
Warren Buffett explains the credit crisis to Charlie Rose - mathoda
http://mathoda.com/archives/433
======
swombat
Finally a bit of economic analysis that's actually worth upmodding, unlike the
"Bankruptcy is the answer" retardation.

Thank you for posting this, as off-topic as it might be.

I'm quite sure the comments will get overrun by Ron Paul supporters claiming
Warrent Buffet has a vested interest in the bailout, all the banks should be
liquidated, etc. Before you make that comment, please read this paragraph
carefully:

 _Time is of the essence: “I mean, if Pearl Harbor came along, you could have
said the planning was wrong by the military ahead of time or maybe the
battleships shouldn’t have all been in the harbor and all that kind of thing.
… I mean, the job is Pearl Harbor. And you better not spends weeks and weeks
and weeks trying to assign blame or deciding on a complete plan for fighting
the whole war, you know, and letting a committee decide where the battleships
should go and all of that. You better spring into action with the best people
you have. … it’s very important that the determination of the US Congress to
do what is is needed be made evident this week and by the actions of most of
the members.”_

Blame, putting culprits in prison, figuring out how to stop this from
happening again, all this will come. But first you have to stop the economy
from free-falling into a depression. Priorities, people.

I'm not going to repost all my arguments about this, they're all already in
this other thread: <http://news.ycombinator.com/item?id=319646>

~~~
brianlash
I like the oracle of Omaha as much as the next ripe-from-college-finance-
student, but I can't side with the faithful teacher on this one.

Too many of us are calling this a depression where we should be calling it a
correction. That's not to say corrections aren't messy -- they are -- but it's
absolutely necessary if you're to return equilibrium to the markets. Til now
prices have been artificially inflated by interventionist government policy.
That's inefficient (it undermines the price mechanism) and it's unsustainable.

Government intervention isn't the answer. It might stave off a correction in
the near-term, but it can't stop a correction in the long-run. Better for
Washington to do nothing, which is to say, better to let the price mechanism
do its work and restore natural equilibrium to the markets.

And please be fair: The "Bankruptcy is the answer" argument is hardly
retardation (as you've put it). The article you're referring to captured the
opinions of 166 economists of the Harvard/Yale/Princeton/UChicago ilk. You may
not agree with it's conclusions but for God's sake man, don't call it
retardation.

~~~
run4yourlives
You can call it whatever you like, that doesn't mean a thing to the people in
the bread lines.

What people seem to be failing to understand is that the "near term
correction" is going to be huge, regardless of whether or not there's an even
bigger one in the future. We need to get through the first one to reap the
benefits of missing the next one.

Or, we can try to avoid the current concerns as much as we can, and use the
time we've bought ourselves to reform our system and negate the need for that
larger one down the road.

------
dpatru
Beware of geeks:

Beware of geeks with clever computer models: “I mean they had all these types
from Wall Street, you know, and they had advanced degrees, and they look very
alert, and they came with these — they came with these things that said gamma
and alpha and sigma and all that. And all I can say is beware of geeks, you
know, bearing formulas.”

~~~
adrianwaj
It's a good quote here by Buffet, amazing one can repost in the thread like
that word-for-word and cop 15+ Karma points for it. All the non-Geeks here mod
this one up?

Using Buffet's analogy, why bother innovating when one can just imitate? On
the extreme, the imitators resent the innovators and hate the idiots. The
innovators see the imitators as an unfortunate evil.

~~~
run4yourlives
I don't think you're quite understanding what he's saying there.

It's just a fancy way of saying the data can be made to support any opinion,
so beware of something that has all this data to back it up, but still smells
fishy on the surface.

~~~
adrianwaj
I sort of know what Buffet means. It's like in the late 90's with regards to
Long Term Capital Management hedge fund:

"At the beginning of 1998, the firm had equity of $4.72 billion and had
borrowed over $124.5 billion with assets of around $129 billion. It had off-
balance sheet derivative positions with a notional value of approximately
$1.25 trillion."

<http://en.wikipedia.org/wiki/Long-Term_Capital_Management>

Eventually most of this was lost within a few months of volatility caused by
events not taken into account by its computer models, and the fund was
ultimately liquidated, losing its investors much of their $1 Billion
investment.

The fund used models determined by some of the smartest around including
economics Nobel prize winners. This team background then enabled them to raise
a lot capital, which was subsequently extremely levered.

From how I understand it, another problem of LTCM (besides for the flaw in the
model not taking into account an extremely rare occurence) was due to the fund
venturing into different types of trades that weren't fully thought-out once
all the arbitrage opportunities ran out in the program's designated purview.

Another aspect of Buffet's hesitancy with "black box" trading can be found in
this hedge fund manager's interview:
<http://news.ycombinator.com/item?id=310284>, that is, the programmers doing
the modelling generally have the same type of educational backgrounds and thus
the trading patterns and performance of their 'boxes' are all similar, thereby
giving none a competitive advantage over the other.

At the end of the day, simplifying things, is it better to trust a brain and
its computer extension or just a brain? In Buffet's case, being the equivalent
in investing of grandmaster Garry Kasparov in chess, he sticks with his brain.
Anyone else might want to run with the computer if they can't get shares in
Berkshire Hathaway. I think LTCM were just very unlucky and a bit reckless,
but could have done very well, if only they had more conservative exit points
in winding up the fund.

But, the main gist of my previous comment was that it didn't add much to the
thread in terms of discussion, but rather just brought a point in the article
to people's attention. And just from that, I couldn't see all the mod points
justified. I guess this goes back to my style of modding which is: "I'll mod
this up or down, but only if it's under or over valued." ;)

------
adrianwaj
What do Warren Buffet, Paul Graham and Hugh Hefner have in common? Each buys
an undervalued asset at its undervalued price, sprinkles it with some fairy
dust and then sells it at a premium once the potential has been realized. One
does it with stocks and securities, the next with startup founders and their
ideas, and the last with women.

~~~
13ren
Except Warren doesn't sprinkle with fairy dust - or sell.

He does however buy good businesses at discounts to their true long-term
value.

~~~
adrianwaj
I am no Buffet expert but know he is a value investor and buying distressed
assets has been a way for him to obtain value. He likes to keep existing
management.

~~~
13ren
Yeah, you've got the flavour right.. although... he tends to not buy
distressed assets so much as assets that the market thinks are distressed....
a solid business (i.e. non-distressed) is very important to him. Maybe I'm
just playing with definitions, but here's an example:

American Express was guilty of fraud, and things looked really bad for them,
because their business is based on trust - surely their future bleak, thought
Wall St. Their stock price tanked (this is just the opinion of the market; it
may or may not correspond to reality). But Warren Buffett went down to the
supermarket, and observed people: in fact, they still trusted American
Express, in the operational sense that they still used it. The fraud didn't
affect Amex's business at all.

So he put half his wealth (or something like that) into it, and made a
killing... by buying a non-distressed asset at a distressed price.

And here, price is just another word for opinion.

Sorry to go on, I just like talking about it.

------
patrickg-zill
We know now, that the reason AIG was bailed out, is because European banks had
$300 Billion or more in credit protection, and that the Euro banks are even
more highly leveraged than US, Canadian, and British banks.

It was French finance minister Christine Lagarde who personally begged Paulson
to keep AIG going.

See:
[http://www.telegraph.co.uk/finance/comment/ambroseevans_prit...](http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3118994/Financial-
Crisis-So-much-for-tirades-against-American-greed.html)

My personal view is not that bankruptcy is the answer; just that it will be
the inevitable result.

The only question is whether a few large Wall St. firms will go bankrupt,
causing pain to many other financial institutions and governments, or whether
America itself will go near-bankrupt as a result of taking the losses on
themselves.

And no, I don't have a lot of respect for Buffett, ever since he fought the
inheritance (death) tax being repealed, which is after all double taxation,
and from which his company personally benefits.

His insurance companies make billions on pricy insurance sold to small and
medium sized business owners who are nearing the end of their life (you buy
the insurance so that when you die, the company does not have to be liquidated
in order to pay the IRS).

~~~
Retric
What double taxation, if you buy stock at 10$ and it's worth 100$ when you die
that _gain_ is never taxed.

~~~
patrickg-zill
I encourage you to actually know what you are talking about before posting.

If I have $1 million in cash when I die, my heirs have to pay taxes on that,
even though I paid taxes on it when I originally earned it. You cannot net out
the capital gains and just pay tax on that, everything is taxed.

~~~
jeremytliles
Your heirs didn't earn that money, so they're only paying taxes once. You pay
once for earning it, they pay once for "earning" it via your departure from
this earth. But presumably if you have lots of money, you've already set up
trusts, paid for college, given lifetime gifts, etc. so your heirs are already
pretty far ahead of the average person.

Seems like a perfectly good way to encourage at least a tiny amount of wealth
redistribution in a society where wealth is not very well distributed at all.

~~~
Retric
It could be setup like that but it's not. You don't pay capital gains at the
time of death and the people you give it to don't pay when they receive it so
only some of the money is ever taxed.

PS: The really sick thing is giving stock to a charity: "By doing so, you
never have to calculate gains nor list the sale as income on your tax return.
Moreover, if the stock was held more than a year (long-term gain), you get to
itemize the charitable deduction at fair market value on the date of gift."
(<http://invest-faq.com/cbc/tax-cap-gains-basis.html>)

To find out why this is messed up calculate what happens when you give 100$ to
charity now vs buying 100$ in stock that is worth 10x a much in 20 years. I
had an aunt who was audited and ended up getting close to a million back
because of this stuff.

------
jacobscott
Buffet + Rose = win

What to people think about Buffet's post-investment media presence? Is he
expending trust-capital by pushing for the bailout when he has $X billion
dollars freshly invested?

~~~
pchristensen
On the contrary, I think he's banking on the fact that many people are scared
but trust his judgment because of his track record. Sure he might profit from
the bailout, but he has also put up $8B and counting when everyone is worried
about liquidity. He's putting his money where his mouth is.

~~~
13ren
As Clinton said on Letterman, all the people that bet against America lost.
He's betting on America.

(I love that attitude and I'm not even American)

~~~
APLonDrugs
Or he’s betting that he will get to run the last two rolls of the dice at the
game of taking America by monopoly that he is playing, like a 11year old kid,
once they have boardwalk and park place along with most of the other important
ones, you can’t stop the game without a temper tantrum, maybe in this case one
will not be allowed to walk away from the game.

------
dejb
> The US government can borrow money very cheaply, and buy mortgages at fear
> driven low prices, which should allow it to make a profit from the rescue,
> if it buys at the market price:

Is anyone reminded of the concept of doubling down on your bet when they see
this? I guess it is strictly correct although I don't like the chances of the
goverment buying at market prices though.

------
comatose_kid
"And so you get what I call the natural progression, the three I’s: the
innovators, the imitators, and the idiots."

~~~
13ren
_Everybody just kind of goes along. And you look kind of silly if you
disagree._

It definitely is not easy to resist conformity, Buffett claims that his
ability to do this is one of the main reasons for success (he's a contrarian)

------
Luc
Hehe: "And all I can say is beware of geeks, you know, bearing formulas.”

------
kul
I’m irritated by this knee-jerk anti-bailout reaction (”$700bn to the fat
cats!”). Check this diagram from the BBC
([http://newsimg.bbc.co.uk/media/images/45062000/gif/_45062415...](http://newsimg.bbc.co.uk/media/images/45062000/gif/_45062415_wall_st_bail_plan_466_2.gif))

There is no $700bn going into some Wall Street bankers pockets. First off,
$450bn of this bailout money is conditional.

Also, see that arrow pointing from the Banks to the Gov’t? That’s a stake in
the banks being given to the taxpayers. So you’re not just losing money,
you’re gaining an asset, and the chances are, at a very good price.

There’s a chance the US Gov’t could end up making a profit out of the
situation when the housing market recovers, which it inevitably will. This
credit bust is definitely a mess, but this doesn’t mean there won’t be any
credit in the future. We need to think 5-10 years into the future. Things will
recover, they always do.

The closest thing to this I’ve ever studied were the currency crises that
happened in Asia in 1998 (indeed they were my savior in my final international
economics exam). The big lesson I learned was that self-fulfilling prophecies
can occur in the markets. If everyone loses faith in a currency, then it will
crash, even if nothing has fundamentally changed.

The same thing can happen with banks. If we think some are going to fail, sell
its shares, then we can help make it fail. So to counter-act that you need
some pretty aggressive action, and even if it isn’t perfect, people are
misunderstanding that doing nothing could be much, much worse.

If this credit problem is not solved and confidence restored, then it is easy
for the effects to spill over to the main economy. The worst would be for
otherwise healthy firms to stop receiving credit, be forced to lay people off
in a downturn, add to unemployment, and then just make the whole macro
condition worse for everyone. Credit plays a vital role in smoothing out
consumption and investment cycles - so the banks that facilitate this and are
otherwise healthy need to be backed up.

That's started happening in the UK
([http://www.telegraph.co.uk/finance/financetopics/financialcr...](http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3123736/Banks-
turn-the-screw-on-businesses.html)). If unemployment rises sharply, then
things will get really bad.

------
njharman
"People should always know better. I mean people people don’t get they don’t
get smarter about things that get as basic as greed and you can’t stand to see
your neighbor getting rich. You know you’re smarter than he is, and he’s doing
these things, you know, and he’s getting rich, and your spouse is getting
unhappy with you because you aren’t doing pretty soon you start doing it. And
so you get what I call the natural progression, the three I’s: the innovators,
the imitators, and the idiots. And that’s what happens. Everybody just kind of
goes along. And you look kind of silly if you disagree."

That is the "free market" at work. And why I shake my head in disbelief at
people who think/expect the free market solves problems.

------
ericwaller
He seems to be making the argument:

    
    
      1. The US government can borrow money at extremely low rates
      2. Purchasing mortgage-based securities at the current market price will eventually make you a lot of money
      3. So.. the government should leverage up and buy 700 Billion worth
    

This sounds awfully similar to the advice given to people buying homes during
the real estate bubble. "Buy the biggest house you can get a loan for.. it'll
be worth more tomorrow anyway, so you can just sell it and make money!"

------
spoiledtechie
Thanks for this post. I am glad to see that we aren't going into bankruptcy
any time soon.

Warren Buffett I feel knows money better than the teacher stuck up in a office
somewhere.

------
netcan
SO do all these economy guys not believe in not intervening in economies any
more?

~~~
byrneseyeview
Warren Buffett has been in favor of higher taxes and stricter regulation for
about four decades. So I guess "these economy guys" isn't a very useful
classification, at all.

------
qqq
he says that only the govt can buy lots of stuff right now, private companies
all need to back off.

but we saw an article here yesterday saying he just invested 8 billion in GE
and something else.

contradiction?

~~~
DougBTX
Yep, though resolved by his reminder that he doesn't have 800 billion sitting
around, and that he's one of the richest guys in the world.

