The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [500]
Buffett once said that he would be happy if Berkshire was still serving his shareholders thirty years after his death. That was his design. The elegant machine that he had created was built to last more than a generation beyond him. Yet to maintain it would be a remarkable accomplishment; he was the soul of that machine, and without him there would be a vacuum at the center, no matter what. For Buffett was the best there would ever be at the thing that only he could do perfectly, which was to be himself.
No group of shareholders in history had ever missed their CEO as much as Berkshire’s shareholders would miss Buffett when he was finally gone. None had ever thought of their CEO as a teacher and a friend the way Buffett’s shareholders had thought of him. The man who had made billions had touched thousands of people and had a relationship that felt personal to countless others whom he’d never even met or seen. But oddly enough, no matter how many fan letters Buffett got or how many autographs he signed, he never fully grasped how loved and admired he was. He got as excited about every letter and request for an autograph as though it were the first.
In July 2007, the Dow hit a new high of 14,000. Then it began to fall. House prices had already peaked, the way every great bubble peaks, partly because the Federal Reserve had finally started raising interest rates, and house prices had been sliding for some time. Unable to refinance, homeowners were defaulting on their mortgages at historically high rates.
The global margin call began in August. Over a period of eight months, the financial world imploded in a credit crisis of historic proportions. Not since the Great Depression had such a severe credit seizure occurred. Not since the Panic of 1907, when old J. P. Morgan himself had personally intervened to orchestrate a solution to the panic, had such extraordinary informal intervention in financial markets taken place as would occur in 2008.
The crisis progressed in fits and starts, with weeks and even months of apparent calm followed by convulsions that left victims scattered like broken shells on a beach. As it turned out, derivatives had indeed spread risk—banks reported tens of billions in losses; a hospital-management company in Australia lost a quarter of its investment portfolio; eight Norwegian towns lost millions on supposedly safe mortgages securities; estimates of total losses ranged from hundreds of billions to as high as $1 trillion from all sources combined. Like Long-Term Capital, the underlying bets were all made in the wrong direction. They had assumed a rational “efficient” market in which a decline in prices would be halted by cool-tempered, calculating buyers.
“They said all these derivatives made the world safer and spread the risk out. But it didn’t spread the risk in terms of how people reacted to a given stimulus. Now, you could argue that it might be way better to have that credit with just five banks, who could all work, than to have it with thousands around the globe, all of whom are going to rush out of it at the same time.”
The Federal Reserve cut interest rates once again, and worked with other central banks to activate other emergency sources of financing,26 yet the credit crisis continued to spread.
The reluctance to lend began to show signs of contagion. The Dow fell seventeen percent, to 11,740, from its October high. With each new announcement of a fire sale, bankruptcy, or collapse, the low rumbling panic grew louder. More people tried to sell assets behind the scenes and found no buyers; more lenders began to call in loans.
On Thursday, March 13, 2008, a run began, this time on Bear Stearns, the weakest of the investment banks, as its lenders started refusing to roll over its loans. In a near re-creation of the Salomon crisis seventeen years earlier, the following