Wednesday, May 6, 2009

Berkshire Hathaway annual meeting

I enjoyed listening to Warren Buffett and Charlie Munger mention many concepts and terms used on your Series 7 exam this past Saturday. The very first slide that Mr. Buffett displayed showed a trade ticket, which, right there, is a Series 7 concept. A trade ticket is just a record of a trade--what was bought or sold, how much was bought or sold, at what price the securities were bought or sold, etc. This trade ticket illustrated how panicky the markets became starting last September, and how hard traders had to scramble to post collateral. How? The ticket showed that Berkshire Hathaway was able to sell $5 million par value of T-bills for more than $5 million--$90 more to be exact. It wasn't that Warren was excited about making a risk-free $90; he was showing us that for a while, people were accepting negative yields on Treasuries. In a flight from stocks to Treauries, investors kept pushing up the price of T-bills, pushing their yields so low that the yields went negative for a while. Yes, that means people were willingly losing money on T-bills for a few days, and, yes, the money would have been much better off under their mattresses. Crowds do crazy things when spooked. If the Qwest center had been hosting a heavy metal band as opposed to 35,000 laid-back shareholders, I might have been concerned about a stampede or a melee erupting at any point. Same thing happens in the markets. People freak out on stocks and send a great company like Wells-Fargo below $10 a share while simultaneously snatching up T-bills that give them back less money than they started with.
Wild stuff.
Moody's was brought up in one of the harder-hitting questions posed by shareholders. Somebody wanted to know why Berkshire didn't use its influence over Moody's after purchasing the company. Not sure if the Series 7 cares, but the fact is that Moody's and S & P are paid by the issuers of the bonds to assign credit ratings. Talk about a conflict of interest, right? If you're being paid by GE to assign a credit score that determines GE's cost of borrowing, might you not be just a little bit kind in your ratings? But Buffett said that conflicts didn't cause the housing bubble, and that he and Charlie don't micromanage their investee companies like that. Then Charlie pointed out that Moody's had just downgraded Berkshire Hathaway's Aaa credit rating, so "maybe that shows a little bit of independence" he said, with a shrug of cool sarcasm that got a big laugh from the massive crowd.
When asked about the derivatives markets that seized up, Warren pointed out that unregulated trading markets involving vast sums are dangerous--there is a reason that the Fed mandates 3-day settlements and 50% collateral in margin accounts. See, those funky mortgage-based derivatives that nearly wiped out Wall Street completely were trading in unregulated markets where settlement dates were vague, and the "contra parties" to the contracts could just hem and haw until finally it became apparent that the contracts were no good.
I certainly did not expect to hear about Reg T and 3-day settlements at this meeting, but there were many cool surprises like that. Not to mention, the $15 box of See's candies turned out to be frighteningly good. Warning: don't open a box of See's candy if you're on a strict diet. Good thing I run so many miles a week.

No comments:

Post a Comment