Pain from credit crunch richly deserved, says Berkshire
5:00AM
Wednesday May 07, 2008
Warren Buffett. Photo / Reuters
Billionaires Warren Buffett and Charlie Munger say the pain many financial institutions are feeling because of the credit crunch is well deserved.
The chairman and vice-chairman of Berkshire Hathaway said the financial companies that engineered sub-prime mortgages and the investment funds backed by those mortgages don't deserve much sympathy as they record losses now.
Buffett said the financial crisis is a byproduct of a system that encouraged executives to "paint pretty pictures".
Munger said lots of financial institutions acted with stupidity and overreached to improve earnings.
"I think you have to start with the idea that a lot of the current troubles are richly deserved," Munger said.
The complexity of the tactics that financial institutions often employ makes it difficult to determine what those companies are worth - even for Buffett.
He said if someone had US$1 million ($1.27 million) to invest in 10 stocks, it would be easier to find good values in the Korean stock market than among US banks because the banks are so complicated.
Buffett said he recently read a 270-page annual report that an investment bank filed with the Securities and Exchange Commission, and he had unanswered questions about 25 pages of the report. "They're cleaning up their act now to some degree because they had to," Buffett said.
Munger said he doesn't think investment banks spend enough time thinking about risk and ways to avoid it like he and Buffett do at Berkshire.
"We try to behave as if Berkshire stock was all owned by crippled relatives," Munger said.
Buffett said the pain isn't over yet for financial institutions, but he said nobody could predict how many more times banks would have to write down the value of their assets.
The largest US bank, Citigroup, alone has taken more than US$45 billion of write-downs and credit losses since June 30.
Buffett reiterated that he believes the US economy is in a recession by his definition, even if it hasn't yet met the commonly used criteria of two quarters of negative growth.
He said his definition of a recession is when most people and businesses are not doing as well as they were three, six or nine months ago.
- AP
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