The American Spectator

Reader Mail

Should've Listened

9.18.08 @ 12:01AM

BUFFETT LINE
Re: Philip Klein's Warren Buffett Told You So:

In his otherwise interesting piece on Warren Buffett, Philip Klein notes in passing that conservatives "aren't generally fans of Buffett" because he's a "loyal Democrat" who supports higher taxes and, lately, Barack Obama. I certainly agree that Buffett's application of "simple Midwestern common sense to complex financial matters" is admirable so far as it goes. The trouble, for me (and perhaps for most other "conservatives"), is that such shrewdness doesn't go very far, and seems often to be tied to a peculiar moral obtuseness -- evidence of which is only faintly on display in public support for higher taxes.

The deeper trouble is the ethics on display in, for example, the creepy population control policies and politically correct educational systems supported by the generous "philanthrophy" of Mr. Buffett and his friend Bill Gates. Ambrose Bierce's famous definition of a philanthropist as a rich man who has taught himself to smile while his conscience picks his pocket doesn't quite measure up to the colossal smugness of Mr. Buffett's philanthropic vision for a better world. It is the vision of a geek moralist who has never thought deeply about any non-techie issue and has come to mistake his cleverness for wisdom.

Klein says that the "Oracle of Omaha" knows enough "to stay away from the latest fads" in the disposition of his shrewd investments. Too bad Mr. Buffett is not as deeply connected to literature and philosophy and theology as he is to the markets. His philanthropy might then be less faddish.
-- John R. Dunlap
San Jose, California

Mr. Klein is right, Warren Buffett told us so. He was right that current financial practices in the lending industry would one day cause a collapse. The reason: the world of financial lenders was not built on the bedrock of liquid, or even semi-liquid collateral, but upon the shifting sands of unsecured promises. As one promise went unmet, this caused another to slide away, then another and another and another. Until, like quicksand, everything sinks out of view. While people admire the man who is clever, it can be dangerous to be too clever. And the people running these institutions were clever. Clever enough to be able to walk away with millions while their investors end up with either squat or taxpayer money.

Oh, don't hold your breath for any criminal investigations or even official investigations or Congressional hearings. These financial institutions are too tightly connected to high ranking politicians, most especially Democrats.

Yes, we were warned. But no one in a position of power was going to do anything about it. They were all making too much money.
-- Michael Tobias

Really, now. The Wall Street Journal's editorial page has been harping on the problems at Fannie and Freddie for years. Why not give them some kudos? Further, the Federal Reserve board issued a study in 2003 (!) showing that the benefits of the taxpayers' guarantee went to the shareholders and management, not the homebuyers. As we all know higher leverage in good times means higher profits. With the implicit, now explicit, guarantee by the taxpayers, it was a classic "heads I win, tails you lose."

I have always been amused by Mr. Buffett's disparaging of derivatives. Insurance is, by its very nature, a derivative! Insurance happens to be the core of his investment empire. Are derivatives only good for him, but no one else?

The current mess is based on two things: excessive leverage and so-called fair value accounting, FVA, coupled with Sarbanes-Oxley rules. They reinforced each other as problems arose. FVA required firms to value their assets at the best price offered for them, or go to jail under the Sarbanes-Oxley travesty. Even if the securities in question were performing well, a low-ball offer became the market price. This caused firms to write down the assets. This writedown came straight out of capital. This is where leverage came into play. A firm leveraged 25-to-1, say, would have its capital wiped out with 4% writedown in its assets. Add into the mix the fact that banks' balance sheets are almost as opaque as re-insurance companies are.

To show how ludicrous the current situation is, consider the following: the total of subprime mortgage debt in mid-2007 was about $1 trillion. The announced write-offs are close to that. Does anyone seriously believe that the whole subprime mortgage market is going to default and that the underlying assets, the houses, will have zero value? This is the type of nonsense that FVA has brought us to.

I'm not trying to remove any culpability from the execs at these firms. They weren't forced to leverage themselves to the hilt. Also, it would have helped if they paid attention to what was going on down in the trenches. It appears they took the Barings Bank' management view: as long as accrual accounting showed we were getting richer, don't ask any questions.
-- James M. Mulcahy
Grand Island, New York

Thank you for "Warren Buffett Told You So" by Philip Klein. However, I have to disagree with his analysis to some degree. The derivatives involved in the current crisis, the Mortgage Backed Securities (MBS), are a very small part of the total derivatives market. Derivatives used to be called futures and options, which began life in the17th century Dutch Republic. They have been used extensively since then without causing any crises. Boone Pickens used derivatives in the mid-'80s to protect his company against falling oil prices. Southwest Airlines has used them to protect it from rising fuel prices. So I don't think it's fair to blame derivatives in general, or the MBS derivatives, either.

The author states in the article that "...financial firms lost sight of what they actually owned, and became overleveraged." That's the key -- overleveraged. The derivatives didn't cause firms to become overleveraged. That was a conscious choice based on the low interest rates from 2001 to 2006, a policy of the Feds. Unnaturally low interest rates cause many businesses to borrow too much. Then when the crunch hits, they have to unload that debt and some can't so they fail.

Remember that the current financial crisis began as a housing crisis. Homeowners became overleveraged and defaulted. They became overleveraged because they thought housing prices would rise forever. They didn't realize that the Feds had goosed the demand for housing with unnaturally low interest rates. When the Feds raised interest rates, demand fell along with prices.

Letter to the Editor

topics:
Taxes, Foreign Policy, Education, Trade, Barack Obama, Sarah Palin, Economics, Business, Islam, Abortion, Environment, Law, Iraq, Energy, Oil, Unions