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By Root 3600 0

to carry a cat home by its tail will learn a lesson that can be learned in no other way.’…I dwell on our experiences in derivatives each year for two reasons. One is personal and unpleasant. Both Charlie and I knew at the time of the Gen Re purchase that it was a problem and told its management that we wanted to exit the business. It was my responsibility to make sure that happened. Rather than address the situation head-on, however, I wasted several years while we attempted to sell the operation. That was a doomed endeavor, because no realistic solution could have extracted us from the maze of liabilities that was going to exist for decades. Our obligations were particularly worrisome because their potential to explode could not be measured. Moreover, if severe trouble occurred, we knew it was likely to correlate with problems elsewhere in financial markets.

“So I failed in my attempt to exit painlessly, and in the meantime more trades were put on the books.” Buffett was referring to a period during which he had hired a new manager, and briefly allowed him to expand the business. Some of these trades later proved costly to unwind. “Fault me for dithering. (Charlie calls it thumb-sucking.) When a problem exists, whether in personnel or in business operations, the time to act is now.

“The second reason I regularly describe our problems in this area lies in the hope that our experiences may prove instructive for managers, auditors, and regulators. In a sense, we are a canary in this business coal mine and should sing a song of warning as we expire…General Re was a relatively minor operator in the derivatives field. It has had the good sense to unwind its supposedly liquid positions in a benign market, all the while free of financial or other pressures that might have forced it to conduct the liquidation in a less than efficient manner. Our accounting in the past was conventional and thought to be conservative. Additionally, we know of no bad behavior by anyone involved.

“It could be a different story for others in the future. Imagine, if you will, one or more firms (troubles often spread) with positions that are many multiples of ours attempting to liquidate in chaotic markets and under extreme, and well-publicized pressures. The time to have considered—and improved—the reliability of New Orleans’s levees was before [Hurricane] Katrina.”10

The general belief, however, continued to be that derivatives spread and reduced risk. In a market shoved upward by cheap debt and derivatives nearly day by day, low interest rates and the “securitization” of mortgages into derivatives were pumping a housing boom that would peak in 2006. By one estimate, total global leverage (debt) had quadrupled in less than a decade.11 Buffett fretted occasionally that he might never again see the kind of home-run climate for investing that had blessed him in the 1970s. But he never stopped searching, he never stopped delving for ideas.

One day in 2004 he obtained from his broker a thick book, the size of several telephone directories stapled together. Its pages contained listings of Korean stocks. He had been scouring the global economy, looking for a country, a market, that was overlooked and undervalued. He had found it in Korea. Night after night, he leafed through the tome, studying column after column of numbers, page by page by page. But the numbers and their nomenclature puzzled him. He realized that he needed to learn a whole new language of business that described a different culture of commerce. So he got another book and figured out everything important there was to know about Korean accounting. That would reduce the odds of getting hornswoggled by the numbers.

Once he’d mastered the listings, he began sifting and sorting. It felt something like the old days back at Graham-Newman, when he sat next to the ticker machine clad in his cherished gray cotton jacket. Staring at hundreds of pages of numbers, he could pick out which were important and how they fell into a coherent pattern. Working from a list of several thousand Korean stocks,