Saturday, October 04, 2008

Warren Buffett Credit Crisis Primer

Whatever your opinion about the $700 billion bailout bill that became law yesterday, it's useful to know what knowledgeable proponents think about it. Few know as much or can communicate their views as clearly as the charming "Oracle of Omaha," Warren Buffett.

Buffett, of course, is chairman of Berkshire Hathway Inc. and one of the richest men in the world. He predicted the credit crisis in his 2002 annual letter to stockholders (starting at pdf page 12 and print page 13) -- well before most others:
[T]he parties to derivatives also have enormous incentives to cheat in accounting for them. Those who trade derivatives are usually paid (in whole or part) on “earnings” calculated by mark-to-market accounting. But often there is no real market (think about our contract involving twins) and “mark-to-model” is utilized. This substitution can bring on large-scale mischief. As a general rule, contracts involving multiple reference items and distant settlement dates increase the opportunities for counterparties to use fanciful assumptions. In the twins scenario, for example, the two parties to the contract might well use differing models allowing both to show substantial profits for many years. In extreme cases, mark-to-model degenerates into what I would call mark-to-myth.
Four days ago, Buffett spent an hour with PBS' Charlie Rose discussing the then-pending bailout bill. The full video of their lengthy conversation can be seen here. It is engaging but long, in no small part because of Charlie Rose's annoying verbosity.

Happily for you, that nearly one-hour video has been edited down to a little over 17 minutes (see below) that captures the essential dozen major points that Buffett wanted to make.

He favors the bailout bill but has no illusions that it is a panacea. He warns, however, that to work at all well, the Treasury Department must use its new authority not to "bail out" banks but to "invest" in them by paying mark-to-market prices for their toxic mortgage derivative portfolios.

Despite Buffett's sunny disposition and irrepressible optimism about the future of the country, he also warns that what lies ahead even if the bill works are more bank failures, rising unemployment, a falling dollar, severe inflation -- and, even now, the "possibility" of a depression.

Here's a choice for you. To understand what's going on you could choose, if you wish, to search the internet for the invariably insipid remarks of Northwest Florida's feeble congressman Jeff Miller, who voted against the bill; or, you could learn something by listening to the Oracle of Omaha:

3 comments:

Anonymous said...

We are screwed either way. Inflation and unemployment or depression and unemployment. As for Miller, I will be voting against him. As of this week my student loan was canceled. He only wants to help corporations with capital gains taxes.

Ranjit Mathoda said...

You may find my concise review of Buffett's conversation with Charlie Rose of interest: http://mathoda.com/archives/433

Anonymous said...

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Recently an insurance company nearly wind up....
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A bank is nearly bankrupt......filing chapter 11 protection.
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How it affect you? Did you buy insurance? Did you buy mini note or bonds?
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Who fault?
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They bailout trouble finance company, but they will not bail out your credit card bills…….Should they have use the bail out $$ to pump into all different industries instead ……You got no choice, and no point pointing finger but you can prevent similar things from happen again……
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Are you a partisan?
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Since the bailout already done, the question now is besides letting the economic back on track, what regulation should be done to prevent similar things from happen again…..

Eg.
The top management of the Public listed company ( belong to "public" ) monthly salary should be tied a portion of it to the shares price ( IPO or ave 5 years ).... so when the shares price drop, it don't just penalise the investors, but those who don't take well care of the company.....If this rule is pass on, without any need of further regulation, all industries ( as long as it is public listed ) will be self regulated......because the top management will be concern about their own pay check…… Instead of spending big money on hotel stay and luxury function……..Top management get monthly salary and director fee, while shareholders & investor get dividends….So those shareholder cum management get…..
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Whenever anywhere, anytime, there is election campaign.....We can use this to question your candidate there….. if you agree on my point, please share with many people as possible.... Finance and Media are the two only industries can shaken politics ( Maybe Hackers can ), please help to highlight also...

Also recently some comments say that Respectable Mr Buffet had start buying, yes, he started buying with guarantee return of 10% annually….. Do we individual investor had the same offer…. If yes, I will definitely join in and buy……and the institution will definitely wouldn't short of money if they offer the same terms to the individual investors..... When ever in the history previously did Mr Buffet claimed that he bought shares.....

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Blog
http://remindmyselfinstock.blogspot.com/
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Facebook, come and join as a friend and share with your friends…..
Remind.myself@yahoo.com

Eg:
Just image, Institution lent out the shares already, in their hand, they don't have any stock or shares already, but Institution know that in the market, there are those individual investor who borrow the share going to sell the stock, so Institution naked short also, because there is no restriction on those Institution that those stock or shares that lend out, cannot be trade by the institution at that moment.