Archive for March 2, 2009

Warren Buffett Says, “Beware of Geeks Bearing Formulas.”

And he, as usual, is correct. In his annual letter to shareholders, Buffett offers a mea culpa for Berkshire Hathaway’s losses in 2008: 

I did some dumb things in investments. … Furthermore, I made some errors of omission, sucking my thumb when new facts came in that should have caused me to re-examine my thinking and promptly take action.

He bet on the continued rise of oil prices, and he bought shares in a couple of Irish banks.

I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year. I still believe the odds are good that oil sells far higher in the future than the current $40-$50 price. But so far I have been dead wrong. …

During 2008, I spent $244 million for shares of two Irish banks that appeared cheap to me. At yearend we wrote these holdings down to market: $27 million, for an 89% loss. Since then, the two stocks have declined even further. The tennis crowd would call my mistakes “unforced errors.”

Besides all-too-rare straight talk from a powerful financial leader, Buffett’s letter provides insight into the practices and culture of the markets. Interestingly, while Buffett continues to say derivatives are dangeous, he outlines Berkshire Hathaway’s derivatives holdings, including the company’s involvement in credit-default swaps (CDS). Granted, when Buffett writes about them, the bets Berkshire has made seem safe. Buffett says he 

believe[s] each contract we own was mispriced at inception, sometimes dramatically so. I both initiated these positions and monitor them, a set of responsibilities consistent with my belief that the CEO of any large financial organization must be the Chief Risk Officer as well. If we lose money on our derivatives, it will be my fault.

Basically, Berkshire Hathaway’s premium receipts are yielding investment income that Buffett bets will exceed any payouts from derivatives losses. Fine. This sort of thinking is what makes the markets operate.

But he still doesn’t like derivatives (bold mine):

Derivatives contracts … often go unsettled for years, or even decades, with counterparties building up huge claims against each other. “Paper” assets and liabilities – often hard to quantify – become important parts of financial statements though these items will not be validated for many years. Additionally, a frightening web of mutual dependence develops among huge financial institutions. Receivables and payables by the billions become concentrated in the hands of a few large dealers who are apt to be highly-leveraged in other ways as well. Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease: It’s not just whom you sleep with, but also whom they are sleeping with.

Cue geeks with formulas. (After the jump.)

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Bill Kristol is STILL a Jerk

Just because he’s left the “New York Times” doesn’t mean that he’s learned his lesson. Take Kristol’s evaluation of Obama’s quasi-state of the union:

[Obama's] silent dismissal of the efforts of his immediate predecessors — he mentioned none of them — is only one indication of the extent to which he intends to be a new president breaking new ground in a new era.

George W. Bush defined his presidency by his response to the terror attacks. Obama didn’t discuss Sept. 11. And by relegating foreign policy to the status of a virtual afterthought, Obama indicated that he doesn’t think his presidency will rise or fall by the success or failure of his diplomatic or military endeavors.

Presidential addresses are not Mad-Libs. Nor are they checklists. At a time when economic concerns predominate, it shouldn’t be a shock for the President to choose one theme to emphasize, and one to leave for another time.

Kristol, like the rest of Bush’s Republican Party, clearly benefits from the eight years he spent honing the GOP message with precision, always appealing to just enough interest groups to get by, and expects the same of President Obama. America learned all too well, though, that the GOP’s scrupulous attention to style left no room for substance: Bush may have talked about the war on terror and the economy, for example, but didn’t seem to manage either very well. We should be thankful for a President spends his time governing, and not talking about it.