Don't Blame It On The Sunshine, Don't Blame On The Moonlight, Just Blame It On Merrill

Here's an article to really, really, really cheer you up. Hey, it's really, really, really, really that good. Says me. :D

Blaming Merrill Might Set Goldman Sachs Free: Michael Lewis

• Commentary by Michael Lewis
  
  May 12 (Bloomberg) -- To: Lloyd Blankfein Re: Winning at Ethics, the Goldman Way
  
  I have reviewed no less than seven times your entire episode on Charlie Rose.
  
  Your artful simplicity, studied humility and former hairline all positively radiated against the set’s dark background.
  
  As one of my lesser colleagues on the desk marveled, “Lloyd seemed almost human: Why?” To which I replied, evenly: “because he finally read my last memo.”
  
  Of course there was no reason you should look to one of your own traders for advice. But now that you have, we must proceed quickly. American public opinion is volatile; our exposure to it is peaking, and it will be more difficult than usual to create the illusion for American mortals (or as we like to call them, “The Morts”) that our business is in their interest, much less that we share anything in common.
  
  This time, please, do not wait five months to internalize my new action items. They are:
  
  No. 1: Implicate the rest of Wall Street, as quickly as possible.
  
  It’s always unnatural to hear the name of Goldman Sachs in the same sentence as Deutsche Bank, much less Merrill Lynch. We must put aside our revulsion. The American people might enjoy seeing one firm being driven out of business by a criminal investigation. They’re less likely to allow for the destruction of every big Wall Street firm. They just forked over trillions to keep them afloat.
  
  Delicate Decency
  
  This job of putting our behavior in a new context -- comparing it not to some broad universal standard of “decency” but to Wall Street standards -- must be done delicately.
  
  For example I was once hauled before a second-grade teacher and simply shouted, “You ill-paid, third-rate moron! I did nothing worse than what every other kid was doing! It is illogical not to punish them, too!”
  
  The outburst did nothing to alleviate my situation, and probably made it more difficult than it needed to be for me to gain entry to Princeton. But the episode taught me one of the central tenets of the Goldman Way: far better to rig a system than to fight it.
  
  Helpful Walks
  
  Our public relations staff might quietly and helpfully walk even hostile reporters through some of the deals created by these other firms. Ditto our lawyers in their meetings with the Securities and Exchange Commission.
  
  No. 2: Continue to use Warren Buffett, but don’t forget to pay him.
  
  When Warren said that stuff the other day about wishing you had a twin brother so he could employ you both, he didn’t mean it as a sign of his undying admiration for you.
  
  Remember: He said almost exactly the same sort of things about John Gutfreund, after Gutfreund had given him a sweet deal to rescue Salomon Brothers from oblivion. The moment Warren was forced to choose between Gutfreund and his money, he chose his money.
  
  Don’t force him to make that choice. If you want more loud character references from Warren Buffett (you do) you must insure that he continues to think of you as profitable.
  
  I don’t know if there are ways Goldman Sachs might simply give money to Berkshire Hathaway for free, but we should explore the possibility.
  
  Hide the Props
  
  No. 3: Hide, and hide from, the prop group.
  
  If you must be seen in public with Goldman employees, make sure they are bankers and brokers, and not our proprietary traders. You did an excellent job on Charlie Rose of making it seem the prop group didn’t even exist.
  
  We were mere “market makers” who helped our customers “get the risk they wanted.”
  
  At the same time, but for different reasons, you should limit your private interaction with the prop traders, especially Jonathan Egol.
  
  The SEC’s complaint focused on one of Jonathan’s Abacus deals and yet failed even to mention Jonathan. Instead they fingered the French guy.
  
  At first I took it as just another sign of Mort stupidity. But now that the Justice Department has gotten involved, and is combing through all the Abacus deals, I wonder. Why is no one yet talking about Jonathan? Why is no one making noises about the deals structured for Jonathan -- and not John Paulson -- to short them? Is it possible that Jonathan has been helping them to understand our business? Just saying...
  
  Our French Problem
  
  No. 4: You need to address our French problem.
  
  In a matter of weeks Fabrice Tourre has gone from non- entity to a potential asset (a “rogue trader” who might have gone quietly so that the firm might survive) to a huge liability (hero on Wall Street, who somehow has managed to portray himself as both a religious martyr and a mere cog in our machine.)
  
  Going forward I suggest that our personnel department reexamine the French male’s ability to subordinate himself. In English there is no “I” in team. It turns out that the French use a different word: equipe.
  
  Our international people should have known this. At the very least they should have been queasy about hiring guys who look as if they’d rather be wearing espadrilles.
  
  ‘Things Like Ethics’
  
  No. 5: Be careful not to say or do anything now that will constrain our ability, after this crisis has passed, to do whatever we want.
  
  The other day, on your emergency conference call with our customers, you said that you wanted Goldman to be seen as a “leader in things like ethics.”
  
  I couldn’t have put it better myself. If in the future we fail to be a leader in ethics we can point to your statement as evidence that we never intended to be a leader in ethics, merely in “things like ethics.”
  
  To that end, I intend to compile a list of things like ethics, in which we might strive to be a leader, without risk to our profitability.

Hmmm... so it's not the fault of the cow-pitalist cow eh? :P

Michael Lewis On Warren Buffett: The Master Of Money

A fantastic piece. Truly fantastic.

The Master of Money

I was sceptical at first for I remember reading before that Michael was never a fan. ( In the second last passage of this article, Michael does include the link to his past article on Warren).

And again, Micheal does have some rather tough and critical comments on Warren but despite of the comments, he acknowledges his admiration of Warren.

• There is now a long shelf of books about Warren Buffett, but this is the first time he has gone to any trouble to add to it. Reportedly Buffett now regrets his decision--he has apparently put some fresh distance between himself and his official biographer. If so, it's not hard to see why. Alice Schroeder is a former Morgan Stanley research analyst, able to understand and to explain Buffett's money-making, but she declined to confine herself to the business at hand. She has sought to describe Buffett's psychological landscape as clearly as his financial one. For the reader, the results are pretty terrific--there are not a lot of 838-page narratives that leave you wanting more--but for Buffett they are no doubt upsetting.
  
  Over his long and admirable career, the famous billionaire has been shockingly honest about who he is and what he does. Now along comes this first-time author who insists on seeing his pleasant honesty and raising it, painfully. Even worse: she's a woman! Buffett has a long and happy history of admitting attractive, intelligent women into his life, which Schroeder describes without mentioning how neatly she fits into the pattern. These women have invariably felt the need to shelter and to protect their man, and to subordinate their own needs to his--until now. Buffett should have known better: you should never completely trust a writer. Especially if she is any good.
  
  Begin, as Schroeder does, at the beginning. Born in 1930, the son of an emotionally abusive mother and a father whom he adored but who was unable to absorb the full shock of his wife, Buffett was emotionally problematic. In Schroeder's telling, the young Warren was sneaky, socially awkward, and generally a wiseass with a cruel streak. As a man he would reserve his harshest criticism for those who lied or cheated or stole, but as a boy he shoplifted pathologically--not because he wanted a particular thing, but simply for the pleasure of stealing. At ease in Omaha, he was unhappy everywhere else, and so he suffered especially when his stockbroker father Howard was elected to the House of Representatives and he became the new kid at middle school in Washington, D.C. He was young for his class. In the most important social departments, he started out well behind his classmates and, as he puts it, "I never caught up, basically." He had terrible social anxieties and, right up until the time he married, at the age of twenty-one, a special lack of talent with girls.
  
  In spite of all this he was deeply, ferociously competitive. Here is one of the odd things about the man whom Schroeder describes: the plain facts of his young character assemble themselves into something like a portrait of a universal loser--and yet right from the start Buffett himself seems to have been able to believe that the universe was wrong and he was right. What other people thought of him, and how other people measured him, did not prevent him from establishing his sense of himself as someone who might win. In his Washington, D.C. school (before he talked his parents into letting him return to Omaha) Buffett did well in only one class, typing. Here, in his own words, is how he went about it: "I made A's every semester in typing. We all had these manual typewriters and, of course, you'd slam the carriage back to hear this 'ding.' I was by far the best in the class at typing out of twenty people in the room. When they'd have a speed test, I would just race through the first line so I could SLAM the carriage back. Everybody else would stop at that point, because they were still on the first word when they would hear my 'ding!' Then they'd panic, and they'd try to go faster, and they'd screw up. So I had a lot of fun in typing class." (This, by the way, is how Schroeder incorporates Buffett's voice throughout her narrative--long italicized quotes woven into the body of the narrative. One measure of how lucky she is in her subject is how much interest there is in just flipping through the book from cover to cover reading only the italicized quotes. Buffett is apparently incapable of being dull.)
  
  The young Buffett's ambition found a number of conventional if implausible outlets--bodybuilding, for instance; he devoured books with such titles as Big Arms and Big Chest--and one strange one, at least for a little kid: money-making. At a shockingly young age Buffett learned the pleasure of having more money than his friends. To accumulate it he worked paper routes, bought and managed pinball machines, and created a horse-racing tip sheet that he sold at the local track. Upon arriving in Washington he asked his father to use his congressional status to request from the Library of Congress every book it had on horse handicapping. By the time he was sixteen, Buffett had accumulated the equivalent in today's dollars of $53,000, and hardly saw the point of taking the spot he had been offered at the Wharton School. He knew what he wanted to do for a living--live in Omaha and invest in stocks--but his parents prevailed and off he went to college. He lasted three years before he returned and finished at the University of Nebraska.
  
  One of the patterns that Schroeder teases out of Buffett's life--not just in his investments but also in his relationships--is his tendency to seek safe harbors. And yet once he has found safety, he isn't content to remain there. Instead he waits for opportunities to stage surprise attacks on the outside world. Omaha is his fort; the outside world is lucrative but dangerous, and Buffett never enters it without some cost-benefit analysis. But in 1950, after he read a book called The Intelligent Investor written by a pair of Columbia University professors named David Dodd and Benjamin Graham, Buffett didn't think twice. As his then-housemate says here, "it was almost like he'd found a god." When Buffett applied to the Columbia Business School, his application landed on the desk of David Dodd. Dodd brought Buffett to Columbia; Graham brought him into his investment firm.
  
  Like Buffett, Graham was instinctively non-conformist--even more so in his exotic personal life than his professional one. ("A Mount Everest for women who liked a challenge: they met him and wanted to climb on top," is how Schroeder oddly describes it.) Buffett--whose idea of a wild night seems to have involved reading Moody's Manuals in as many positions as possible--turned a blind eye to Graham's sex life to remain focused on his financial technique. Benjamin Graham was in many ways very different from what Warren Buffett was destined to become. Graham's experience of the Great Depression had instilled him with pessimism. He eschewed judgments about the future prospects of a company or an industry, and instead looked for bargains in the here and now--companies that were trading below the value at which they might be liquidated. Graham was "looking at businesses based on what they were worth dead, not alive," as Schroeder puts it. Cigar butts, he called these.
  
  Cigar butts obviously appealed to Buffett, but Buffett's investment career was destined to coincide with a very different period in American financial history. There never was a better time and place to make money from optimism than in the American stock market since World War II. Had Buffett confined himself to the gloomy business of plucking wet smelly cigar butts off the ground, he would never have become Warren Buffett. And Buffett was built differently than Graham. He had emerged from his childhood both a pleaser and an optimist. Dale Carnegie's How To Win Friends And Influence People apparently made a deep impression on him. When he looked at a company, he saw not just its asset value but also its possibilities.
  
  Buffett's first big bet was on a then obscure insurance company called GEICO. GEICO was not, by Graham standards, a bargain: it traded at a price above the value of its assets. But Buffett dug down into the business, saw how fast the company was growing, and, as Schroeder writes, "felt confident of being able to predict what it would be worth in a few years. ... A less Graham-like analysis could hardly be imagined. Graham's 1920s bubble and Depression experiences had made him suspicious of earnings projections. But Warren was betting three-quarters of his patiently acquired money on the numbers he had calculated."
  
  In retrospect it is hard to say whether the rising market created Buffett's long-term optimism, or Buffett's optimism simply found a lucky home in a rising market. It is hard, also, to say whether Benjamin Graham changed Buffett's life or merely gave him an excuse to do what he was going to do anyway. At any rate, Graham wound up being more of an intellectual pit stop than a destination. In 1956 Buffett moved back to Omaha, started his first investment partnership, and really never looked back. By 1960 he had made money grow at such incredible rates that "his name was being passed along like a secret." A dollar invested with Buffett in 1957 was 26 dollars by 1969, and he was taking no obviously wild risks. In no year did he ever lose money.
  
  In describing how Buffett's mind works, and why it is so well suited to his chosen career, Schroeder is particularly good. A shrewd evaluator of businesses and the people who ran them, Buffett turned himself, at a young age, into a kind of odds-calculating machine. As Schroeder puts it, "he tended to extrapolate mathematical probabilities over time to the inevitable (and often correct) conclusion that if something can go wrong it eventually will." This habit of mind informed not just his investment decisions but also much else--for instance, his obsession with nuclear proliferation. In Buffett's mind, it is not a question of if but when a nuclear bomb explodes in a big city, and the goal should be not to prevent it but to reduce the odds, and put the terrible day off for as long as possible.
  
  To his natural gifts as a bookie Buffett coupled an incredibly keen sense of self-preservation. He seems always to have been something of a physical and emotional coward. He is actually less wary in his financial life than he is outside of it. He avoids social conflict, unless there is money on the line, and also all sorts of new experiences. His long-time partner Charlie Munger likes to call Buffett a "learning machine," but there are whole swaths of human activity he actively resists learning anything at all about, such as the entire high-tech industry. He confines himself to the diet of an eight-year-old, refusing to eat anything much beyond spaghetti, hamburgers, and grilled cheese sandwiches. Schroeder describes a bizarre scene in which Katharine Graham escorted Buffett to dinner at the Manhattan apartment of Sony Chairman Akio Morita. Japanese chefs served plate after plate that Buffett left completely untouched. "By the end of fifteen courses, he still had not eaten a bite," writes Schroeder. "The Moritas could not have been more polite, which added to his humiliation. He was desperate to escape back to Kay's apartment, where popcorn and peanuts and strawberry ice cream awaited him. 'It was the worst,' he says about the meal he did not eat. 'I've had others like it but it was by far the worst. I will never eat Japanese food again.'" Buffett ate what he needed to eat to remain alive--and learned what he needed to learn to invest shrewdly.
  
  Finally, and most critically, Schroeder stresses Buffett's obsession with money, which he famously views less as a unit of exchange than a store of value. Kay Graham once asked him for a dime to make a phone call and Buffett, finding only a quarter in his pocket, went off to make change. In telling the tale of Buffett's rise, Schroeder returns over and over to his pathological stinginess. As rich as Buffett became, he never stopped measuring himself by how much money he had. He tells Schroeder that he pretty much measures his whole life by Berkshire Hathaway's book value, and the reader can't help wondering if that is ultimately how he measures other people, too. "He was preoccupied with money," Schroeder remarks. "He wanted to amass a lot of it, and saw it as a competitive game. If asked to give up some of his money, Warren responded like a dog fiercely guarding its bone, or even as though he had been attacked. His struggle to let go of the smallest amounts of money was so apparent that it was as if the money possessed him, rather than the other way around."
  
  Buffett's single-minded pursuit of money seems to have left him with little interest in anything else. His detachment from his children became a running joke in the Buffett family. Schroeder quotes a friend's description of the first Mrs. Warren Buffett as "sort of a single mother. ... He was so used to her attention and remained so undomesticated that once, when she was nauseous and asked him to bring her a basin, he came back with a colander. She pointed out that it had holes; he rattled around the kitchen and returned triumphantly bearing the colander on a cookie sheet. After that she knew he was hopeless." In the late 1970s Susie Buffett moved to San Francisco and pursued other relationships, and even told one lover that she would seek a divorce. In the bargain she persuaded her housekeeper back in Omaha, an attractive younger woman named Astrid Menks, more or less to replace her as Buffett's caretaker. Buffett apparently leapt rather more enthusiastically into this arrangement than his wife expected. "Susie herself was shocked," writes Schroeder. "This wasn't what she had in mind when she stressed to her husband that they both had needs. But it might have been predicted. Warren had searched his whole life for the perfect Daisy Mae, and whatever he wanted Astrid did: buy the Pepsi, do the laundry, take care of the house, give him head rubs, cook the meals, answer the telephone, and provide all the companionship he needed."
  
  Through it all, Buffett maintained his desire to present to the outside world a life simple and ordinary. He only ever made one public statement on his polygamous family arrangements ("[I]f you knew the people involved, you'd see that it suited all of us quite well"), though he added to Schroeder that "they both need to give, and I'm a great receiver, so it works for them." His life was structured to maximize the time and energy he could devote to Berkshire Hathaway, and he seems to have spent very little time questioning that structure. From time to time he seems to have backed away from his life with what sound like tiny spasms of self-doubt. As early as 1970, he wrote to his shareholders that "I don't want to be totally occupied with outpacing a market rabbit all my life." But always he takes a deep breath and waits for the feeling to pass.
  
  In her account of Buffett's equally complicated financial life, Schroeder describes two decisions that led him down the path he eventually took. The first came in 1958, after he bought a small windmill-maker in Beatrice, Nebraska called Dempster Mill Manufacturing. Having milked its assets for all they were worth and then put it up for sale, Buffett found himself cast in the town papers as the rapacious, heartless big-city financier. He hated the role. He was painfully thin-skinned and avoided any situation in which he might come in for personal criticism. From that moment on, he sought to be seen as the good guy. He set out to solve an original and seemingly insoluble problem: how to become the world's richest man and also be universally admired and loved. At times he would still behave like an old-fashioned capitalist pig--exploiting weakness in others, obsessing about money, stiffing workers, driving ruthlessly hard bargains, and so on; but he did it so deftly and sensibly, and with such good humor, that he was seldom again cast in the role of the villain.
  
  Buffett's second great decision was to maximize, at great financial cost to himself, the interest that the public might take in his business affairs. In 1986, Congress passed a tax reform that changed how Berkshire Hathaway's capital gains were taxed. Previously, those gains had been taxed only once, when a shareholder sold his shares. Now, so long as Berkshire remained a public corporation, Buffett would need also to pay tax on any gains from the sale of stocks inside his portfolio. There was an obvious solution, and it was seized upon by public fund managers everywhere in Buffett's position: shutter the corporation and become a private equity fund. At the time Berkshire had $1.2 billion of unrealized capital gains. Buffett might have doled these out, and then restarted as a partnership free of corporate double tax. Instead, at a cost to himself that Schroeder puts at $185 million, he kept Berkshire intact.
  
  A man who cares so deeply about money reveals himself most wholly in his decisions to part with it. Buffett had exchanged cash for an audience. The first twenty years of his investing life had been spent more or less in obscurity. (In 1981 only twenty-two people attended the Berkshire Hathaway conference.) By 1986, however, Buffett's every move was being watched, and usually cheered. His fame became not only a pleasure but an asset. His capital became unlike anyone else's, because it came with his name attached to it. Warren Buffett saw deals that no one else saw, and had access that no one else had. If the stock market was a roulette table, he had his hand on the wheel. Then he pushed his luck.
  
  
  
  From very early on in his investment career, Buffett had qualms about Wall Street. He began his career as a stockbroker, but when he learned that a stockbroker made his money not by enriching his customers, but by churning their portfolios, he lost interest in the job. As his wealth grew and amplified his opinions, he voiced them more frequently, and conveyed his distaste for Wall Street brokerage firms. And so it came as a shock, in 1986, when he turned on a dime and bought a giant stake in Salomon Brothers (where, at the time, I happened to work). The firm had been mismanaged and was the target of a hostile raid which, if successful, would almost certainly have cost the CEO, John Gutfreund, his job. In rode Buffett to take a stake in the firm that foiled the raid, and to keep Gutfreund in his job.
  
  But it was no ordinary stake. Buffett's reputation as the soul of integrity enabled him to charge the embattled CEO extra for his capital: his dollars were not just money, they were also an ethical imprimatur. Salomon Brothers sold Buffett a security that guaranteed a high return, no matter how the other shareholders fared, and a sensational return if the firm's stock price happened to rise. Other investors had to worry that the firm was well run, whereas Buffett was being paid a big sum to bet only that it would not go bankrupt. He had rented not just his capital but also his reputation. The moral algebra of the transaction was curious: it caused a lot of people to feel better about Salomon Brothers but no one to think worse of Buffett.
  
  But the joke was on Buffett. A few years later, a rogue trader at Salomon Brothers rigged the U.S. Treasury bond market. Gutfreund had learned of the fraud and failed to mention it on visits to both the Treasury and the Fed. Treasury Secretary Nicholas Brady was so outraged that he decided to eliminate the firm from the list of dealers allowed to do business with the U.S. Treasury--a decision that would have driven Salomon Brothers, overnight, into bankruptcy. The head of the SEC, Richard Breeden, described Salomon Brothers as "rotten to the core." Schroeder devotes a great deal of space to the scandal, and in the bargain delivers the definitive account of it, at least from Buffett's point of view. This entanglement with a big Wall Street firm, she tells us, quickly turned into the single most miserable experience in Buffett's career. This man who prized his moral high ground above everything was put in the position of publicly defending, and rescuing for profit, a business of which he strongly disapproved. "How had he gotten himself into the--at best awkward--position of sitting on the board of such a company?" Schroeder asks, quite reasonably. "It was as if, during a dry spell, Buffett's urge to make money had once again overwhelmed his high hopes, high aspirations, and high principles. And as had been true throughout his life, whenever his avarice got the upper hand, trouble followed."
  
  The story that followed remains incredible. The whole world wanted to put Salomon Brothers out of business, but Buffett, all by himself, prevented it from happening. Just as some years earlier the SEC had failed to sanction him for fraud, essentially on the grounds that he was too good a person ever to have meant to commit fraud, the Treasury decided not to put his investment bank out of business because he, Warren Buffett, was willing to run it--which he did, until he got his money back. He then returned to Omaha, and vowed never to do it again.
  
  Which brings us, oddly, to our present financial crisis. There has never really been a bad time in the last fifty years to be Warren Buffett, but just now would seem to be less favorable than most. If Buffett still measures his life by the book value per share of Berkshire Hathaway, then for the first time in forty years he must feel like a wasting asset. His share price is still off more than 40 percent from its highs, underperforming even the S&P 500. He railed against derivatives as weapons of mass destruction, and now turns out to have been sitting on a $68 billion pile of credit default swaps and exotic put options on various stock market indexes. And having vowed never again to become entangled in a big Wall Street investment bank, he has gone and sunk $10 billion into Goldman Sachs, a virtual re-enactment of his investment in Salomon Brothers--cash for reputation. The difference this time is that he has gotten himself a sweeter deal than not merely ordinary shareholders, but also the U.S. Treasury.
  
  On the surface at least, he seems like a guy who has spent the last few years ignoring all of his own best advice. What does Schroeder make of this? By September of last year, when Berkshire's share price began to collapse, The Snowball was already in bookstores. Its final chapter has a rushed, panicky feel to it, as if the author sensed that she was going to watch some meaningful part of her story unfold after she told it. If so, she was right: Buffett's role in the current crisis is likely to be as interesting as any episode of his career.
  
  Still, while Schroeder could not have foreseen the sensational reversal in Berkshire's fortunes, she offers, inadvertently, an explanation for it: the impulse to grasp for things before they all slip away. Susie Buffett, diagnosed with cancer the year before, died in 2004. "Before 2003," writes Schroeder, "Buffett's need for attention had been satisfied by a few interviews a year and the shareholder meeting. He had always been careful and strategic in his cooperation with the media (if not always forthcoming about just how cooperative he had been). But starting around the time of Susie's illness, for whatever reason, he had begun to need the mirror of media attention, television cameras especially, almost like a drug. The intervals he could tolerate without publicity were growing shorter. He cooperated with documentaries, spent hours talking to Charlie Rose, and became such a regular on CNBC that it started to prompt puzzled queries from his friends."
  
  Thus she leaves open the possibility that Buffett might have gone a bit soft in old age. "Basically, when you get to my age," she quotes him telling a group of business school students, "you'll really measure your success in life by how many of the people you want to have love you actually do love you. I know people who have a lot of money, and they get testimonial dinners and they get hospital wings named after them. But the truth is that nobody in the world loves them." Where there was once only the time value of money, there is now also the time value of love. My God, he's even given his fortune away!
  
  In short, there has never been a better time to bet against Warren Buffett. The reader will forgive me, I hope, if I decline to do it. For one, he is sitting on a huge pile of increasingly precious capital, and has the power to extract the most onerous terms for its use. Yes, he railed incessantly against derivatives and yes, he has gotten himself twisted into the awkward position of having traded them himself. But the problem, as he most surely knew, was never derivatives. (This was a man who, in 1998, stood ready to buy the entire trillion-dollar derivatives book of the collapsed hedge fund Long Term Capital Management.) The problem was stupidly priced derivatives.
  
  For some years now Buffett has been making his living selling insurance mainly against natural rather than financial catastrophe. He demanded high prices to accept the risk that Florida would be wiped out in a hurricane instead of low prices to accept the risk that American house prices would fail to appreciate forever. That he drifted, when the price beckoned him to drift, into selling insurance against financial catastrophe is not all that surprising. What is surprising is what he somehow avoided: every other AAA-rated financial institution essentially rented out its credit rating to the great subprime mortgage boom, and bankrupted itself. These firms have either collapsed (AIG, AMBAC, MBIA) or are in the process of collapsing (GE). Berkshire Hathaway may no longer be AAA-rated, but it will easily survive even this debacle. The problem in this sorry episode was not that we suffered from too much of Warren Buffett's instincts, but that we suffered from too little.
  
  There is another reason I wouldn't like to bet against Warren Buffett: I did it once and lived to regret it. Long ago, after Buffett became entangled with Salomon Brothers, I wrote long critical article about him for this magazine, which, perhaps because there has never been much criticism of Warren Buffett, makes a cameo appearance in several books about him, including this one. The piece dwelled on Buffett's small hypocrisies--posing as a friend of the ordinary shareholder while accepting bribes from corrupt corporate regimes, using his track record as a weapon against the efficient-markets people when he cut deals available to no other investor--and downplayed his virtues.
  
  Even then I thought that his virtues far outweighed his vices, and felt a bit like the guy who, having grown weary of hearing others drone on about the physical perfection of some supermodel, went to the beach with a camera and snapped a photo of her cellulite. Now Schroeder's brave book offers a close-up of the same cellulite, but more fairly, in the context of a genuinely delightful character. Buffett might not like it, but this book has done him a very Buffett-like service. Twenty years from now, when the financial markets have forgotten our current trauma, and finance is once again fashionable, some young person will pick it up and discover that history's most legendary investor was not a cartoon but a real live human being. And still, somehow, deeply admirable.
  

Michael Lewis: The End

Excellent article: Michael Lewis: The End

• To this day, the willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grownups remains a mystery to me. I was 24 years old, with no experience of, or particular interest in, guessing which stocks and bonds would rise and which would fall. The essential function of Wall Street is to allocate capital—to decide who should get it and who should not. Believe me when I tell you that I hadn’t the first clue.
  
  I’d never taken an accounting course, never run a business, never even had savings of my own to manage. I stumbled into a job at Salomon Brothers in 1985 and stumbled out much richer three years later, and even though I wrote a book about the experience, the whole thing still strikes me as preposterous—which is one of the reasons the money was so easy to walk away from. I figured the situation was unsustainable. Sooner rather than later, someone was going to identify me, along with a lot of people more or less like me, as a fraud. Sooner rather than later, there would come a Great Reckoning when Wall Street would wake up and hundreds if not thousands of young people like me, who had no business making huge bets with other people’s money, would be expelled from finance.
  
  When I sat down to write my account of the experience in 1989—Liar’s Poker, it was called—it was in the spirit of a young man who thought he was getting out while the getting was good. I was merely scribbling down a message on my way out and stuffing it into a bottle for those who would pass through these parts in the far distant future.
  
  Unless some insider got all of this down on paper, I figured, no future human would believe that it happened.
  
  I thought I was writing a period piece about the 1980s in America. Not for a moment did I suspect that the financial 1980s would last two full decades longer or that the difference in degree between Wall Street and ordinary life would swell into a difference in kind. I expected readers of the future to be outraged that back in 1986, the C.E.O. of Salomon Brothers, John Gutfreund, was paid $3.1 million; I expected them to gape in horror when I reported that one of our traders, Howie Rubin, had moved to Merrill Lynch, where he lost $250 million; I assumed they’d be shocked to learn that a Wall Street C.E.O. had only the vaguest idea of the risks his traders were running. What I didn’t expect was that any future reader would look on my experience and say, “How quaint.”
  
  I had no great agenda, apart from telling what I took to be a remarkable tale, but if you got a few drinks in me and then asked what effect I thought my book would have on the world, I might have said something like, “I hope that college students trying to figure out what to do with their lives will read it and decide that it’s silly to phony it up and abandon their passions to become financiers.” I hoped that some bright kid at, say, Ohio State University who really wanted to be an oceanographer would read my book, spurn the offer from Morgan Stanley, and set out to sea.
  
  Somehow that message failed to come across. Six months after Liar’s Poker was published, I was knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share about Wall Street. They’d read my book as a how-to manual.
  
  In the two decades since then, I had been waiting for the end of Wall Street. The outrageous bonuses, the slender returns to shareholders, the never-ending scandals, the bursting of the internet bubble, the crisis following the collapse of Long-Term Capital Management: Over and over again, the big Wall Street investment banks would be, in some narrow way, discredited. Yet they just kept on growing, along with the sums of money that they doled out to 26-year-olds to perform tasks of no obvious social utility. The rebellion by American youth against the money culture never happened. Why bother to overturn your parents’ world when you can buy it, slice it up into tranches, and sell off the pieces? (read the next page here )

Has The World Markets Gone Kaput?

The signs out there are terrible!

On CNBC website Nowhere Near Capitulation Yet ...

!!

Is this doomsday or what?

Everyone is shouting that this is the worse crisis yet, Worst Crisis Since '30s, With No End Yet in Sight and ECB doyen Otmar Issing calls crisis "extremely dangerous"

And then you have Michael Lewis commenting this on Sept 15th: This Is the Day Asian Capital Woke Up

• According to the bankruptcy papers thrown together over the weekend, the list of Lehman's 30 biggest unsecured creditors is dominated by Asian financial institutions: Aozora, Chuo Mitsui Trust, Sumitomo Mitsui Financial, Mizuho Corporate Bank, Shinkin Central Bank, Bank of China and so on.
  
  Who else did you imagine would be left holding this bag? Who else did you imagine was propping up the system?
  
  Ever since the government jumped in to bail out Bear Stearns Cos. -- and whatever else that was, it was a bailout -- the behavior of the U.S. government in the financial markets has felt like a mystery by an author who is cheating and withholding a key piece of information.
  
  In letting Lehman fail the federal government puts a fine point on an obvious question: Why didn't they let Bear Stearns go, too? This business about the markets having time to adjust to Lehman's problems is baloney. The markets didn't adjust to Bear Stearns collapse; the markets looked at what the Fed had done for Bear Stearns and assumed they'd do it for Lehman.
  
  Unfounded Fears
  
  One part of the answer is that the people who sit on top of our financial system simply didn't know what would happen if a big Wall Street firm went down. They have since studied the matter and concluded that their worst fears were unfounded.
  
  But in Lehman's list of creditors we have another part of the answer, I'll bet. It wasn't merely instability the U.S. Treasury and the Federal Reserve feared. It was the loss of the good opinion of the people who supply the U.S. with the capital it no longer generates itself. For 25 years Asian financial firms have been amazingly indulgent of U.S. investment bankers.
  
  What do you think they're saying about them -- and us --now.

And it's no wonder that Asian markets are being hit bad, especially Hong Kong. This morning Raw Fear Slams Stocks, Hong Kong Plunges 7%

And the Russians aren't doing so good either. Russia's Stock Market Woes

• STRATFOR - The Russian markets plunged on September 16 before government authorities halted trading on the exchange an hour early; the MOSCOW Interbank Currency Exchange fell 17 percent, and the dollar-denominated Russian Trading System (RTS) fell 12 percent.
  
  The carnage built upon ongoing losses in the Russian economy that have now seen the RTS fall by nearly 60 percent since its mid-May highs. The Russian ruble has recently become the world’s worst-performing major currency.
  
  Russian government officials insist that this is simply a passing storm that has nothing to do with the August invasion of Georgia. While obviously an overstatement, there is something to the claim. Western financial institutions — and investment houses specifically — currently are engaged in a flight to quality investments. Russia, despite its ongoing impressive energy and minerals exports, simply never made the list of the top tier of reliable assets.
  
  But the fact remains that investors — and especially foreign investors — are scared. They were already nervous about the Kremlin’s flagrant targeting of foreign assets, and now the Russian willingness to invade its neighbors is most certainly a factor, as is the falling price of oil (Brent crude pushed below $90 a barrel Tuesday). Yet while the Russian stock markets are suffering because of the uncertainty, Russia is not necessarily suffering.

Chris Perruna's charts comparison of Shanghai and Nasdaq is most interesting, Shanghai is a Nasdaq Déjà vu

And the following webpage on NYTimes shows the extend of the damages: http://www.nytimes.com/interactive/2008/09/15/business/20080916-treemap-graphic.html

So is Wall Street kaput?

• Wall Street as we know it is kaput. It is not just that Merrill Lynch agreed to be purchased by Bank of America or that the legendary investment bank Lehman Brothers filed for bankruptcy or that the insurance giant AIG is floundering. It is not even that these events followed the failure of the investment bank Bear Stearns or the government's takeover of Fannie Mae and Freddie Mac, the largest mortgage lenders. What's really happened is that Wall Street's business model has collapsed.
  
  Greed and fear, which routinely govern financial markets, have seeded this global crisis. Just when it will end isn't clear. What is clear is that its origins lie in the ways that Wall Street -- the giant investment houses, brokerage firms, hedge funds and "private equity" firms -- has changed since 1980. Its present business model has three basic components.
  
  First, financial firms have moved beyond their traditional roles as advisers and intermediaries. Once, major investment banks such as Goldman Sachs and Lehman worked mainly for their clients. They traded stocks and bonds for major institutional investors (insurance companies, pension funds, mutual funds). They raised capital for companies by underwriting -- selling -- new stocks and bonds for the firms. They provided advice to corporate clients on mergers, acquisitions and spinoffs. All these services earned fees.
  
  Now, most financial firms also invest for themselves. They use partners' or shareholders' money to place bets on stocks, bonds and other securities -- so-called "principal transactions." Merrill and other retail brokers, which once served individual clients, have ventured into investment banking. So have some commercial banks that were barred from doing so until the repeal in 1999 of the Glass-Steagall Act of 1933.
  
  Second, Wall Street's compensation is heavily skewed toward annual bonuses, reflecting the profits traders and managers earned in the year. Despite lavish base salaries, bonuses dominate. Managing directors with 15 years' experience can receive bonuses five to 10 times their base salaries of $200,000 to $300,000.
  
  Finally, investment banks rely heavily on borrowed money, called "leverage" in financial lingo. Lehman was typical. In late 2007, it held almost $700 billion in stocks, bonds and other securities. Meanwhile, its shareholders' investment (equity) was about $23 billion. All the rest was supported by borrowings. The "leverage ratio" was 30 to 1.
  
  Leverage can create huge windfalls. Suppose you buy a stock for $100. It goes to $110. You made 10 percent, a decent return. Now suppose you borrowed $90 of the $100. If the price rises to $101, you've made 10 percent on your $10 investment. (Technically, the price has to exceed $101 slightly to cover interest payments.) If it goes to $110, you've doubled your money. Wow.
  
  Once assembled, these components created a manic machine for gambling. Traders and money managers had huge incentives to do whatever would increase short-term profits. Dubious mortgages were packaged into bonds, sold and traded. Investment houses had huge incentives to increase leverage. While the boom continued, government remained aloof. Congress resisted tougher regulation for Fannie and Freddie and permitted them to run leverage ratios that, by plausible calculations, exceeded 60 to 1.
  
  It wasn't that Wall Street's leaders deceived customers or lenders into taking risks that were known to be hazardous. Instead, they concluded that risks were low or nonexistent. They fooled themselves, because the short-term rewards blinded them to the long-term dangers. Inevitably, these surfaced. Mortgages went bad. The powerful logic of high leverage went into reverse. Losses eroded firms' tiny capital bases, raising doubts about their survival. This year, Lehman lost nearly $8 billion in "principal transactions." Otherwise, it was profitable.
  
  How Wall Street restructures itself is as yet unclear. Companies need more capital. Merrill went to Bank of America because commercial banks have lower leverage (about 10 to 1). It seems likely that many thinly capitalized hedge funds will be forced to reduce leverage. Ditto for "private equity" firms. In time, all this may prove beneficial. Financial firms may take fewer stupid and wasteful risks -- at least for a while. Talented and ambitious people may move from finance, where they were attracted by exorbitant pay, into more productive industries.
  
  But the immediate effect may be to damage the rest of the economy. People have already lost their jobs. States and localities, particularly New York City and New Jersey, that depend on Wall Street's profits and payrolls will face further spending cuts. Banks and investment banks may tighten lending standards again and impede any economic recovery. The stock market's swoon may deepen consumers' pessimism, fear and reluctance to spend. There may be more failures of financial firms. It's hard to know, because financial crises resemble wars in one crucial respect: They result from miscalculation.

Blaine Lourd: The Evolution of An Investor

Here's one truly fantastic reading material for the weekend, The Evolution of an Investor ( The link to this article was posted on The Kirk Report ). Article was written by Michael Lewis who penned Liars Poker.

Here are some snippet of what's stuff written..

• "Seven months in at Lehman, I was one of the top rookie producers," Blaine says, "but every stock I bought went down." His ability to be wrong about the direction of an individual stock was uncanny, even to him. At first, he didn’t understand why his customers didn’t fire him, but soon he came to take their inertia for granted. "It was amazing, the gullibility of the investor," he says. "When you got a new customer, all you needed to do was get three trades out of him. Because one of them is going to work. But you have to get the second one done before the first one goes bad."
  
  It wasn't exactly the career he’d hoped for. Once, he confessed to his boss his misgivings about the performance of his customers' portfolios. His boss told him point-blank, "Blaine, you're confused about your job." A fellow broker added, "Your job is to turn your clients' net worth into your own." Blaine wrote that down in his journal.

Blaine quit his job at Lehmans...

• He quit Lehman Brothers and took a job at the Los Angeles office of Bear Stearns. But Bear wasn’t any better. He says he was pressured to make transactions rather than give good advice. The stories he told himself to feel better about his career became less and less plausible. The nicest thing he could say about himself was that he hadn’t broken the law. He hadn’t bankrupted anyone or anything like that. But when he stepped back from his job and really looked at it, he realized that a huge amount of his time and energy went into making people feel happy about his advice when they should have been furious. The problem was the constant tension between company and client, caused by the firm’s inability to know what the market or any particular stock was going to do next. “I always thought there was going to be a place where the client wouldn’t be compromised and the broker wouldn’t be compromised,” he says. “But it was the same everywhere. It was all about getting people to transact.” And these weren’t bucket shops; they were Wall Street’s most distinguished firms.

Niagara Falls... loved how it was told.

• Back in the old days, when investors believed that they were paying for some mysterious wisdom, the buildings housing Wall Street firms were stone on the outside and dark wood on the inside. Now that investors have learned to fear what they can’t see, the firms are in buildings made of as much glass as can be incorporated into a structure without compromising its ability to stand. The day I arrive at D.F.A.'s offices, I find 150 financial advisers in a glass box, waiting to be educated in a seminar that lays out the D.F.A. way. The coffee and pastries are free, the men and women wear suits, and the conference room has the antiseptic feel of any other 21st-century firm. But the atmosphere is entirely different from Wall Street. There’s no chitchat about the market, even though it has been bouncing around wildly. Instead, two speakers discuss how, knowing what we now know, anyone could present himself as a stock-picking guru. "If you put a thousand people in barrels and push them over Niagara Falls," one of them says, "some of them will survive. And if you take those guys and push them over again, some of them will survive. And they’ll write books about how to survive being pushed over Niagara Falls in a barrel."

Waking up to the lie and Winning the Loser's Game

• Blaine bought the book—it's actually called Winning the Loser's Game —and took it with him to Aspen on his Christmas vacation. There, on the first page, he read "Investment management, as traditionally practiced, is based on a single basic belief: Professional investment managers can beat the market. That premise appears to be false."Ellis, who had spent 30 years advising Wall Street firms, went on with charts, graphs, and more evidence than he needed to convince Blaine of the truth of that statement. The problem wasn't Blaine; the problem wasn't even the firms he worked for. The problem was the entire edifice of modern Wall Street, in which some people—brokers, analysts, mutual fund managers, hedge fund managers—presented themselves as experts and were paid fantastic sums of money for their expertise. But essentially, Ellis argued, there was no such thing as financial expertise. "I read this book," Blaine says, "and I thought, My whole life is a lie, and everyone around me is facilitating this lie."

I guess and I should stop here. Do give the rest of the article a read, The Evolution of an Investor

Cheers and Happy Weekend Shopping!