Monday, September 20, 2010

Munger Says `Thank God' U.S. Opted for Bailouts Over Handouts (But What About General Electric, Charlie?) BRK.B; GE

UPDATE: EconblogReview has some similar thoughts, link below.
"Munger Tells 25 Million Americans To "Suck It In", And To "Thank God For Bank Bailouts" As BRK Benefits From $95 Billion Of TARP Funding" (BRK.B)

Original post:
Long time readers know that not only am I a fan of the Warren and Charlie show*, I've read enough of their writings to be able to pull an appropriate quote when I need to.

Being a billionaire does not make Charlie a genius, it makes him rich.**

This piece seems a bit odd, I'll let you judge after the the Andrew Ross Sorkin interview.
First up, Bloomberg:

Charles Munger, the billionaire vice chairman of Berkshire Hathaway Inc., defended the U.S. financial-company rescues of 2008 and told students that people in economic distress should “suck it in and cope.”
“You should thank God” for bank bailouts, Munger said in a discussion at the University of Michigan on Sept. 14, according to a video posted on the Internet. “Now, if you talk about bailouts for everybody else, there comes a place where if you just start bailing out all the individuals instead of telling them to adapt, the culture dies.” 

Bank rescues allowed the U.S. to avoid what could have been an “awful” downturn and will help the country as it deals with the housing slump, Munger, 86, said. He used the example of post-World War I Germany to explain how the bailouts under Presidents George W. Bush and Barack Obama were “absolutely required to save your civilization.”

“Hit the economy with enough misery and enough disruption, destroy the currency, and God knows what happens,” Munger said. “So I think when you have troubles like that you shouldn’t be bitching about a little bailout. You should have been thinking it should have been bigger.”

Germany was unable to stabilize its financial system in the 1920s, and, Munger said, “We ended up with Adolf Hitler.”

Taxpayer funds injected into banks helped insulate bond investors from losses and cushioned stock declines for equity holders. U.S. programs designed to ease the burden for distressed mortgage holders didn’t prevent foreclosures from rising to a record. One out of every 381 households received a foreclosure filing in August, according to RealtyTrac Inc.

Angry Public
“Charlie Munger is misrepresenting history, and that’s why the public is angry at Wall Street,” said Joshua Rosner, an analyst at research firm Graham Fisher & Co. “We could have wiped out the equity holders before we wiped out the taxpayer.”...MORE

 From NPR's Weekend Edition September 18, 2010
Inside The Minds Of Wall Street Execs
Guest host Robert Smith talks to New York Times reporter Andrew Ross Sorkin, author of "Too Big to Fail," about the second anniversary of the U.S. financial meltdown. Sorkin looks back on the causes for the meltdown and his worries about the next big crisis.
...Mr. SORKIN: To give you a flavor of it, there were a couple things that happened that week that I think actually went underreported, one being that Morgan Stanley almost went out of business, the next being that Goldman Sachs was the domino after that, the next being that actually there was worries inside the Treasury Department that General Electric was going to have to go bankrupt.

SMITH: General Electric? I hadn't heard that.

Mr. SORKIN: No. That was real. And there were projections that the Federal Reserve was making that we could be headed for 25 percent unemployment in this country. So you know, we talk about 10 percent - hovering around 10 percent today. And the last piece was, there was a rumor that McDonald's franchisees weren't going to be able to make payroll the next Tuesday because Bank of America, which financed McDonald's and effectively rolled their paper, quote-unquote, was going to stop rolling their paper. So all of a sudden the kid on the corner who is flipping burgers was being impacted by the guy on pinstripes on Wall Street....
So they bailed GE out. I'll write about it before month end. Oh, and Berkshire invested a few billion into GE after Buffett decided it was Too Big to Fail.

*"I didn't set out in life to become the assistant leader of a cult."
-Mr. Munger at the 2007 Wesco annual meeting as recorded
by T2 Partners' Whitney Tilson

**"Think about it a little more and you will agree with me because you're smart and I'm right."
--Mr. Munger quoted in "Damn Right: Behind the Scenes with..."

Is Berkshire's Charles Munger Still Making Sense?
There is much with which to disagree in Mr. Munger's sentiments. For one, it would seem that the U. S. in fact had an "awful" downturn despite the bailouts. For another, it is difficult to see how a managed bankruptcy of Citigroup or Bank of America (or both) would have destroyed civilization as we know it. For a third counterexample, shouldn't the corporations have adapted, such as by wiping out the common shareholders as appropriate and having the bondholders convert their bonds into equity?...