

"Basically, It's Over" by Charlie Munger - david927
http://www.slate.com/id/2245328

======
miked
From [http://seekingalpha.com/article/97158-goldman-sachs-
buffett-...](http://seekingalpha.com/article/97158-goldman-sachs-buffett-s-
the-milkman-and-he-always-delivers) :

"In the news yesterday, Goldman Sachs (GS) announced that Berkshire Hathaway
(BRK.A), Buffett's investing vehicle, will purchase $5B worth of perpetual
preferred shares with a 10% dividend being paid in return for exclusive use of
this capital injection. Not only does Berkshire get a dividend nearly double
that of Canadian bank issued perpetuals, but the holding company also receives
warrants to purchase $5B of common stock at $115 during the next five years."

So let's put it together.

* Buffett and Munger buy tons of stock in the above mentioned "casino".

* The casino loses big.

* Casino gets huge tax bucks from you and me to cover its loses and pay huge bonuses to itself.

* The tax money flows back to Berkshire via the holdings listed above, and form thence to Buffett and Munger.

* Munger writes folksy article damning "casino gambling".

For those who weren't aware, Buffett was a director of Goldman for many years.
You know, the years when all this latest crap was happening. The years when he
and Munger must have talked at least once a week. Those years.

EDIT: Buffett is the largest individual investor in GS, and was apparently
asked (on that basis) to join the board, but apparently never did. My bad. On
the other hand, his involvement in TARP is even worse that I knew:

From [http://www.mcclatchydc.com/2009/04/05/65496/buffett-
champion...](http://www.mcclatchydc.com/2009/04/05/65496/buffett-champion-of-
bailout-is.html) :

"Buffett's company, Berkshire Hathaway, hasn't received any of that federal
aid, but Berkshire, based in Omaha, Neb., owns stock valued at more than $13
billion in the top recipients of TARP funds, including Goldman Sachs Group, US
Bancorp, American Express and Bank of America, which analysts all thought were
in deep trouble before TARP was approved in October."

I'm a huge believer in economic freedom, i.e., the free market. I only wish
that most large businesses were. It's so much easier for them to rent-seek.

~~~
megaduck
All absolutely true, but note the lack of derivatives and hedges. The Goldman
transaction was a straight equity deal, with a big emphasis on dividends. In a
nutshell, it was a chance to squeeze one of the 'casinos' hard, while still
staying out of the whole CDO/default swap/derivative mess.

Both Munger and Buffett have a habit of stealing your wallet while telling you
you're an idiot for letting them do it. The article and the Goldman deal are
reflections of that attitude.

~~~
nandemo
Warrants are derivatives.

~~~
megaduck
If you classify options as derivatives, then you're right. However, if you use
that definition then the Berkshire/Goldman warrants are the simplest
derivative that I've ever seen.

The Goldman warrants are an option to purchase an additional $5 billion of
stock at $115 per share, any time in the next 5 (now 4) years. Basically,
they're a plain vanilla call option.

What's really interesting about those warrants is that they behave identically
to an equity purchase, only without the downside. Berkshire literally _can't
lose money_. Plus, if the warrants are ever exercised, then Berkshire simply
gets more equity. It never gets tarted up with default swaps and tranches and
triggers and all that crap. The deal is the complete opposite of the 'casino'
mentality that Munger is decrying.

So, yeah, you might be technically correct. However, you've also got to look
at the spirit of the thing.

------
joelhaus
Munger is clearly advocating for "the Volker Rule" and a middle of the road
economic policy when it comes to regulation (It's hard not to agree).

The finger pointing at Bershire here from self-proclaimed free market
advocates is bunk. In theory, we all benefited indirectly from TARP, they just
had enough foresight to position themselves to take advantage of the
opportunities presented by the turmoil.

It would also be nice to clearly differentiate Bucket Shops and Over-the-
Counter Trades. The concepts are very similar, but only one is legal. Anyone
have a good explanation?

P.S. The article is a good parable, but switching from the casino metaphor to
talk of actual casinos threw me for a loop.

P.P.S. Most _everything_ is a derivative. The problem is with counter-party
risk and transparency. Derivatives are not inherently bad.

------
chasingsparks
One of my discomforts with almost all economic arguments is the strong
partitioning of ideas. If you are free market, the government can do no good
and if you are "Progressive" corporations are evil. Munger is mostly above
this level of naivete, but not completely. He points out that government
spending is too high and that leverage can be too dangerous (i.e. gambling.)
However, he seems to be prescriptively mute on the former and favors
prohibition on the later.

The school of thought to which I am a recent entrant suggests a more
uncommonly (expressed) alternative. Keep all the gov debt and spending as low
as possible when times are good. Regulate to a minimum. When a crisis occurs,
the government should sometimes step in to stabilize a violently turbulent
system. (Sounds like Keynes, no?)

However, you don't bailout a company. That ruins the fabric on which
capitalism is built. The losers loose their money. An option is a derivative;
not all derivatives are options. Bailouts make all derivative speculation,
speculation in cheap options. Don't ban derivatives. Ban bailouts.

~~~
fifi33
"If you are free market, the government can do no good."

Absolutely false, and I bet you can't name one scholar from Hoover who agrees
with you.

~~~
jbooth
Ok, how about this phrasing,

"If you're a scholar from Hoover, you'll write dozens of articles a year
castigating government involvement in the marketplace as a general idea, while
never, ever, once writing anything that praises government action [unless
maybe if it was government action by a republican]"

~~~
anamax
If that's actually true, you could have provided examples.

Feel free to tell us how many such articles you've read. No, reading articles
about such articles doesn't count.

------
JesseAldridge
So what's going on with bank reform, anyway? I haven't really kept up. I
distinctly recall Bernanke saying, "too big to fail has got to go" around the
time of the bailouts. Yet I haven't heard much about progress on that front...

~~~
asmithmd1
Good question. Since the Government bailed out the banks that were too big to
fail they have midwifed the merger of a couple of those banks so the banks
that were too big to fail are now even bigger.

~~~
jrockway
And then they made enough money to pay the government back.

~~~
asmithmd1
Yes, government backed trusts can make lots of money - see: railroads and
phone system.

That does not mean that is the best state of affairs for most other
businesses. I am pro free-market competition, but the trouble is most big
businesses are not.

Do you seriously think it would have been a good idea to have exactly one
phone company in the US during the dot com boom? Can you imagine how long it
would have taken to get a T1 provisioned from Ma Bell? Instead because the
government sued AT&T and broke them into 7 smaller companies and forced them
to open the CO to competitors we had many companies to choose from.

I say companies should be able to do whatever they want as long as they are
small enough to fail - i.e. I am not on the hook for paying off their bad bets

------
Tichy
Proof by fiction is even worse than proof by anecdote.

~~~
megaduck
I wouldn't dismiss this piece out of hand. As co-captain of Berkshire
Hathaway, Charlie Munger's got a pretty good window into the global financial
system. Both he and Buffett have a pretty folksy manner, but behind the
goofiness is usually some razor-sharp analysis.

To make it more palatable, substitute 'United States' for 'Basicland', and
'investment banks' for 'casinos'. Then it becomes a pretty accurate picture of
our current situation.

~~~
Tichy
I got the analogy, and the story may or may not be accurate. I have heard the
name Charlie Munger before, but I don't know what he stands for. I just don't
like the general approach of convincing readers with fiction. It appeals to
the subconscious rather than logic. I prefer logic in such matters.

~~~
timr
_" I just don't like the general approach of convincing readers with fiction.
It appeals to the subconscious rather than logic. I prefer logic in such
matters."_

The idea behind a parable is to encourage you to think for yourself, not to
explicitly convince you of an argument.

~~~
Tichy
Maybe, but it is a deception, because the setup is given by the storyteller.
So if you think for yourself, you do so with the assumptions given by the
story.

I still think it is simply a device to sway people's opinions. Otherwise, why
not just give some condensed facts about the real world?

~~~
tdoggette
You're opposed on principle to _rhetoric_?

~~~
Tichy
Am I supposed to like rhetoric?

~~~
halostatue
Like? No. Understand and be able to use, because it makes a lot more sense to
a lot of the people on this Earth? Yes.

~~~
Tichy
So you basically agree that it is designed to sway the opinions of people who
don't like to think hard about what they hear?

Another place I know parables from is the bible. Does that mean I have to be
religious?

~~~
halostatue
No, I don't agree with that proposition at all. Rhetoric is something you
don't have to like, but to dismiss it entirely as you have done in this
subthread is to do a disservice to yourself. I happen to find rhetoric
fascinating, as it has to do with human communication and interaction.

If you've ever given a presentation, you've performed rhetoric (the art of
using language to persuade). If you've presented based on measurable facts,
you've still used rhetoric. (Indeed, without using other language to help
organize and interpret the facts at hand, it's very easy for facts to be used
to confuse an issue.)

Parables are rhetorical devices usually used to illustrate a moral _or_
religious lesson. Yet, they can also be used to illustrate other lessons, too.
A quick search for "secular parables" resulted in the "Parable of the broken
window" as a lesson to be learned about economics.

    
    
      http://en.wikipedia.org/wiki/Parable_of_the_broken_window

------
chrisbolt
Dupe: <http://news.ycombinator.com/item?id=1144930>

~~~
cookiecaper
Is there much point in pointing out a dupe if there is no discussion on it?

~~~
fnid2
This problem has to be solved by pg, or whoever maintains the code here. It's
really too much to expect users to review all posts to see if what they want
to submit has been submitted before. It's also too much to expect that there
is only one url to the same content.

~~~
paraschopra
URL detection isn't as trivial as it sounds - lots of edge cases
[http://visualwebsiteoptimizer.com/split-testing-
blog/challen...](http://visualwebsiteoptimizer.com/split-testing-
blog/challenge-realtime-url-matching-how-we-do-it/)

~~~
Nwallins
I wonder if you could do a quick content check -- something along the lines
of:

    
    
        Run the content through the "Readability" filter (http://lab.arc90.com/experiments/readability/)
        Hash the first N paragraphs
        Compare the hash on a submitted article to all hashes from that domain

------
pnelly
good article, how can a system based on greed, corruption, and imaginary
wealth survive? The U.S. has concentrated less and less on production and
innovation, and needs to refocus it's efforts it it's going to get out of this
hole. Energy is a great example of where production and innovation is now
needed, and could revive the U.S. Economy. I hope this comes to pass.

~~~
nazgulnarsil
not trying to single you out, but your post is a good example of the type of
rhetoric that i dislike on economic subjects. "feel good" statements about
greed and corruption discourage the kind of dispassionate analysis we actually
need.

~~~
hga
I'll go further: all economic systems are based on greed and corruption
because those are parts of human nature. The question is how to you harness
the former and limit the latter. We seem to do a _very_ good job with both
when compared to the rest of the world.

In terms of the bottom lines of economic growth, standards of living and
employment, again, we do much better than the rest of the world (I'm not going
to count the special case of China emerging from decades of communism,
returning a billion plus people to the world market is a one time thing ...
and their recent grow should be weighted against how much they lost
economically during the previous period).

~~~
akadien
I'll go even further: all economic systems are based on _greed_ , of which
corruption is a manifestation, and _fear_. Those are the two basic emotional
responses to finance, and the basic question is how do you not fall prey to
mental errors because of them. And in too many cases, people use numeracy to
force others into making mental errors because of those two basic human
emotions, not to mitigate against them. I've started an open blog at
financialpreparedness.com to rant and rave about this and other sorts of
things.

~~~
anamax
>I'll go even further: all economic systems are based on greed, of which
corruption is a manifestation, and fear.

Lots of things are manifested as greed, many good.

You also forgot envy.

I'm being greedy when I'm worrying about what I've got.

I'm being envious when I'm worrying about what you've got.

I claim that envy causes far more problems than greed.

~~~
hga
You need to go further:

Jealousy is where you're thinking of what the other has and you want it.

Envy is the same except you know you can't get it.

Since envy gives _no one_ a (material) benefit, whereas greed gives one or
both sides benefits, yep, it's absolutely the worst. Of the 7 deadly sins,
envy is the only one without any direct reward.

