• Choose a category
• All
• Classic-Fiction

By Root 719 0

seems to have avoided the contagion. I toured one of the manufactured homes at the Berkshire Hathaway annual meeting in 2006. Potential homeowners are not encouraged to buy a palace. Clayton Homes offers affordable housing at lending terms designed to help ensure the borrower will be able to pay off the loan. It is the chance for people to live a decent life, and there is dignity in being able to live within one’s means while bettering one’s circumstances. Most of Clayton’s earnings come not from its manufactured housing, but from its loan portfolio. Warren reports its results in the finance section of the Berkshire Hathaway annual report. At the end of 2007, Clayton had an “$11 billion loan portfolio, covering 300,000 borrowers.”52 Berkshire Hathaway provides the financing (instead of, say, an investment bank that would buy the loans, package them up, and resell them). In contrast to the rest of the mortgage loan market, “[d] elinquencies, foreclosures and losses” have stayed constant and the “Clayton portfolio is performing well.”53

Unfortunately, for many others in the global financial markets, false promises and broken dreams were part of many investment portfolios.The MADness spread across the globe as if it were a hypercontagious flu virus.

Chapter 6

Shell Games (Beware of Geeks Bearing Grifts)

I’ve looked at the prospectuses, and they are not easy to read. If you want to understand the deal you’d have to read around 750,000 pages of documents.

—Warren Buffett to Janet Tavakoli,

January 10, 2008

On August 5, 2005, two days after Warren and I set up our meeting, Matthew (“Matt”) Goldstein, at the time a senior writer for TheStreet.com, wrote about problems with mortgage-backed CDOs. Eliot Spitzer, then New York Attorney General, had just sent Bear Stearns Co. (Bear Stearns) a subpoena. Hudson United, a small New Jersey bank, had tried to sell mortgage-backed CDOs it bought in 2002 back to Bear Stearns, the underwriter and seller of the CDOs. Hudson discovered its CDO investments were worth only a small fraction of the “market prices” that Bear Stearns had supplied Hudson up until it tried to sell them back.

In April 2005, I addressed the International Monetary Fund in Washington about the hidden risks of off-balance-sheet vehicles, securitizations, and the failure of the rating agencies to reflect these risks in their ratings. Sophisticated investors are baffled by the complexity; even multistrategy hedge funds such as Chicago-based Citadel had contacted me about securitizations. I told Goldstein that investors seemed to rely on ratings and rarely ask how the underlying assets are priced or whether they will get full price if they need to sell the investment: “There are huge transparency issues. In some cases, investors have been taken in by hype.”1

The U.S. Securities and Exchange Commission (SEC) launched a separate investigation into Bear Stearns’ CDO activities. Like the New York Attorney General’s office, it wanted to know if Bear Stearns had mispriced mortgage-backed CDOs and harmed investors. Bear Stearns subsequently disclosed in a regulatory filing that the SEC intended to recommend action. Many financial professionals believed Bear Stearns would be charged for alleged improper pricing of CDOs it had sold to both a bank and an institutional investor.2

Yet, despite increasing attention in the financial press, the New York Attorney General’s office dropped its case. The SEC’s rumored civil enforcement action involving Bear Stearns’ CDO pricing practices fizzled, and the investigation was closed.3 The Slumbering Esquires Club rolled over and went back to sleep.

The SEC’s new head struck me as the Antichrist of investor advocacy. On July 26, 2005, just a few days before Goldstein’s article and my first reply to Warren Buffett, Christopher Cox attended a Congressional coffee klatch—commonly known as his confirmation hearing—for the post of chairman of the SEC. One of Cox’s former clients pleaded guilty and got a 10-year sentence in a case involving defrauded funds.4 Cox had worked on a