Berkshire Hathaway Chairman Warren Buffett lambasted bankers, insurers and regulators for being blind to the possibility home prices could fall, and said their shortcomings caused the worst recession in half a century.
Buffett and Vice-Chairman Charles Munger said Wall Street sold subprime mortgage 'sewage', blamed the media and regulators for missing the danger and said the government stress tests of financial firms won't advance Berkshire's understanding of the stocks the company owns. Buffett hosted a record 35,000 people at the Omaha, Nebraska-based firm's annual meeting on May 2 and spoke at a news conference yesterday.
"I think that virtually everybody associated with the financial world contributed to it," Buffett said of the crisis. "Some of it stemmed from greed, some from stupidity, some from people saying the other guy was doing it."
Home foreclosures have advanced to a record, US unemployment rose to its highest in 25 years and Berkshire shares plunged 31 per cent since shareholders gathered at Omaha's Qwest Center arena last year. The US government and the Federal Reserve have spent, lent or committed $12.8 trillion — an amount that approaches the value of everything produced in the country last year — to stem the recession.
Buffett, 78, used the five-hour question-and-answer session at the meeting and the press conference to promote the long-term prospects of his derivative bets and explain his stock picks. He said that San Francisco-based Wells Fargo & Co., the second- largest holding in Berkshire's portfolio, will prosper regardless of the results of the test of top US lenders.
Wells Fargo
"Wells Fargo has a dramatically different business model," than competitors, Buffett said yesterday. He said the public has a distorted perception of lenders because of losses at Citigroup, once the largest US bank. Minneapolis-based US Bancorp and Buffalo, New York-based M&T Bank Corp., which are in Berkshire's portfolio along with Wells Fargo, avoided the riskiest bets, he said.
"We would buy stock in any of the three banks at the present prices," he told reporters. Buffett dismissed the importance of stress tests in helping him assess those firms, saying "I think I know their future, frankly, better than somebody who comes in and takes a look."
Stephen Cohen, a spokesman for New York-based Citigroup, declined to comment. Buffett said most of the companies undergoing stress tests aren't too big to fail. "The top four get to be more special cases," he said. Results of the examinations may be released this week.
Buffett told shareholders he expects Berkshire will eventually profit from derivative bets on world stock markets that caused a $10 billion liability as of the end of 2008. Berkshire will only have to make payments on the contracts if markets are below agreed-upon levels when the terms expire, which is 10 years from now at the soonest. Berkshire has received about $4.9 billion in payments on the derivatives.
Life insurers that made similar bets with customers by guaranteeing returns on equity-linked retirement products "didn't get paid appropriately," Buffett said yesterday.
When insurers ¿tell the policyholder that he gets some of the up side and you take all the down side, that¿s poison," Buffett said. "That would be like a stockbroker telling you that he' will pay you back if your stocks lose money."
Buffett said the media failed to adequately report on the housing bubble, and singled out regulators of mortgage companies Fannie Mae and Freddie Mac for missing the danger their loans would pose if home prices fell. Munger said the firms that packaged subprime mortgages into securities "were either delusional or flim-flam artists."
