted off and clarified. Its purpose wasn’t to cause grief to Berkshire, but to reign in companies who had taken ‘window dressing’ to an art form by selectively trading to maximize reported earnings, while their non-traded holdings withered. It took a near-disaster to get companies to own up that the market isn’t always wrong, and that just because you elected not to sell doesn’t mean your shareholders didn’t incur a loss. The SEC took a lot of heat for being asleep and not noticing while balance sheets crumbled. In response, they're trying to look tough.
So what if the SEC elected to enforce it on the model citizen? We can think it’s stupid, and stupidly applied, but it wasn’t written for us. However, we can set the example. Let the cops feel good that they ‘set us straight.’ The world will see through it. And meanwhile we'll best keep in mind that they aren’t going anywhere.
Anyway, it’s too late to do anything about the letter now. We’ll just have to wait and see what happens next time we want our cops to cut one of our people a break. I would have thought we'd have learned our lesson.
_________________________________________
The SEC is invoking a US accounting standard, albeit sporadically and unevenly.
The rule has been there for years. Prior to 2009 the interpretation was "absent an ability to demonstrate that a decline is temporary, the conclusion must be that the loss in value is other than temporary." (Wiley, GAAP 2006, p413).
More recently the rule has been strengthened a bit, to more clearly put the onus on the company to demonstrate that a prolonged impairment is not temporary. Time frames are still a bit vague, and there is no hard and fast formula (eg, 'trading at below-cost pricing for XX days triggers a charge'). But the burden now is clearly on the company to demonstrate that a depressed stock price is temporary. Unless we have some specific knowledge, why argue?
We can thank the SEC folks for being alert, bringing this to our attention, thinking of US shareholders' interests, doing good work for the world, blah, blah; acknowledge that 'that's what makes markets'; take the write-down; and say we think it's unnecessary and we hope the market eventually agrees.
If we want to protest, we should let Charlie rail against 'the accountants,' if he likes. But getting snarky with some SEC staff guy and his supervisor is just dumb. This 'we're smarter than you, so leave us alone' attitude always backfires. SEC staffers will bristle, anti-business types through-out government will take offense. Worst of all, the really bad actors in corporate America will happily line up behind Hamburg. That 'efficient market' line was a great put-down; let's see who else uses it.
Anyone who doesn't think that the SEC has a huge amount of clout, and that they use it capriciously and to their own advantage, hasn't been paying attention. They left Berkshire with that Gen Re cloud for several years longer than they needed to, far longer than warranted; that was entirely their choice. As for Brandon, Buffett himself was willing to personally vouch him, and they intentionally made an example out of the guy, though they couldn't seem to ever come with actual charges of wrong-doing. The SEC will torture GS for as long as it suits their purpose. As for us, we're in too many regulated businesses to be messing with these guys.
As for the accounting, this is akin to the derivative issue (but per GAAP, the write-downs are one-way). So what. We don't want to be the bad guys here. It costs us nothing, except a little humility, to set the standard for conservative reporting. (As with the derivative rule, there's no cash or tax consequence.)
The GAAP rules, by the way, explicitly say that the performance of the rest of the portfolio is irrelevant to write-down considerations for individual under-performers. Under current rules, we shouldn't even raise that argument.
If our problem is with GAAP, which it seems to be, then we should keep it with GAAP. Insulting the cop who stops you and just issues a warning for some technical offense is just plain dumb. Especially doing it in a public forum. If we don't like the rule, or think it is ambiguous, then we should take it up with the people who made it, not the people who are charged with enforcement - regardless of what we think about their competency.
The letter:
http://www.sec.gov/Archives/edgar/data/1067983/000119312510152905/filename1.htm
A link to the rule:
http://books.google.com/books?id=uw8R3ebIKNUC&pg=PA534&lpg=PA533&ots=9hjR_XweSN&dq=GAAP+wiley+long-term+asset+impairment+securities#v=onepage&q&f=false
---------------------------------
I found it curiously coincidental that the SEC saw fit to make the Hamburg January 11 letter public almost immediately before the Sokol incident hit the news. In retrospect the timing is just too close.
The real problem I have, though, is that Hamburg was not at all constructive. His letter was not addressed to anyone who had a hand in authoring the rule - only the people charged with checking that to see that it was being adhered to. If we don't like a rule, or think it should be better-defined, we should address the people that made it.
I don't at all agree that this is a somehow bad or terribly invasive rule that needs to be overturned, by the way. In needs to be better defined, and less ambiguous. But this was not 'the good fight'.
The distressing thing is that this is just one more unneccessarily self-destructive action. Poorly timed, as it turns out.
His letter accomplishes nothing good for Berkshire. He really has to learn to pick his battles. If he’s going back-talk his local cops, he should save it for when it really, really matters. And even then he should hold his tongue. The SEC’s letter stipulated a public (EDGAR) response, and also left the door open for a phone call. Grumbling should have been kept to the phone call, if at all.
In Berkshire’s world, the SEC are the local cops. We all know they are lazy, incompetent to the point of negligence, sensitive to criticism, vindictive, and petty. We also know that like all cops ‘they don’t make the rules, they only enforce them.’ Well maybe not regularly or consistently, but that’s their defense.
Complain prominently and publicly about the SEC’s heavy-handed treatment of your buddy Greenberg? Go ahead. See what happens when you ask them to give your own boy, Brandon, a little slack. Didn’t matter whether he was involved in anything, they ran him out of town with a vengeance for being at the scene. The cop tells you to tidy up out in front of the store, you don’t back-talk and think you’re going to get away with it - no matter what they’re getting away with across the street.
This ‘rule’ is nothing to us. It was almost never invoked until 2009, when it was dusted off and clarified. Its purpose wasn’t to cause grief to Berkshire, but to reign in companies who had taken ‘window dressing’ to an art form by selectively trading to maximize reported earnings, while their non-traded holdings withered. It took a near-disaster to get companies to own up that the market isn’t always wrong, and that just because you elected not to sell doesn’t mean your shareholders didn’t incur a loss. The SEC took a lot of heat for being asleep and not noticing while balance sheets crumbled. In response, they're trying to look tough.
So what if the SEC elected to enforce it on the model citizen? We can think it’s stupid, and stupidly applied, but it wasn’t written for us. However, we can set the example. Let the cops feel good that they ‘set us straight.’ The world will see through it. And meanwhile we'll best keep in mind that they aren’t going anywhere.
Anyway, it’s too late to do anything about the letter now. We’ll just have to wait and see what happens next time we want our cops to cut one of our people a break. I would have thought we'd have learned our lesson.
_________________________________________
The SEC is invoking a US accounting standard, albeit sporadically and unevenly.
The rule has been there for years. Prior to 2009 the interpretation was "absent an ability to demonstrate that a decline is temporary, the conclusion must be that the loss in value is other than temporary." (Wiley, GAAP 2006, p413).
More recently the rule has been strengthened a bit, to more clearly put the onus on the company to demonstrate that a prolonged impairment is not temporary. Time frames are still a bit vague, and there is no hard and fast formula (eg, 'trading at below-cost pricing for XX days triggers a charge'). But the burden now is clearly on the company to demonstrate that a depressed stock price is temporary. Unless we have some specific knowledge, why argue?
We can thank the SEC folks for being alert, bringing this to our attention, thinking of US shareholders' interests, doing good work for the world, blah, blah; acknowledge that 'that's what makes markets'; take the write-down; and say we think it's unnecessary and we hope the market eventually agrees.
If we want to protest, we should let Charlie rail against 'the accountants,' if he likes. But getting snarky with some SEC staff guy and his supervisor is just dumb. This 'we're smarter than you, so leave us alone' attitude always backfires. SEC staffers will bristle, anti-business types through-out government will take offense. Worst of all, the really bad actors in corporate America will happily line up behind Hamburg. That 'efficient market' line was a great put-down; let's see who else uses it.
Anyone who doesn't think that the SEC has a huge amount of clout, and that they use it capriciously and to their own advantage, hasn't been paying attention. They left Berkshire with that Gen Re cloud for several years longer than they needed to, far longer than warranted; that was entirely their choice. As for Brandon, Buffett himself was willing to personally vouch him, and they intentionally made an example out of the guy, though they couldn't seem to ever come with actual charges of wrong-doing. The SEC will torture GS for as long as it suits their purpose. As for us, we're in too many regulated businesses to be messing with these guys.
As for the accounting, this is akin to the derivative issue (but per GAAP, the write-downs are one-way). So what. We don't want to be the bad guys here. It costs us nothing, except a little humility, to set the standard for conservative reporting. (As with the derivative rule, there's no cash or tax consequence.)
The GAAP rules, by the way, explicitly say that the performance of the rest of the portfolio is irrelevant to write-down considerations for individual under-performers. Under current rules, we shouldn't even raise that argument.
If our problem is with GAAP, which it seems to be, then we should keep it with GAAP. Insulting the cop who stops you and just issues a warning for some technical offense is just plain dumb. Especially doing it in a public forum. If we don't like the rule, or think it is ambiguous, then we should take it up with the people who made it, not the people who are charged with enforcement - regardless of what we think about their competency.
The letter:
http://www.sec.gov/Archives/edgar/data/1067983/000119312510152905/filename1.htm
A link to the rule:
http://books.google.com/books?id=uw8R3ebIKNUC&pg=PA534&lpg=PA533&ots=9hjR_XweSN&dq=GAAP+wiley+long-term+asset+impairment+securities#v=onepage&q&f=false
---------------------------------
I found it curiously coincidental that the SEC saw fit to make the Hamburg January 11 letter public almost immediately before the Sokol incident hit the news. In retrospect the timing is just too close.
The real problem I have, though, is that Hamburg was not at all constructive. His letter was not addressed to anyone who had a hand in authoring the rule - only the people charged with checking that to see that it was being adhered to. If we don't like a rule, or think it should be better-defined, we should address the people that made it.
I don't at all agree that this is a somehow bad or terribly invasive rule that needs to be overturned, by the way. In needs to be better defined, and less ambiguous. But this was not 'the good fight'.
The distressing thing is that this is just one more unneccessarily self-destructive action. Poorly timed, as it turns out.
