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Buffett and Munger Weigh In

Written By Brian Hicks

Posted May 9, 2008






Here’s the word on the ongoing mortgage mess from Warren Buffett and his partner Charlie Munger. 

It seems they are all for the creative destruction that capitalism sometimes visits on those who take big risks. This time is no different.

In fact, Buffet even said that, “Capitalism without failure is like Christianity without hell.”

I’ll let you ponder that one.

Meanwhile, here is the rest of what was on their minds in their latest interview.

From the AP by Josh Funk entitled: Lenders deserve to suffer, Buffett says.

“Billionaires Warren Buffett and Charlie Munger say the pain many financial institutions are feeling because of the credit crunch is well deserved.

The chairman and vice chairman of Berkshire Hathaway Inc. said Sunday that the financial companies that engineered subprime mortgages and the investment funds backed by those mortgages don’t deserve much sympathy as they record losses now.

Buffett said the current financial crisis is a byproduct of a system that encouraged executives to “paint pretty pictures.”

Munger said lots of financial institutions acted with stupidity and overreached to improve earnings in recent years.

“I think you have to start with the idea that a lot of the current troubles are richly deserved,” Munger said.

The complexity of the tactics that financial institutions often employ makes it difficult to determine what those companies are worth — even for Buffett.

“There are some financial institutions I can’t value,” Buffett said.

He said if someone had $1 million to invest in 10 stocks, it would be easier to find good values in the Korean stock market than among U.S. banks because the banks are so complicated.

Buffett said he recently read a 270-page annual report that an investment bank filed with the Securities and Exchange Commission, and he had unanswered questions for about 25 pages of the report.

“They’re cleaning up their act now to some degree because they had to,” Buffett said.

Munger said he doesn’t think investment banks spend enough time thinking about risk and ways to avoid it like he and Buffett do at Berkshire.

“We try to behave as if Berkshire stock was all owned by crippled relatives,” Munger said.

Buffett said the pain isn’t over yet for financial institutions, but he said nobody can predict how many more times banks will have to write down the value of their assets.

The largest U.S. bank, Citigroup Inc., alone has taken more than $45 billion of write-downs and credit losses since June 30.

Buffett reiterated that he believes the U.S. economy is in a recession by his definition, even if it hasn’t yet met the commonly used criteria of two quarters of negative growth.

He said his definition of a recession is when most people and businesses are not doing as well as they were three, six or nine months ago.

“I would say that we’re in a recession clearly,” Buffett said.”


Now that is a couple of smart guys.

No wonder they are billionaires.