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Stock Ideas Investors Daily Edge Waren Buffet's View What Caused the Financial Crisis
Stock Ideas Investors Daily Edge Waren Buffet's View What Caused the Financial Crisis 
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| Waren Buffet's View What Caused the Financial Crisis |
| Saturday, 04 October 2008 | ||||||||
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So here we are at the end of a frenzied week of debates, political polls and bailout mania. Thankfully, there’s been some great post-season baseball to distract us from the madness. That’s baseball’s beauty. For seven months, it’s always there. It’s like a serious relationship, whereas, to me, football is more like a series of first dates. When I risked taking my eye off a ball game to peer at the real world, I noticed some odd stuff going on. I wonder if you noticed any of it, too? Such as: This must be the worst-timed quote of this young century – in Contingencies, the magazine for the American Academy of Actuaries, Sen. John McCain wrote: Opening up the health insurance market to more vigorous nationwide competition, as we have done over the last decade in banking, would provide more choices of innovative products less burdened by the worst excesses of state-based regulation.” It’s like Dr. Frankenstein promising to fix his monster. That was my impression in the VP debate after the numerous times Gov. Palin promised that Sen. McCain would reform Wall Street and Washington. What does it say about the entire crew in Washington – every darned one of them – when the country turns to Warren Buffett for both fiscal and moral guidance… for a calming message. Thursday, CNN had a huge banner on its website touting a conversation with Buffett about the bailout. Fortune had a big story quoting Buffett on Thursday as well.
It’s ironic that Buffett’s view is so highly valued today. Five years ago his comments on the derivatives market – particularly credit default swaps – were roundly dismissed or ignored. If you remember, back then, Buffett called credit default swaps a “time bomb” and “financial weapons of mass destruction.” It’s why he insisted that the insurance arm of his Berkshire Hathaway get the heck out of the credit default swap business. So, I figure there ought to be a new law – a regulation – that people either take all of Buffett’s advice (right down to charitable donations) or none of it. The latter, by the way, are not allowed to quote Buffett, either. Wondering what a credit default swap is? That’s easy. It’s an insurance policy. One that promises to make good on defaulted mortgages. Deregulation allowed banks and hedge funds to sell the insurance on big packages of bundled loans. The problem was that they were great at collecting premiums but lousy at making sure they had the money to make good on their promises to pay if something went bad. Deregulation meant no one was checking them out. It is like you paying your homeowners insurance faithfully, your house burns down, and the insurance company doesn’t have the money to cover your losses. Now, imagine that same company covers your whole neighborhood… and a tornado hits… That’s what happened with the collapse of Bear Stearns, the fire sale of Merrill Lynch and the meltdown at American International Group. The housing crisis hit and they couldn’t make good on their promises to pay on defaults. In the end, those derivatives played a big role in the fall of each of these financial giants. There is a big difference between moral values, ethical values and political values. That must be why corporations, businesses and professions have codes of ethics or codes of conduct, and not codes of morality. I think the Lord uses good people and bad people use the Lord. Politicians go overboard campaigning on moral issues so that the electorate won’t pin them down on the ethical stuff. My pal Wayne Gilchrest, who won a Purple Heart as a Marine in Vietnam, is in his last days as a Republican congressman from Maryland. A bunch of dollar-uber-all Republicans – known as The Club for Growth – spent millions to unseat Wayne in the GOP primary, all because he stood up to slimy property developers who wanted to rape the Chesapeake Bay. The bay is a huge part of Wayne’s district. As a majoritarian, he was doing the will of the majority in his district that want to preserve the bay. But, the wishes of 200,000 people stood in the way of six guys who wanted to fill in a few thousands acres of shoreline and build, then sell, McMansions. Now that their fellow deregulationists have wrecked the economy… no one is buying houses or getting mortgages… you can only hope the guys who arranged the political demise of a superb nine-term GOP congressman are now sitting on acres and acres of worthless wetlands. After watching three hours of the House’s debate on the bailout bill I was left with the depressing image that most of our congressmen are barely literate rubes. Apparently, the aforementioned Rep. Wayne Gilchrest agrees with that. He was incredulous after last Monday’s House vote defeated the bailout plan. He told the Washington Post, that he was disgusted with colleagues who… “[D]on't understand the issues, who not only don't read the Financial Times, they have never heard of the Financial Times.” He also said: “We’re in this bad place as a country because of the evangelicals, the neocons, the nasty, bitter and mean… very clever ideological groups that use money, technology, fear and bigotry to lead people around. Voting according to your knowledge and experience, that’s out the window. Competence and prudence? Forget it.” But, as the Post noted, Gilchrest thinks there’s more to the economic problems that face the US than stupid politicians and venal moneymen. For, Gilchrest also said: “We’ve become a country that sits down in front of the boob tube and listens to people shouting about freedom, but now people equate freedom not with the acquisition of knowledge but with comfort. ‘“Give me my flat-screen TV, the gas-guzzling car, the goods made in China.’ The whole concept of freedom has become the idea of comfort, with a complete lack of responsibility. Maybe living in luxury diminishes the intellect.” Here’s what I think caused the financial crisis. Everyone on Wall Street and in Washington spent the early part of the century getting drunk every night… staying up late… and watching hours of real estate infomercials that make flipping sound so profitable and effortless. Have a great weekend. Andy P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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