Warren “The Oracle” Buffett and the War on the Economy

Warren Buffett a.k.a. “The Oracle of Omaha” was interviewed by CNBC yesterday via Becky (Not-so) Quick and Joe Kernan. The interview was apparently three hours long; however, I’ve only watched and quoted about 25 minutes of Buffett via the first two online videos on CNBC.com, listed below:

I have compiled some Buffett quotes from the first two videos and additionally will cite “Oracle” quotes compiled by John Hempton of Bronte Capital, as John’s quotes are clearly from one of the other six videos I have not seen. For a deep-dive into all things Buffett, CNBC has a full transcript of the interview from yesterday as well as all other previous interviews with Buffett. I’m not sure it’s a wealth of information, but it sure is a lot. Find CNBC’s Buffett Archive here.

A great deal of deference is given to Warren Buffett. After all, he managed to eek out steady, 20% plus returns via Berkshire Hathaway for decades. He has won over pundits, believers in efficient markets, and investors worldwide with his folksy charm. You don’t get a moniker like “The Oracle” for nothing!

Full disclosure, I am a former stockholder of Berkshire: I owned a paltry single B class share of Berkshire from 2003 to August 2007 and made a little off of it in the sale. I also use GEICO and have recently become a Wells Fargo customer (via the shell that was Wachovia). Further still, I was a bit of a Buffett junkie in year’s past. From a post on Warren Buffett over at autoDogmatic I made back in July of 2006:

He’s also a hero of mine. Ever since plowing through Roger Lowenstein’s Buffett: The Making of an American Capitalist and subsequently picking up The Essays of Warren Buffett: Lessons for Corporate America, only to go on to read Benjamin Graham’s The Intelligent Investor, I’ve recognized the Oracle of Omaha as an avatar for capitalism.

My take on Buffett has changed and changes still. Berkshire hasn’t been nearly as successful in the past decade: why is that? Has Buffett’s luck simply run out? I can’t help by reread a portion of my autoDogmatic post which included Buffett’s own analysis of his success — look at the bolded bit in the blockquote:

When Buffett announced that he would give his wealth to the Gates Foundation, he said the following:

We agreed with Andrew Carnegie, who said that huge fortunes that flow in large part from society should in large part be returned to society. In my case, the ability to allocate capital would have had little utility unless I lived in a rich, populous country in which enormous quantities of marketable securities were traded and were sometimes ridiculously mispriced. And fortunately for me, that describes the U.S. in the second half of the last century.

In light of what we have seen in recent years, is it not clear that bubbles have dominated the American economy over the past few decades? Commodities reached unprecedented highs in the 1970s. From there, we had a bubblicious double-decade secular equities bull market that began in the 80s and ended with the dotcom bust. Finally, our credit-based bubble economy blew what will likely go down in history as the greatest real estate bubble ever.

Buffett has assuredly been fantastically astute at picking up mispriced assets and he’s also a sort-of folksy philosopher regarding business; however, he also has been fantastically lucky. In the above quote, Buffett isn’t being merely honest, he’s being downright profound: his success was predicated on our finance-driven (“enormous quantities of marketable securities were traded”), bubbling (“ridiculously mispriced” assets) economic system!

Today, Buffett has been struggling to make use of the above one-two punch that served him so well. Even worse, he is starting to seem out of touch if not downright confused. Simply read a few of his quotes below. What should strike you most are his comparisons of our current situation to a war — even though the Obama Administration has yet to take a play from George W. Bush’s book (yet), Buffett has clearly decided that there is a “War on the Economy,” a war that must be won and we should all toe the line! Throughout his interview with Quick, Buffett analogizes the current credit crisis to Pearl Harbor. That’s evocative imagery that may stoke the flames of patriotism and may be appropriate in describing the direness of our current predicament; however, we are talking about banking and finance and not foreign invaders! Haven’t we seen the dangers and fundamental futility of waging a war on an intangible idea? For reference, just look at how things have turned out with the “War on Terror” or the “War on Drugs.”

Donald Ruffkin elaborates further on Buffett’s bizarre War analogy in his post Come on, Buffett! Here’s a quote from Ruffkin:

I noted then, as I will now, that it is disingenuous at best for Buffett to be calling this an “Economic Pearl Harbor”. (1) There is no external aggressor. (2) We are more like a drug addict or an alcoholic than a populus being attacked. (3) His metaphor implies we are not at fault – we just need to fight back against the force which is fighting us. In many, many ways this is not an appropriate metaphor. I understand that he is trying to convey a sense of urgency, and a need to put aside our differences to reach a good solution. But the gaping holes in the metaphor are so large that I am left with the impression that he is simply trying to scare us into following the prescription of Obama.

It would seem that not all out of the CNBC interview with “The Oracle” sounds as crazy as the war analogy. John Hempton of Bronte Capital’s transcript of a portion of the interview (the portion I did not watch) where Buffett discusses the toxic assets on bank balance sheets is worth discussing (See Hempton’s post here). For just a flavor of this discussion, here is Hempton:

[Buffett] says the problem of American banks are not overwhelmingly toxic assets. This is a radical view – but it is in my view correct. The problem with the banks is that nobody will trust them and they have not been able to raise funds. The view that this is a liquidity crisis – and not a solvency crisis – has long been a staple of the Bronte Capital blog. It is radical though. Krugman, Naked Capitalism and Felix Salmon think alike – asserting – seemingly without proof – that the problem is solvency. Buffett doesn’t even think the US banks (on average) require capital – a view that most people would find startling (though again I think is correct provided appropriate regulatory forbearance is given).

It is hard for me to be as sanguine about Buffett’s viewpoint as Hempton, and I question (as does Hempton via his post title!) whether channeling Buffett’s current prognostication is any indication of the insight or accuracy of one’s conclusions.

Quotes from Warren Buffett’s discussion with Becky Quick

Much, much more could be said about Buffett’s interview, but for the most part, many of the holes in Buffett’s remarks are so obvious that they need no discussion but I did emphasize comments worth further thought or questioning.

  • Well we went wrong originally because we had a belief that — everyone had the belief — I had it, the government had it mortgage lenders had it borrowers had it the media had it everybody thought house prices could go nothing but up and or at least they couldn’t go down a lot and once you had that belief and that was nationwide it didn’t make any difference what you lent on a house because if the guy couldn’t pay you’d sell it at a profit anyway or you wouldn’t lose much money. So you had 11 trillion of residential mortgage debt built upon this theory that who was borrowing and what their income was wasn’t that important b/c the house itself had to go up in price. And when that tumbled … a) it’s a huge amount out of people’s net worth and then secondarily all these instruments that were built upon it that people didn’t understand too well started toppling to various degrees in value and then that exposed other things … I mean it was like you know some kid was saying the emperor has no clothes and then after he says that on top of that the emperor has no underwear either!”
  • “If you’re in a war if we really are in an economic war if there is a obligation to the majority to behave in ways that don’t go around inflaming the minority . . . I think I think that the minority really does have an obligation to support things that are clearly designed to fight the war in a big way. . . . Job one is to win the economic war. . . . I would do no finger pointing whatsoever.
  • “We have a system, largely free market, rule of law, quality of opportunity that caused the potential of humans be unleashed . . . but the machine gets gummed up from time to time.”
  • “There was a paralysis of confidence in banks and which is silly now because of the FDIC. . . . If you don’t trust where you have your money the world stops. And they recognized that but it was a little belatedly and they didn’t put in deposit insurance until the start of 1934 with the Glass-Steagall act. We have a system that is far better organized to deal with that. The trouble is that a lot of people don’t believe in the system. . . . No one should be worrying about having their money in a bank in the United States.
  • Patriotic democrats and patriotic americans will realize this is a war; and if they didn’t realize it immediately, it’s not as dramatic as a physical war when the news comes over and you know you’re under attack; but it is virtually as serious and I think that once the degree of that seriousness becomes apparent to both parties overwhelmingly they will behave well.”
  • “We need clarity on the financial system.”
  • “The American banking system is too big to fail.”
  • “We have to deal with all large quasi-financial institutions as well as all of the banks and people can’t be worried about them and we can’t have a contagion like we almost had in September. The world almost came to a stop in September . . . We need to get banks back to banking. . . . we should not be giving lectures to people. . . . [Money]’s cheap its abundant and the spreads are terrific.
  • [In retort to Quick’s comment about whether Wall Street should be profitable given their involvement in creating the crisis] “Well the shipowners made money in World War II. [and nobody was questioning them]”

Additional Transcript from John Hempton

BUFFETT: Yeah, the interesting thing is that the toxic assets [of American banks is] if they’re priced at market, are probably the best assets the banks has, because those toxic assets presently are being priced based on unleveraged buyers buying a fairly speculative asset. So the returns from this market value are probably better than almost anything else, assuming they’ve got a market-to-market value, you know, they have the best prospects for return going forward of anything the banks own. The problems of the banks are overwhelmingly not toxic assets, you know. They may have been one or two at the top banks, but they are not going to do in–if you take those 20 banks that are subject to the stresses, they’re not going to do those banks in. Those banks have the earning power which has never been better on new business going out of this to build capital positions if they pay low dividends which they’re starting to do now.

JOE: Hm.

BUFFETT: Toxic assets really are not the problem they were. Now, when I said it was contingent–I didn’t remember being exactly contingent on TARP, but it was contingent on the government jumping in.

JOE: Right.

BUFFETT: The government needed to act big time in September, I will tell you that.

JOE: So…

BUFFETT: And they did act big time.

JOE: So you are OK with the shift to providing the banks with capital as opposed to the original intention of the TARP for actually getting the toxic assets off the books?

BUFFETT: Yeah, and interestingly enough, they don’t need to supply the banks, in my view, with lots of capital. They need to let almost all of–I mean, the right prescription with most of the banks is just let them pay very little in the way of dividends and build up capital for awhile, and they will build up a lot of capital. The government has needed to say–what the government needs to say is nobody’s going to lose a dime by having their deposits in these banks. They’re going to make lots of money with the deposits.

JOE: Hm.

BUFFETT: The spreads have never been wider. This is a great time to be in banking, you know, if you just get past the past and they are getting past the past. I mean, right now every time a loan is made to somebody to buy a house–and we’re making, you know, making millions of loans–four and a half million houses will change hands this year out of a total stock of less than 80 million. So those people are making good mortgages. You want those assets on your books and you get a great spread in putting them on now. So it’s a great time to be in banking, but you do have to get past this past. But the toxic assets, in my view, you know, if they’ve been written down to market, I’d rather buy those assets from the bank than any other assets they’ve got.

JOE: Hm. OK…

Post-script — In all seriousness, I think it’s time Warren consider laying off the Cherry Cokes (See my post on Ketones and Alzheimer’s) as he may be showing initial signs of senility. That’s a scary thing to say, and I hope it is not true, but after watching these interviews, hearing such a nonsensical war analogy beaten to death, and hearing Buffett blame the crisis on a symptom rather than a cause (bolded quote below), I’m starting to wonder.

One Reply to “Warren “The Oracle” Buffett and the War on the Economy”

  1. wow, lengthy diatribe there. but great write up.

    I think Buffett ever since he has gotten into politics has lost it. (wonder if other politicians have equally lost touch with reality/business skills).

    The fact that he so heavily invested into financials knowing we weren’t near the bottom of the market is a perfect example.

    In his position of influence he’s leading not only himself but thousands of other pawns into these investments. Those folks unfortunately don’t have 50 billion to lose. its a shame.

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