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Berkshire Hathaway
Sympathy for the Greedy

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By EliasFardo
December 3, 2008

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Since I don't care if I am viewed as politically correct or not, I can make the following statement: I have sympathy for the greedy employees of the Bear Stearns, Lehman Brothers and AIGs of the world. I submit for their defense, their anti-thesis: Berkshire Hathaway. I see Berkshire as a witness for their defense, not their prosecution. Berkshire will survive this crisis while they won't because of its strong balance sheet and its fanatical, one-man risk control team. But even Berkshire with its AAA rating has been savagely buffeted in the stock market, has had its credit default swap-implied rating established at Baa3 - a full nine points below its actual rating - and has had its very survival questioned. If such craziness can be visited on the strongest, how do the weaker have any chance?

There has been a near total denial of the cause of this crisis. There are plenty of people willing to blame greedy executives, but few seem to be willing to account a total complicity. This crisis is over determined, or as a Buddhist would say, dependently originated. It is not just greedy executives as everyone from self-serving politicians to manic media personalities violently claim. The cause is greedy executives. The cause is also incompetent executives. But the cause is also an unsustainable rise in housing prices, cheap money from the Fed, excessive involvement and influence from the federal government in residential housing mortgages, credit rating agencies, mortgage brokers, lazy and greedy investors, wishful thinking home buyers, commercial bankers, investments bankers and bond insurers. The cause is all of them.

The abundance of causes has created an abundance of harm. The causes enable one another, creating even more damage than any one causes alone could inflict. If three years ago someone could have explained to Lehman Brothers just where in their operations they had crossed the line where their protection from a total market crisis of many causes had just escaped them, their uncanny understanding would insure them a very bright future indeed. Buffett was so concerned with the line he avoided even approaching it. But, when planning for the worst, just how much leverage is too much and how little equity is too little? This is where my sympathy originates. How does anyone recognize the line where things fall apart? And even if it can be determined, how does one successfully communicate that to the board? Buffett can hold to less leverage, more equity and less risk because he controls the company. Others lack that luxury. I doubt if anyone would have any success traveling to the major financial institutions in the world, showing them their line, and convincing them to keep on its safe side - requiring a smaller organization, substantially more equity, substantially fewer assets, and the resulting lower equity returns and earning per share such changes would require. They would see it not as toeing the line, but as towing a very heavy line indeed.

But beyond my sympathy, to the defense of Bear Stearns, Lehman Brothers, AIG and their fellow-travelers. All the finger pointers grossly underestimate how difficult predicting which causes will occur when, which causes will create other causes, and how they will all interact to form an even larger problem. When I listed the causes of the credit crisis, I mentioned basically first order causes. It gets even more difficult moving beyond first order causes to second and third order causes and second and third order effects.

Which brings me back to Berkshire. Even with Berkshire's exemplary financial strength, it was subject to a host of second and third order effects of the crisis. Its stock price plummeted, its earnings were hurt, it was subject to unfounded and inane rumors, it was attacked by short-sellers, its credit default swap-implied rate fell to a nine point gap and even its survivability was questioned. One might say that most of this is nonsense, but that is exactly the point. Even Berkshire suffered all this and more. So, if Berkshire with its rock-solid balance sheet and operations suffered so, how much more did the second and third order effects hurt the likes of Lehman Brothers? If credit default swaps on Berkshire's debt could be priced so out of whack, how much more so could the credit default swaps sold by AIG on mortgage CDSs be priced out of whack? If inane and unsubstantiated rumors about Berkshire's financial health could cause its stock price so much damage, how could a Bear Stearn's stock price and credit access stand firm against the same treatment?

So, my final question is this: Viewing how much mischief overall market conditions and rumor mongering and possible manipulation and all the rest have caused for a Berkshire Hathaway, can any of us really be sure how much of the ruin of Bear Stearns, Lehman Brothers, AIG and the like was do to the failure of its management to recognize and toe the line, and how much was do to the effect of things that were always beyond their control?