Buffett’s new shareholder letter: Bankers’ advice biased toward earning fees

Berkshire Hathaway CEO Warren Buffett writes in his annual shareholder letter that bankers offer advice that is biased by the fees they might earn from transactions. 

By , Guest blogger

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    Warren Buffett talks to reporters before the start of a meeting with Berkshire Hathaway stockholders regarding the split Berkshire B shares.
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It hardly sounds like a groundbreaking realization from legendary investor and “Oracle of OmahaWarren Buffett. Of course, there is the rustic way in which he phrases it. As New York Times’ chief mergers and acquisitions reporter Andrew Ross Sorkin quotes, “Don’t ask the barber whether you need a haircut.”

Just as a woman with sharp scissors may urge you to go for an earlier than needed cut, Wall Street dealmakers eager for fees are going to push to get deals done.

From The New York Times:

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“Of course, acquirers often hire more than one banker to advise a board, to act as a check on the other. But all too often, both banks are given the incentive to recommend the deal.

“Since 2008 in the United States, in 131 of the 230 deals that were worth over $1 billion, the acquirer hired more than one bank, and in some cases more than five. Those banks were paid an estimated $3.3 billion for advisory services, according to Thomson Reuters and Freeman Consulting.

“The problem, as Mr. Buffett explained when I called him on Monday, is that the system is skewed. Companies are willing to pay advisers a supersize fee when they do a deal because then it is merely a rounding error, a tip on a lavish, celebratory meal.”

Sorkin refers to Buffett’s statement on bankers as “a bold suggestion that isn’t sitting well with the establishment.” Yet, that sounds like an overdramatization. It’s unlikely to impact Wall Street’s firmly entrenched techniques for squeezing “value” out of corporate America.  

You can make up your own mind on the matter by reading Andrew Ross Sorkin’s commentary on Buffett’s annual letter to Berkshire Hathaway shareholders.

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