Herzog's mother is a Sephrardi Jewess from Egypt. It is unlikely he is "racist" concerning Sephardim. In his talk with the US ambassador he reports Peretz's perception in the public's eyes, and the Labor voters were mostly Ashkenazi and more sensitive to Moroccan origins. Herzog mentioned a relevant point to the electability of his party chief. Sounds politically incorrect, but it was indeed a relevant bit of info for the evaluation for Labor's chances.
Clashes between IDF and protesters in Bethlehem and East Jerusalem (Reuters)
from the article: U.S. diplomat: I never heard Herzog say racist remarks about Peretz