Warren Buffett on the Dollar, the Recession, Subprime and Bear Stearns

The following comments were made at Berkshire Hathaway's Annual General Meeting last weekend in Omaha:

On the dollar:

Warren Buffett said that Canada’s currency is likely to outperfom the U.S. dollar in coming years. He acknowledged that he had bought a couple billion dollars worth of Canadian currency some time ago, and now wishes he had bought more and kept it longer than he did. Mr. Buffett continues his bearish stance on the U.S. dollar and continues to hold the Brazilian real.

He said he was “happy to invest in overseas companies, because currencies in those countries are not likely to decrease to the same extent as the U.S. dollar. The federal government appears likely to follow policies that will make the dollar even weaker.” Mr. Buffett stated that he does not feel a need to hedge on other currencies.

On the recession:

He confirmed his view that the U.S. is in fact in recession. If people find their financial situation is worse than it was six months ago, his advice is to “remain calm and make good investment decisions. It means driving the extraneous thoughts out of your mind.” He added that investors should think for themselves and be detached from the crowd.

One of Berkshire Hathaways’ subsidiary companies will likely buy an unnamed middle-sized United Kingdom company, Mr. Hull said. He believes an insurance division of Royal Bank of Scotland (RBS) is the likely target.

Berkshire Hathaway plans to continue to insure municipal bonds issues, but if premiums are too low, it won’t accept the coverage. This business has brought in over $400-million in premiums in just the first 90 days of 2008.

Mr. Munger said that much of the present trouble in the financial markets is “richly deserved” and the result of “stupidity and over-reaching” by people who ran the institutions. He added that “what you are seeing now is to some extent justice.”

Mr. Buffett said that Sweden has a few companies that he would want to buy, but only at the right price.

On subprime:

Both Mr. Buffett and Mr. Munger agreed that home buyers that were misled on mortgages and are facing a crisis, such as foreclosure, deserve some help. Mr. Buffett said that mortgage papers should include a single sheet that says, in simple words and bold type, the terms of the loan and what could happen to house payments and interest rates if things change.

He also said that he had written a letter to Treasury Secretary Henry Paulson in which he suggested that people taking out a mortgage should be provided a one-page document that is headlined “WARNING” in red, and describes in-depth the maximum rate they could face in the future.

Mr. Buffett believes that the housing market woes will weigh down bank results and earnings for a couple of years and the industry’s continuing write-downs due to bad debt are not over by a long shot.

On Bear Stearns:

Mr. Buffett said that the Fed did the right thing in arranging a bailout of Bear Stearns (BSC). He said that another investment bank or two would have failed only days later had the Fed not acted.

It would have been a spectacle of unprecedented proportions.” He said that action “prevented, in my opinion, the contagion where you’re going to have runs on investment banks. Just imagine the thousands of counterparties around the world having to undo contracts.

Mr. Buffett said he looked at the Bear Stearns opportunity when he got the call, but said he turned it down because he lacked enough capital and time to craft a solution.

As I understand it, Bear Stearns had $65-billion due on Monday and I didn’t have $65-billion. I couldn’t get my mind around that situation in the required time.

He also said JPMorgan (JPM) was the right buyer for Bear Stearns.

[Jeff Hull, a financial and investment advisor with Berkshire Securities Inc. (a subsidiary of Manulife Financial) is the Financial Post’s insider to Warren Buffett and his company’s AGM.]

Comments

[dectra:]

Warren Buffet: Simply the greatest investor ever.

2008 May 07 08:25 AM

[TonyCinTX:]

I own Berkshire stock, and I am glad Buffett has the discipline to pass up a deal he does not grasp and is willing to say that is why he passed it up. Bear Stearns might be a windfall, but I'd rather he pass on the speculation and protect the capital. If I want to risk speculation, I am happy to look at something besides Berkshire. They are my anchor for value investing.

2008 May 07 09:51 AM

[ArnoldCountry:]

Mr. Buffet is brilliant and I saw the other day that his finance arm, Clayton, bought some sub prime loans and immediately froze their rates and would not increase them to help borowers. However, I read this this morning:

UBS Mortgage Sale a Cautionary Tale
Wall Street Journal (05/07/08) P. C2; Shah, Neil; Gullapalli, Diya; Mollenkamp, Carrick
Following on the heels of Deutsche Bank AG and Citigroup Inc., UBS AG has become the latest investment bank to sell off unwanted assets, which some observers believe indicates signs of recovery in the credit markets. UBS is unloading $15 billion in Alt-A and subprime mortgages to asset manager BlackRock Inc., reportedly for about 68 cents on the dollar. While that price represents a significant loss for UBS, Citigroup credit strategist Matt King says banks are willing to meet buyers' prices in order to shrink their portfolios and holding costs. There remain concerns that rising mortgage defaults will make it difficult for these banks to continue getting rid of troubled assets.

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As I see it, if an investor is able to buy troubled subprime loans at 68 cents on the dollar, the problem is over. Can you imagine the positive impact on the market if all of those borrowers immediately had their rates reduced to zero for 3 years and chopped their payments down to 1/3rd, all resulting in principal reductions for each payment, the consumer would save their home, the buyer of the loans would still be profitable assuming a 6% interest rate per year (discount of 32% would only lose 18%) and the principal reduction would build back equity. Of course, if that is not pallatable how about lower their rates to 3%.

2008 May 07 12:52 PM

[Jonathan Ch...:]

Of particular interest is what Warren Buffet did not say. The subject of CDS (Credit Default Swaps) is probably high on the list of his concerns. This unregulated security bubble has grown from about $45 Trillion to $65 Trillion in the past month or so. Based on the creation of synthetic BONDS which are related to real companies and their bonds, these CDS have the potential to implode explosively.
IF you don't know what they are, I suggest you find out.

2008 May 07 02:32 PM

[User 190263:]

The definition of recession is very precise, it is X number of months of "shrinking" economy...it is not what Mr. Buffett "thinks" it is or how people "feel" about their financial sitution. It is totally irresponsible for someone like Mr. Buffett, who I have a lot of respect for except on this, to declare a recession based on a definition of his own choosing! We already have enogh clowns in the media that have been beating the drums about recession for months without any evidence of an actual "shrinking" economy even for one quarter. Mr. Buffett should have more respect for us than that. The economy is not growing as it was, it is much worse than it was, some people are affected (not most like media would have you believe), BUT WE ARE NOT IN A RECESSION AS PER WHAT THE DEFINITION OF RECESSION IS! Please stop creating new definitions for recession. We "could" go into a recession in the future but we ARE not there now.

2008 May 07 04:27 PM

[ArnoldCountry:]

Recession? That is the problem, at every "recession" the government puts in controls that speak to the definition of "recession" but do not focus on the reality. User 190263, you are merely speaking to the definition. Who cares. Just like the word depression... who cares. I think all one needs to do is take off the blinders and broaden ones vision beyond the definition and you would realize that we are in a form of depression... one that has never been defined before due to the complexities that have been added to our economic system.

2008 May 07 07:30 PM

[curious cat:]

user 190263, you are exactly right about that kid. he doesn't fool me for a minute, acting like he never played the game before, drinking cokes and eating candy bars. he is talking his book every chance he gets, trying to get everyone to panic, so he can pick up the pieces on his life size monopoly board. he had the insurance company, they sold him the railroads cheap and pretty soon, he'll have all the property and charge whatever he wants. heck, i knew it was all over when he picked the hat....

2008 May 07 11:17 PM

[Mr. Wall 12:]

To user 190263 and curious cat,

I am afraid that both of you are itching to find a fault in the words of a venerable investor who has the wisdom and foresight to make forward looking comments which project his view on the direction of the economy. You speak of the definition recession, yet you never mention in your post which criticizes Buffets "emotional response" what that definition is. To clear the record it is defined by the government as “two quarters of negative GDP growth”. Now let’s frame your comment in terms of the definition. I’m sure like a good analyst you noted the Bureau of Economic Analysis announced according to preliminary numbers that the economy grew at .06% in the first quarter of 2008, a slim margin by any measure and a preliminary number.

Now to the matter of forward looking statements, since your concerned with the proper use of the term of recession within the context of its definition let me ask this: If I hold the view that the next two quarters the economy will experience negative GDP growth and we are in the first of those two quarters is it correct for me to say the we are in a recession? When you take into consideration my forward looking view the answer is yes. Bottom line Buffet knows the definition he has a forward looking view and he doesn’t need to mislead the market to make money the market will have a herd mentality by itself.

2008 May 08 03:58 PM

[x bsc employee:]

hope the co stocks yakes a nose dive they let me go with 1 yr letf till i would be fully vested they suck $ hungry scumbags

2008 May 12 05:15 AM

[x bsc employee:]

sorry bout spelling i did i fast i was pissed lol

2008 May 12 05:17 AM

[x bsc employee:]

it

2008 May 12 05:17 AM