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Was Warren Buffett even tempted by Bear Stearns? I do not know for certain, but I have a point of view. On September 27, 2007, BusinessWeek’s Matt Goldstein asked me if I had seen a New York Times article suggesting that Warren Buffett was considering the purchase of a stake in Bear Stearns. The original article stated that “Mr. Buffett did not return telephone calls seeking a comment.”60 It did not surprise me; it is hard to talk and laugh at the same time. Goldstein was not suggesting I had a particular reason to know, it was just that everyone was talking about it. Many news outlets picked up the viral rumor and CNBC aired at least five segments that day on the rumor that Buffett was a potential buyer.61

I told Goldstein that I had no way of knowing for sure, but heck no.

Chapter 10

Bazooka Hank and Dread Reckoning (AIG, Fannie, Freddie, Lehman, Merrill, and Other F luid Situations)

If they sell five percent of it, they’ll get the market price.

—Warren Buffett

to Janet Tavakoli, August 10, 2007

Before the fall of 2007, few besides Warren Buffett, John Paulson (Paulson & Co.), Bill Ackman (Pershing Square), David Einhorn (Greenlight Capital), Jim Rogers (Rogers Holdings), and I specifically challenged investment banks’ prices of complex structured products. On August 9, 2007, I told CNBC that “when you get truthiness in lending you get truthiness in pricing.” Even with corporate leveraged loans, there is “too much foam and too little beer.”1 Many AAA rated money market investments were losing money because they were backed by CDOs backed by subprime loans. Becky Quick of CNBC asked who is vulnerable, and I responded just about every investor: hedge funds, REITs, insurance company investment portfolios, mutual funds, and money market funds might lose money.

The next day, I challenged American International Group Inc.’s (AIG) accounting, after it told analysts it did not need to show a loss (reflecting a change in market prices) on its credit derivatives portfolio for its second quarter ending June 30, 2007.Yet, accounting practices required AIG to mark to market its portfolio using market prices or a close approximation to market prices.The rule did not say only if you feel like it. AIG seemed to take the position that (1) nothing like this is currently trading, so there is no market price; and (2) AIG would never have to make any cash payments because its portfolio was so “safe.” Accounting gives one a lot of room to make reasonable assumptions, but how could AIG say nothing had changed?

For example, AIG wrote credit default protection on a whopping $19.2 billion “safe” investment that had exposure to subprime loans (a super-senior tranche of a CDO backed by BBB rated tranches—the lowest rating that is still investment grade—of residential mortgage-backed securities, and these were backed by a significant amount of subprime loans. By August 2007, the prices of the collateral backing the super senior had tanked.)2 Anyone who buys insurance knows that even if you are “safe,” if you are in a high-risk category, your cost of insurance goes up. If AIG were to pay someone to take over its insurance-like obligation, AIG would have to pay more than it had received, and AIG should have shown this as a loss.

AIG’s stance seemed bizarre given that five insurance executives from AIG and Berkshire Hathaway’s Gen Re Corp (even Warren Buffett cannot control every action of every employee) were under investigation (and eventually found guilty) of conspiracy to inflate AIG’s reserves and mislead investors about AIG’s earnings.3

I told Dave Reilly at the Wall Street Journal: “There’s no way these aren’t showing a loss.”4 That is simply a market reality. This is Wall Street speak for: In my humble opinion, you are a big fat liar. AIG responded: “We disagree.”5 That is Wall Street speak for: No,YOU are a big fat liar!

Before Dave Reilly wrote his article, he talked to experts, including me, for background. Then he called AIG to ask them for their thinking. AIG stood