"Our" Banks, Warren? No, YOUR Banks

Warren Buffett's Freudian Slip

This land is your land
This land is my(?) land
From California to the New York island
From the red wood forest to the Gulf Stream waters
This land was made for you (and me?).

--Lyrics, "This Land is Your Land"; Woody Guthrie (tweaked by Ross Kaplan)

The first time I read "Pretty Good for Government Work," Warren Buffett's defense of the bank bailouts in The New York Times this week, it all seemed perfectly reasonable and logical: the system truly was on the verge of a melt-down in September, 2008, and doing nothing surely would have brought on -- if not a financial apocalypse -- something very, very nasty.

But re-reading it, I couldn't help coming back to a single, offending word: 'our.'

Here's the context:

Just over two years ago, in September 2008, our country faced an economic meltdown. Fannie Mae and Freddie Mac, the pillars that supported our mortgage system, had been forced into conservatorship. Several of our largest commercial banks were teetering. One of Wall Street’s giant investment banks had gone bankrupt, and the remaining three were poised to follow. A.I.G., the world’s most famous insurer, was at death’s door.

--Warren Buffett, "Pretty Good for Government Work"; The New York Times (11/16/2010)

I suppose if I owned tens of millions of shares in Wells Fargo, Wachovia, and Moody's (the credit rating agency); $10 billion in Goldman Sachs bonds that I very much wanted repaid; billions in credit default swap positions, etc. etc. -- I would start to think of the financial system as "our" financial system, too.

But in reality, it's "their" financial system.

They own it, they derive the lion's share of benefits from it, and they -- quite logically -- defend it.

Bailout Red Herring

The second canard buried in Buffett's apologia is the inference that critics of the bailout advocated doing nothing.

Hardly.

Away from the Op-Ed pages of The Wall Street Journal and The New York Times, there has been a deafening chorus -- nay, consensus -- on what government properly should have done -- in fact, should still do now -- in response to the Wall Street-engineered financial melt-down.

Of course, that's after acknowledging that the very best course of action would have been actually trying to prevent it in the first place (vs. enabling it).

In a mythical letter addressed to "Uncle Sucker," Blogger Barry Ritholtz puts it best:

When the crisis struck, you did not seem to understand the role you should play. Instead of stepping up to halt the financialization, to unwind it, you gave away the shop. You failed to extract concessions from firms on the verge of bankruptcy. Your negotiating skills were embarrassing. In the face of meltdown, you panicked.

You could have undone the decades of radical deregulation at that moment. You could have fired the incompetent management, wiped out the shareholders who invested in insolvent companies, gave the creditors and bond holders a major haircut for their foolish lending. Instead, you rewarded them for their gross incompetence.

The solutions you ran with were ad hoc, poorly thought out, improvised. You crossed legal boundaries, putting the Fed in the position of violating its charter and exceeding its mandates. You created a Moral Hazard, the impact of which may not be felt until decades in the future.

--Barry Ritholtz, "Dear Uncle Sucker . . ."; The Big Picture (11/17/2010)

There are no Pulitzers -- yet -- for blog posts, but if there were, I'd nominate "Dear Uncle Sucker."

Read Buffett's piece, then Ritholtz's in its entirety, and decide for yourself.

P.S.: Dear RE/MAX and Coldwell Banker Burnet: looking for an experienced -- albeit opinionated -- Twin Cities Realtor (and blogger)?

If my boss, Mr. Buffett, reads this, I may be available (Buffett is chairman of Berkshire Hathaway, the ultimate parent company of Edina Realty).

Ahead for Berkshire Hathaway: Utility-Like Returns?

Warren Buffett's 2009 Annual Letter

Investors who expect Berkshire Hathaway's future performance to match its historic returns are guaranteed to be disappointed.

So who is the author of the above quote (paraphrase actually)?

Some money manager or securities analyst trying to making their "bones" with a rare "sell" call on Berkshire Hathaway? (Full disclosure: Berkshire is the ultimate parent company of Edina Realty, which I suppose would make Buffett my boss if I weren't an independent contractor).

A competitor, perhaps?

Try Buffett himself.

Blunting the sting at least a little bit: Buffett makes the same warning every year, noting that "the law of large numbers" -- which certainly applies to multi-hundred billion behemoths like Berkshire Hathaway -- makes it increasingly difficult to rack up market-beating performance, year after year.

Different this Time

And yet, careful readers of Buffett's letters through the years will discern a true watershed in this year's annual letter:

Berkshire Hathaway is slowing turning itself into a utility.

As such, its returns going forward are sure to be more utility-like: stable and solid, to be sure, but lower -- and subject to government approval (sufferance?)

Again, the words come straight from the . . . er, horse's mouth:

Permitting and construction periods for generation and major transmission facilities stretch way out, so it is incumbent on us to be far-sighted. We, in turn, look to our utilities’ regulators (acting on behalf of our customers) to allow us an appropriate return on the huge amounts of capital we must deploy to meet future needs. We shouldn’t expect our regulators to live up to their end of the bargain unless we live up to ours.

--Warren Buffet, 2009 Annual Letter to Shareholders

In fact, the following passage clearly seems addressed not to shareholders, but to Berkshire's regulators, who increasingly hold sway over the company's future performance:

With few exceptions, our regulators have promptly allowed us to earn a fair return on the ever increasing sums of capital we must invest. Going forward, we will do whatever it takes to serve our territories in the manner they expect. We believe that, in turn, we will be allowed the return we deserve on the funds we invest.

--Warren Buffett

So what is the template for future Berkshire investments and acquisitions?

More companies like capital-intensive -- and regulated utility -- Burlington Northern Santa Fe.

"Ever Increasing Sums of Capital"

As Buffett acknowledges, this historic shift to capital-intensive, regulated industries (albeit monopolies, to be sure) is a function of decades of compounding returns at 20%-plus. No doubt more corporations wish they had this problem.

Yet it violates one of Buffett's two heretofore cardinal investing maxims: 1) only invest in businesses you understand; and 2) avoid capital-intensive businesses.

The reason to avoid capital-intensive businesses is that they act like an anchor on investment returns; even Buffett acknowledges as much:

The best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow.

That's still good advice for investors -- advice they eschew at the expense of their future returns.

Heir Apparent

The other under remarked tidbit in this year's annual letter is that Buffett clearly has anointed a successor: David Sokol, the co-head of Berkshire's Mid-American Energy subsidiary.

Sokol has been temporarily dispatched to stop the hemorrhaging at subsidiary NetJets, an aviation operation that offers fractional ownership of jets.

This represents a signal departure for Buffett, who famously leaves incumbent management alone.

Sokol's "special assignment" is a tacit nod that he's being groomed for more and bigger assignments prospectively. And who knows their way around regulated utilities -- the parent company's future -- better than the guy who successfully shepherded Mid-American for 15 years?

Lastly, no Warren Buffett letter is complete without one great, homespun quote.

Here is my candidate for this year's:

"Sing a country song in reverse, and you will quickly recover your car, house, and wife."

"Look, Ma, No Hands!"

Just Another Day at the (Virtual) Office

Based on market time, showing feedback, etc., I advised my client that a price reduction on her home was in order, and she agreed.

So I got her the necessary paperwork, she signed it, and I forwarded it (via my front desk) to MLS for them to input.

Happens every day, right?

Except this time, I was in Arizona, my client was in Florida, and her home (and my office) are in Minnesota.

Complicating matters just a little bit: I don't travel with a scanner, and wi-fi connections proved a little less ubiquitous in Arizona than in big cities on the east coast.

Real Estate "Parents" & "Children"

So, I dropped into the Scottsdale office of Long Realty, a sister company to Edina Realty (both are subsidiaries of Berkshire Hathaway).

Thanks to Long Realty agent Kim Grabovich for letting me borrow her password to do the necessary scanning, printing, etc.

P.S.: Just like real-life siblings resemble one another, so do real estate siblings -- or more accurately, their Web sites.

The reason is that Home Services of America, the immediate parent company of Long Realty and Edina Realty, handles the agent Web site software for both brokers.

Chilling Reads

"Basically, It's Over: A Parable About How One Nation Came to Financial Ruin."

--Charles Munger; Slate (2/19/2010)

"The Fat Lady Has Sung."

--Thomas L. Friedman; The New York Times (2/20/2010)

Anyone else note the eerily similar notes struck by Thomas Friedman and Charles Munger?

If you didn't know, Munger is Warren Buffett's long-time right-hand man and sidekick at Berkshire Hathaway.

Buffett, of course, is better-known as the the Wizard of Omaha, the nation's most successful investor, and it's second-wealthiest citizen.

One last little tidbit: Edina Realty is owned by a chain of companies that ultimately are owned by . . . you guessed it!

Munger's piece is harrowing, sobering, and extremely cautionary.

The tone is leavened only a little bit when you realize the title is a play on the "mythical" country, "Basicland," that Munger describes.

Too bad there's not an easy way to dismiss Friedman's headline.

P.S.: And no, I couldn't bring myself to post this at 11:59 p.m. -- I changed it to 12:01 a.m.

Warren Buffett's Crystal Ball -- & Rearview Mirror

Memorable Quotes from
Berkshire's '09 Annual Letter

In 75% of [the last 44 years], the S&P stocks recorded a gain. I would guess that a roughly similar percentage of years will be positive in the next 44. But neither Charlie Munger, my partner in running Berkshire, nor I can predict the winning and losing years in advance. (In our usual opinionated view, we don’t think anyone else can either.) We’re certain, for example, that the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell us whether the stock market will rise or fall.

--Warren Buffett, 2008 Berkshire Hathaway Annual Report

Substitute "housing market" for "stock market," and you've got a pretty good long-term outlook . . .

If you've never read one of Buffett's letters, I highly recommend it; they're probably the closest thing capitalism has to Mao's "Little Red Book."

At least in my view, here are the most memorable quotes from this year's letter (last year's top line was an instant -- and much quoted -- classic: 'you don't know who's swimming naked until the tide goes out'):

"Putting people into homes, though a desirable goal, shouldn’t be our country’s primary objective. Keeping them in their homes should be the ambition."

"At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one."

"Beware the investment activity that produces applause; the great moves are usually greeted by yawns."

"When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000's. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary."

"Participants [in derivatives contracts] seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease: It’s not just whom you sleep with, but also whom they are sleeping with."

*Through its subsidiary, MidAmerican Energy, Berkshire Hathaway is the ultimate parent company of Edina Realty.

2009 "Dear Client" Letter - Part One

Rational Moves in an Irrational Market

Warren Buffett, Chairman of Berkshire Hathaway (the ultimate parent company of Edina Realty), writes a renowned annual shareholders' letter read by tens of thousands. Buffett's letters contain nuggets of wisdom, pithy quotes (his line about credit derivatives being "weapons of mass destruction" was from 2003), and his general take on market conditions.

In my capacity as a Twin Cities realtor, I write an obscure annual letter that I send to a couple hundred people offering . . my general take on market conditions. Here is the most recent edition, headed to clients this weekend:

Dear Client:

Happy 2009!

As the year begins, consider some of the more unusual -- if not unprecedented -- features of today's financial and real estate markets, and the economy in general:

--Zero per cent. As of mid-December, that is the Federal Reserve's target number for short-term interest rates (the one it controls). That's also the interest rate on U.S. T-bill's (actually less than zero, net of fees).

--From $60 a barrel to $150 to $38 to . . .??? After their moon shot during the first half of 2008, commodity prices -- including oil -- suffered a historic collapse the second half of the year. At $1.80 or so per gallon (less at Sam's Club and Costco), gas prices are near their lowest in 5 years, and more than 50% off their $4-plus peak last Summer (seemingly another lifetime ago).

--Falling stocks and housing. Unless you're over 80 years old and started buying stocks when you were a (very small) child, you just experienced your worst-ever year in the stock market: down 40% over all. By comparison, housing turned in a stellar performance: only down 15% nationally, and now 20%-25% off its 2006 peak (again, nationally).

--Not everyone has savings and investments, but fortunately, most people have jobs (almost 93%, to be specific). However, with the economy clearly slowing, many experts predict that the unemployment rate will be significantly higher in 2009.

Comforting, huh?

"Lemonade Recipe" (or, Rational Moves in an Irrational Market)

When things are so uncertain, it's tempting to do . . nothing. In fact, depending on your circumstances, doing nothing may be the smartest move of all (it worked for Seinfeld).

However, even in a sour economy -- perhaps especially in a sour economy -- there are three tried-and-true strategies most people should at least consider. In that vein, here is my 2009 realtor's advice to clients -- past, present, and, hopefully, future -- on how to turn today's, shall we say, challenging environment to your advantage.

--One. Take advantage of cheap money. The flip side of anemic rates on savings are historically low borrowing costs. Long-term mortgage rates have literally collapsed since Thanksgiving, falling from over 6% to 4.75% or even lower. If you plan on staying in your home long-term, you'll easily recoup the expenses associated with re-financing. Even if your time horizon is as short as 5 years, you may still benefit, depending on your current interest rate and mortgage balance.

Talk to a lender to find out. Better yet: talk to two or three (money is fungible), and be sure to ask for the required disclosures: the Truth-in-Lending ("TIL"), and Good Faith Estimate of Settlement Costs. Also ask whether the lender offers a re-lock option: in an environment of volatile (and for now, falling) rates, paying a nominal fee for a "second bite at the interest rate apple" can be a good idea.

Cont: 'Dear Client Letter - Part Two'