By
Morgan Housel
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April 15, 2008
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"Lose money for the firm, and I will be understanding. Lose a shred of reputation for the firm, and I will be ruthless."
Those were the words Warren Buffett told Congress in the early '90s after a trading snafu with Salomon Brothers -- now part of Citigroup (NYSE: C ) -- caused him to step in as interim chairman.
Sure enough, Berkshire Hathaway's (NYSE: BRK-A ) (NYSE: BRK-B ) success has ridden on the back of its incredible reputation. In a corporate world tarnished with fraud from Enron to Martha Stewart, Berkshire has remained one of the industry's guiding lights when it comes to corporate responsibility.
That's why Monday's news that General Re -- one of Berkshire's largest reinsurance subsidiaries -- would replace its CEO after reports that federal prosecutors would fight for his ouster came as such a shock.
Joseph Brandon, the now-former CEO of General Re, will be replaced by current president Franklin "Tad" Montross. The move comes just months after four General Re executives were convicted of fraud related to an illegal insurance maneuver that artificially ballooned insurance titan AIG's (NYSE: AIG ) reserves by $500 million.
Buffett has an upcoming cameo on an episode of All My Children. Unfortunately, the inside of General Re is starting to look like a bit of a soap opera, too. Brandon, while not charged with a crime, is being associated with the insurance fraud after a postal inspector claimed one of the four former executives told now-departed AIG CEO Maurice "Hank" Greenberg that Brandon and Buffett wanted the defendant to be in on the action.
Prosecutors have not named Buffett as directly involved in the ordeal.
What does all of this mean for Berkshire? Probably not much. Buffett has half a century of pristine reputation under his belt, and it's unlikely that a case from which he appears so disconnected will tarnish that in any meaningful way. Berkshire's business model relies on decentralizing subsidiaries from Buffett's immediate supervision. With such a system in place, the inevitable bad apples that pop up shouldn't reflect negatively on Berkshire's commitment to corporate accountability.
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