Courtesy of Scripophily.com — The Gift of History.
Rare specimen Class B stock certificate from Berkshire Hathaway Inc., printed in 1996.
building Berkshire into one of the largest conglomerates in history. Today, in
addition to an investment portfolio of two
dozen stocks worth more than $100 billion, Berkshire is comprised of 65 different
wholly-owned subsidiaries, nine of which
would be Fortune 500 companies standing
alone. The conglomerate is worth more
than $500 billion with a per share book
value exceeding $100,000 — marking a
20% compound annual growth rate from
Buffett’s assumption of control.
Berkshire’s Clayton Homes subsidiary
is the nation’s largest builder and financier
of manufactured housing, most sold to
lower income Americans. On Wall Street,
Clayton repackages substantial portions
of its loans into mortgage-backed securities. In 2008, investors in other securitized
mortgage loans faced steep defaults, due
to lax lending practices of originators
along with poor quality control during the
securitization process. But Clayton’s securitized loans fully performed, repaying all
principal and interest. It is not because of
customer credit quality, which is weak,
but because despite low credit scores,
Clayton only lends to borrowers on terms
they likely can repay — based on an examination of assets and income and without
escalating “teaser” interest rates.
Berkshire’s unique practices do not
always succeed. Take its aversion to middlemen in the acquisitions arena. Berkshire does not scout for deals but rather
“waits for the phone to ring,” as Buffett puts it. Buffett evaluates opportunities alone or with advice only from Vice
Chairman Charlie Munger, foregoing the
professionals that most companies hire to
conduct due diligence. While the practice
has generally yielded strong results, costly
mistakes have occurred, ranging from the
total loss of $443 million paid in 1993 using
Berkshire stock for a disintegrating shoe
maker to a $1 billion after-tax loss on debt
Berkshire staked in 2007 on a failed leveraged buyout of Texas utility companies.
18 FINANCIAL HISTORY | Fall 2015 | www.MoAF.org
Berkshire’s $22 billion 1999 acquisition
of Gen Re, also paid in Berkshire stock,
dramatized the pitfalls: unbeknownst to
Buffett when Berkshire bought Gen Re, its
underwriting standards had deteriorated,
its derivatives book had become bloated
and its exposure to catastrophic risks was
unduly concentrated. Without Berkshire,
Gen Re’s losses covering the 9/11 terrorist
attacks on New York’s Financial District
would likely have rendered it insolvent.
Consider Buffett’s trust-based philosophy of granting managers unbridled autonomy. While lauded within the company
and responsible for much of Berkshire’s
success at the subsidiary level, costly management shifts sometimes result. Costs are
revealed in several well-publicized CEO
departures, including multiple successive
resignations within