Seeking Alpha

The Manual of I...'s  Instablog

The Manual of Ideas
Send Message
Great ideas are the lifeblood of the investment business and the exclusive focus of The Manual of Ideas. Authored by investment and finance professionals who have grown up on the teachings of Ben Graham, Warren Buffett and Joel Greenblatt, and have studied under or worked with luminaries such as... More
My company:
BeyondProxy LLC
My blog:
The Ideas Report For Serious Investors
My book:
The Manual of Ideas (monthly)
  • Stanford Lawyer Magazine Interview with Charlie Munger 2 comments
    May 13, 2009 11:23 AM | about stocks: BRK.A, BRK.B

    Charlie Munger, vice chairman of Berkshire Hathaway and founder of law firm Munger, Tolles & Olson, recently interviewed with Stanford Lawyer Magazine. Highlights:

    SL: As we look at the current situation, how much of the responsibility would you lay at the feet of the accounting profession?

    Munger: I would argue that a majority of the horrors we face would not have happened if the accounting profession developed and enforced better accounting. They are way too liberal in providing the kind of accounting the financial promoters want. They’ve sold out, and they do not even realize that they’ve sold out.

    SL: Would you give an example of a particular accounting practice you find problematic?

    Munger: Take derivative trading with mark-to-market accounting, which degenerates into mark-to-model. Two firms make a big derivative trade and the accountants on both sides show a large profit from the same trade.

    SL: 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.

    SL: 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.

    SL: The Federal Reserve is today buying assets that it wouldn’t have even considered looking at a year ago.

    Munger: I think the problem is so extreme that nothing non-extreme has any chance of working. I like the fact that it is so willing to do things that have never been done before, because we have problems that we have never seen before. I am a right-wing Republican, and I like the fact that Obama has put into the White House Larry Summers, who is a ferociously smart human being and will try to do the right thing even if it offends some people. I think that’s a quality that we need right now.

    SL: How and why do you think economists have gotten this so wrong?

    Munger: I would argue that the economists have not been all that good at working concepts of good and evil into their profession. Nor do they understand, at all well, the economic consequences of bad accounting.

    SL: In fact, they’ve made a profession of driving value judgments out of the subject.

    Munger: Yes. They say it’s not economics if you think about the consequences of good and evil, and good and bad business accounting. I think what we’re learning is that when you don’t understand these consequences, you don’t have an adequately skilled profession. You have big gaps in what you need. You have a profession that’s like the man that Nietzsche ridiculed because he had a lame leg and was very proud of it. The economics profession has been proud of its lame leg.

    Read the entire interview, including Munger's views on President Obama, investment mistakes, and China. Watch an excerpt of the interview

    .

    Themes: charlie munger Stocks: BRK.A, BRK.B
Back To The Manual of Ideas' Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (2)
Track new comments
  • Living4Dividends
    , contributor
    Comments (1220) | Send Message
     
    Great article - it seems the accounting profession is supposed to provide transparency to equity investors and bond holders. It seems they merely a useful tool for obfuscating the true financial picture of a corporation. Tsk-Tsk
    13 May 2009, 06:05 PM Reply Like
  • AdhocRevo39
    , contributor
    Comments (6) | Send Message
     
    Interest rate swaps have enormous dangers given their size and the accounting that has been allowed. www.walkertexaslawyer.com
    24 Mar 2011, 12:48 AM Reply Like
Full index of posts »
Latest Followers

StockTalks

  • Contents of new Superinvestor Issue of The Manual of Ideas: http://bit.ly/lTS25k. Email support@manualofideas.com for free extended excerpt.
    May 29, 2011
  • Final Proof Rating Agencies Are Useless: Moody's Says Sokol Departure Is 'Credit Negative' for BRK. Are You Serious? http://t.co/kthS5b5
    Apr 1, 2011
  • BREAKING: David Sokol Says He Is Sorry, To Return Lubrizol Trade Profit To Berkshire Hathaway, http://bit.ly/fwzTuV
    Apr 1, 2011
More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.