Thursday, May 14, 2009

An Interview with Berkshire Hathaway's Charlie Munger (BRK. A)


Charles T.Munger is a man of many interests, much like his hero Benjamin Franklin. Self taught in a range of disciplines, he’s a strong advocate for interdisciplinary education saying, “If I can do it, many people can.” A student of physics and mathematics before entering law school, he left his mark on the legal profession early in his career by co-founding Munger, Tolles & Olson in 1962—a firm that is today consistently ranked at the top of its field. Now an icon of the business world, he joined forces with Warren Buffett in the mid-1960s—leaving law to become vice chairman of Berkshire Hathaway and a partner in one of the most successful firms in the world.

Over the years Munger has gained a reputation as something of a no-nonsense voice for sound investment strategies and responsible business practices—as well as simple common sense. But lately it is the mythical Greek character Cassandra who is much on his mind. After living through the Great Depression, serving in WWII, and entering the business world in an era of restraint and sensible regulation, he is irritated by what he calls “the asininities” of today’s government and business leaders that led to the current crisis. He saw the financial train wreck coming and voiced his concerns loudly.

But almost no one shared them. “It is painful to see the tragedy coming, to care about all the people who are going to be clobbered, and not to be able to do one damn thing about it,” said Munger, as we prepared for the interview that follows. As the nation navigates through this crisis, entering waters previously uncharted, perhaps the powers that be will be more willing to address issues previously ignored.....MORE (6 page PDF)
HT: Calculated Risk who highlights:
...And on derivatives:
Grundfest: You and your partner, Warren Buffett, have for years warned about the dangers of the modern derivatives markets, particularly credit derivatives, and about interest rate swaps, currency swaps, and equity swaps.

Munger: Interest rate swaps have enormous dangers given their size and the accounting that has been allowed. But credit default derivatives took that danger to new levels of excess—from something that was already gross and wrong. In the ’20s we had the “bucket shop.” The term bucket shop was a term of derision, because it described a gambling parlor. The bucket shop didn’t buy any securities. It just enabled people to make bets against the house and the house furnished little statements of how the bets came out. It was like the off-track betting system.

Grundfest: Until the house lost its money and suddenly disappeared. Or the house made its money and suddenly disappeared.

Munger: That is right. Derivatives trading, with no central clearing, brought back the bucket shop, because you could make bets without having any interest in the basic security, and people did make such bets in the billions and billions of dollars. Some of the most admired people in finance — including Alan Greenspan — argued that derivatives trading, substituting for the old bucket shop, was a great contribution to modern economic civilization. There’s another word for this: bonkers. It is not a credit to academic economics that Greenspan’s view was so common.
There is much more.