Pious Buffett Should Heed Own Counsel

Arnold's top-dollar economic adviser is also a hypocrite.

Schwarzenegger's campaign to become California governor got a massive boost when Warren Buffett, CEO of Berkshire Hathaway (BRKA - commentary - Cramer's Take) and the possibly the world's savviest investor, agreed to serve as the Terminator's adviser on economic matters.

Buffett, estimated to be the world's second-richest man, has gained prophet status in the world of business by calling on corporate America to become cleaner, better governed and more transparent. Because of this towering reputation, people sit up and listen when he preaches on things like financial disclosure and corporate governance. Problem is, his own actions at Berkshire Hathaway do not match his words.

Perhaps because the returns have been so good, observers have tended to overlook the transgressions of Berkshire and Buffett. But topping the list of sins is an insurance deal Berkshire did that helped disguise serious problems at an ailing Australian insurance company called FAI.

Soon after the deal, Australia's largest insurance company, HIH, bought FAI, whose problems helped bring about HIH's dramatic collapse in 2001. While Berkshire's involvement in the deal with FAI did receive a small amount of press in the U.S., an Australian judicial investigation reveals in lurid detail the critical role that Ajit Jain, still a senior executive at Berkshire, played in the deal. In helping to hide problems at the failing insurance company, Berkshire arguably behaved like the big-name U.S. banks that set up dubious financings to help Enron doctor its books. Yet Buffett showered Jain with praise after his involvement in the Australian deal was reported, and is said to remain very close to the executive.

When asked for comment, Buffett's assistant said he isn't doing interviews. In a telephone message returning a call, Jain said, "This is a hot topic and there is a lot in the public domain." He declined to comment further.

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In keeping with TSC's editorial policy, Peter Eavis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback and invites you to send any to [e-mail].