Buffett and Goldman

I received a link to this write-up about the Berkshire Hathaway shareholders meeting from the Motley Fool:

Buffet defends Goldman? — Philip Durell, Inside Value advisor
I expected Warren Buffett to be on the defensive over the SEC’s civil charge and subsequent Manhattan U.S. Attorney’s Office criminal investigation, both of which accuse Goldman Sachs (NYSE: GS) of fraud. So I was stunned by his response, which I’ve paraphrased below:

I think the transaction has been somewhat misrepresented by the media. There were four losers in the Abacus deal, including Goldman, who lost about $100 million … We are often brought business and asked to insure bonds, but we don’t care who is on the other side of the trade. It could be Ben Bernanke or John Paulson for all we care. It’s up to us to decide whether we want to insure the bonds, and what premium we’ll accept. … No one should care who is on the other side of the deal.

(Those are my notes — not a direct transcript.)

At the press conference, Buffett and Munger went further, saying they had no problem with Abacus deal as laid out in the SEC’s complaint. Charlie Munger stated that Goldman had the greatest ability and morality among investment banks (faint praise!), and that jumping all over Wall Street’s best was stupid. Munger laid the blame for the derivatives mess squarely at the feet of the regulators, whose lax rules led to a dysfunctional system. He said it’s insane to blame an escaped tiger for its actions, when its poorly made cage and neglectful keeper are the real culprits.

I don’t think Goldman is as pure as Munger and Buffett’s comments suggest. True, Goldman wasn’t acting in a fiduciary capacity in the deal in question. And I agree that government and regulators’ constant railing against the banks is just an easy way to deflect public opinion away from their own culpability. Still, Goldman knew it was selling toxic waste. If the bank won’t hold itself to a higher standard, we should.

I agree with Buffett on this one.

Hindsight is 20/20.  Folks like Durell are looking back on this as if everyone knew how it would end (which is a feature of a Black Swan that Nassim Taleb writes about in his book of the same name).

They didn’t.

The proof of that is that Paulson was the only one making the bet that the mortgages were toxic.  Just about everybody else in the game was betting they were not toxic.

I can understand why hindsight is 20/20 on this one.  In retrospect it would seem easy to determine that lending money to people who can’t afford to pay it back would end badly.  But, that wasn’t the logic at the time.

The logic lenders used to take such little care in who they were loaning money to was that housing prices would continue to rise and they would be able to foreclose on a property if the borrower stopped paying and get their money back.

Today, we all know the flaw in that logic.  Then we did not.

Beating up Goldman now based on today’s logic, isn’t productive.

“Holding Goldman to a higher standard” is a nice-sounding platitude, but here’s who we should really hold to higher standards:

1.  Politicians – Politicians were the primary cheerleaders for lending money to people who couldn’t afford it.  They charged Fannie Mae and Freddie Mac with making this happen.  They thought spreading “the dream” of home ownership was good because they thought ownership bred responsibility and wealth.

They had it backwards.  Responsible behavior results in home ownership.  It turns out the traditional lending standards (good credit history, 20% down payment, stable income, etc.) were effective at filtering responsible people into home ownership.  Home ownership didn’t cause responsible behavior.

2. Borrowers – As explained in #1, lowering borrowing standards based on the idea that home ownership is good for everyone was the main mental model driver of the boom and bust.

But higher borrowing standards isn’t the only higher standard we should hold borrowers to.  We should also expect them to do their homework and be responsible for their own decisions.  These people put themselves on the hook for making payments they would very likely not be able to make and we try to let them off the hook by saying lenders took advantage of them.  Buck up.  Read the fine print.  Google it. Go to the library.  Ask your friends and family for help in understanding.  Don’t take the word of the talking heads on the tube or the lender trying to get you into the ARM.

When I bought my first home, I read books on owning a home and borrowing.  I learned the ins and outs of the different types of mortgages.  I chose to pay a higher interest rate at the time in a fixed rate mortgage to protect against the risk of mortgage payments that could go up with interest rates.

3. Lenders – Lenders caved to politicians desires and started essentially giving money away.  They did this because they thought they could recover the money from foreclosure and/or the government.  In the process, they were handing out crazy loans.  Prudence left the system.  No-docs?  Really?

Goldman is getting a bad wrap.  The media distortion of Goldman’s role amazes me.  It’s tabloid tripe.  It fits mainstream media’s narrative: Wall Street firms are evil.  Goldman is a Wall Street firm.  Ergo Goldman is evilSee.

But it’s wrong. It’s BS.  It’s like going after someone who sells hurricane insurance because there were no hurricanes that year.

Mainstream media should be going after the three parties listed above.   Goldman isn’t Darth Vader in this one.  Darth Vader in this one wasn’t an entity.  It was an idea.  It was the idea that people who had demonstrated irresponsible financial management were entitled to own a home.

Call them on their BS.  Ask them if they think home ownership for everyone is a good idea.  Ask them if they think traditional lending standards are a good idea.  Ask them if they’ve heard any of the people who supported the idea of home ownership for everyone come out and publicly admit that it turns out they were wrong.

I haven’t.


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