Wednesday, October 01, 2008

jimmy or warren?

"...I think I said one time that, you know, you only find out who's been swimming naked when the tide goes out. Well, we found out that Wall Street has been kind of a nudist beach." -Warren Buffet, CNBC Squawk Box August 22, 2008

I deserve to be laughed at. When I first heard the name Warren Buffet a few years ago, I said to myself, "Who knew that the guy that sang Margaritaville, was an investment genius?" I just read this long transcript from August 22, 2008 when Warren Buffet was on CNBC. He had some very enlightening things to say about Fannie Mae and Freddie Mac. I tried to find some video to post, but my googlizing skills failed me. My full notes are here. Below are a few excerpts that I found especially interesting, they are a little bit long but give me a break the transcript was from a 3 hour interview.

On patience and farsightedness:
"Well, I think in any personal activity, business activity or certainly governmental activity, you know, there should be--you should be thinking plenty about what happens down the road."

On regulators at Fannie and Freddie:
"Well, it's really an incredible case study in regulation because something called OFHEO was set up in 1992 by Congress, and the sole job of OFHEO was to watch over Fannie and Freddie, someone to watch over them. And they were there to evaluate the soundness and the accounting and all of that. Two companies were all they had to regulate. OFHEO has over 200 employees now. They have a budget now that's $65 million a year, and all they have to do is look at two companies. I mean, you know, I look at more than two companies. 
And they sat there, made reports to the Congress, you can get them on the Internet, every year. And, in fact, they reported to Sarbanes and Oxley every year. And they went--wrote 100 page reports, and they said, `We've looked at these people and their standards are fine and their directors are fine and everything was fine.' And then all of a sudden you had two of the greatest accounting misstatements in history. You had all kinds of management malfeasance, and it all came out. 
And, of course, the classic thing was that after it all came out, OFHEO wrote a 350--340 page report examining what went wrong, and they blamed the management, they blamed the directors, they blamed the audit committee. They didn't have a word in there about themselves, and they're the ones that 200 people were going to work every day with just two companies to think about. It just shows the problems of regulation."

More on Fannie and Freddie and their dual business goals:
"Well, how they got here was they had two businesses, basically. They insured mortgages on a huge scale, trillions, and then they ran sort of a hedge fund, a carry trade where they bought mortgages and borrowed extensively against them. And because they had really the backing of the United States government--and everybody assumed they had the backing. I assumed it. And the truth is they do have the backing of the United States government in terms of their debt, not in terms of their equity--they were able to borrow without any normal restraints in terms of capital or margin requirements or anything of the sort. They had a blank-check from the federal government. 
And they also had an added problem in that they had a dual mission. The government expected them to promote housing and the stockholders expected them to raise the earnings substantially every year. And as the years went by, they emphasized the latter more and more. They started talking about "steady Freddie," and Fannie Mae said, `We're going to increase the earnings at 15 percent a year.' Any large financial institution that tells you that sort of thing is giving you a line of baloney. I mean, they may do it for a while, but when they can't do it with operations, they do it with accounting and they cheat. And that's what happened at both those places on a huge, huge scale. 
And we have this--they're so wound up with national housing policy, that they're a national problem and, with this dual situation, you know, Lincoln said a house divided against itself, you know, must fall. And they existed half-slave, half-free for a long time, and then the motivations became in conflict, and when they got on the 15 percent a year merry-go-round and said, you know, `We're going to deliver earnings up every quarter, and we'll meet them to the penny,' when they can't do it operationally, they do it with accounting."

On why he divested in Freddie and Fannie in 2000 or 2001:
“...it became so apparent to me that they were intent on trying to report quarterly gains to please Wall Street, and there are all--if you've got the government behind you and you can borrow money in unlimited amounts, you can report earnings for any given quarter that you want to. I mean, the chickens don't come home to roost till later. And the management was intent on that. They started doing things on the asset side they shouldn't have done, they made promises they shouldn't have made, and so we got out.”

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