CNBC posted its Series of Warren Buffett interviews (seven in all; transcript prints at 47 pages). WB used "economic Pearl Harbor" to describe the free-fall we are seeing and predicted a 5-year workout. Key points the Oracle made: (1) by shoring up the money market fund and commercial paper markets in September 2008, the Fed saved the world economy from a complete meltdown; (2) the housing bubble's collapse triggered the systemic crisis, based upon mistaken beliefs as to the potential downside in housing prices--a mistake WB admits he made, along with everyone else; (3) rating agencies made the same pricing errors, for the same reasons; (4) FDIC saved banking, and can protect 7,000 banks & 1,400 other financial institutions today--in 3,600 bank failures since 1934, the FDIC has covered all depositors 100 percent, which is essential; (4) shareholders should not be protected, just depositors; (5) derivatives are dangerous but not evil--but excessive leverage created massive asset inflation, which now is deflating; (6) Fed margin regulations were circumvented by derivatives, with disastrous results; (7) from an investor perspective, there is more money to be made buying deeply depressed toxic assets than buying healthy assets on bank balance sheets; (8) mark-to-market accounting is generally good--better than letting companies imagine accounting values--but regulators should not force capital infusions based upon market-marked assets; (9) the stimulus plan will help, but longer term; (10) the "uptick rule" banning short sales when prices are falling is a good idea.
WSJ pundit Holman Jenkins dissects WB's asset mark-to-market analysis and distinguishes between using MTM for accounting disclosure purposes and for regulatory capital purposes. The former is laudable, the latter lethal--WB called it "gasoline on the fire in terms of financial institutions." Jenkins lays out his extrapolation of WB's thesis:
Mr. Buffett obviously understands where we are today, though it seems to elude many of those kibitzing about "nationalization," "letting banks fail" and other lagging notions. Since last year, our banking system no longer rests on capital, but on government guarantees. With those sweeping guarantees in place to protect their depositors and bondholders, banks now are able to earn princely spreads above their cost of funds, however questionable their balance sheets.
Banks will "build equity at a very rapid rate with the spreads that exist now," Mr. Buffett said. With the possible exception of Citigroup, he added, "the banking system largely will cure itself."
Notice he didn't call for subsidizing hedge funds to buy toxic assets. He didn't call for more government capital injections -- which are not merely redundant when comprehensive guarantees are in place, but positively destructive of the ultimate goal of moving back toward a system based on private capital.
Bottom Line. The overall lesson the Oracle divines in 2008--re-emphasized to him--is: "...the dangers of extreme leverage, whether it's on an individual basis or it's societal...[W]e want to err on the side, next time, of not allowing people to go on--or big institutions to get as unchecked on leverage as we have allowed them to do here recently."
The NY Post reports an excerpt from the CNBC "Squawk Box" interview:
"I've never seen the consumer or the Americans just generally more fearful than this," he said. "And you can get fearful very quickly, but you don't get confident, you know, in five minutes.
"Not only has the economy slowed down, but people have really changed their habits like I haven't seen," said Buffett.
Of the liar-loan set, WB had this to say--much in tune with Team 44:
"We're in a big war, and we're going to use money to fight it. The people that behaved well are no doubt going to be finding themselves taking care of the people who didn't behave well."
Where does that leave Team 44's budget projections for a rapid and robust recovery?
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