Lehman, Again, Must We?

“A shut-down in rational decision making”

Good afternoon. In today's call we will continue to use the word unprecedented to describe our environment. As a Company, we have never seen a change as abrupt as the one that has occurred in our E&C market since early September.

The first break came in mid-September when demand dropped as a result of the meltdown in the financial markets….—Steven Berglund, CEO Trimble Navigation; February 3, 2009


Trimble Navigation is, for readers who don’t know the company, the Garmin or Tom-Tom of the agriculture and E&C (engineering and construction) businesses.

Steve Berglund, for readers who don’t know him, is about as straight-talking a CEO as they make.

And it was Berglund’s comments about the credit collapse from the company’s February conference call—especially “the first break in mid-September”—that played in our minds as we considered the following headline on our Bloomberg:

CIT Says U.S. Bailout Unlikely as Talks End, Studies Options With Advisers

CIT, for readers who don’t know the company, is to the retailing and manufacturing businesses of America what Lehman Brothers—whose collapse triggered that “first break in mid-September” of 2008—was to hedge funds and commercial real estate developers.

And it was the collapse of Lehman Brothers that triggered the credit crisis Steve Berglund, in that same February call, described as forming “two distinct periods” in 2008:

Total year 2008 really consisted of two distinct periods. The first nine months were recession conditions and difficult.... The sharp break in the fourth quarter represented a major loss of confidence by businesses which constituted our primary customer business base.

This resulted in businesses across the U.S. and Europe cutting back dramatically on investments. In practical terms, the E&C market has shut down rational decision-making while awaiting events.

Now, we hear at NotMakingThisUp are not suggesting CIT's problems will have any impact on Trimble Navigation. If CIT goes down, it will not be the engineering and construction business that will “shut down rational decision-making.”

Rather, it will be thousands of small and middle market and large companies that borrow money and lease equipment from CIT that may well see a “shut down in rational decision-making.”

For CIT lends to manufacturers and wholesalers and distributors and importers and retailers and technology companies, and broadcasting, publishing, security, gaming, sports and entertainment companies.

And it provides credit to Small Business Administration borrowers.

In addition, CIT does business with “all of the U.S. and Canadian Class I railroads,” according to the CIT 10K. It leases hopper cars to ship grain, gondola cars for coal, open hopper cars for coal, and center beam flat cars for lumber through CIT.

And CIT leases aircraft to airlines—23 aircraft placed in 2008, and 114 aircraft on order at the end of 2008—and it finances parts for defense companies.

And woe be the retailers who finance their accounts receivable through CIT—$42 billion worth in 2008—and the small commercial businesses who lease office equipment financed by CIT.

When Lehman went down, the Feds claimed they couldn’t get involved, even while they were preparing the necessary documents to take over AIG, the collapse of which would have brought down the world (see “Widespread Panic, Starting Today” from September 18, 2008).

CIT may not bring down the world, but its failure, we think, could well trigger an echo of the Lehman collapse.

Why the Feds are not prepared to help—a shut down in rational decision making in and of itself—we can’t fathom.



Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will be ignored. This content is intended solely for the entertainment of the reader, and the author.

Chamberlain in Moscow

Being on a road trip, we’ll take what papers we can get. And today that means The New York Times.

Just last week in “Nobel Freakonomics” we mentioned the Times in a less-than-flattering light—i.e. that we haven’t been reading it for serious news since the publisher decided to cut costs by outsourcing the Times’ newsroom to the White House.

It was an off-hand joke. But apparently that’s exactly what happened, judging by what passes for today’s story on the Moscow summit.

“Obama Resets Ties to Russia, but Work Remains.”

That’s the headline, parroting directly the administration’s ceaseless ‘Reset Button’ yammering about everything it has been trying to disinherit from George Bush. Still, since that apparently didn’t sound upbeat enough to the White House, the Times adds a more pleasant, editorial-style subheading:

“A Trip Brings Progress but Fissures Persist.”

How, exactly, did this trip bring “progress” you wonder? Reading the story itself, the “progress” is unclear. Here’s how the Times describes it—and we are not making this up—in paragraph two:

But while Mr. Obama and President Dmitri A. Medvedev of Russia declared a reconciliation, they did so partly by agreeing to disagree on important issues and by selectively interpreting the same words in sharply different ways.

Substitute “Chamberlain” for “Obama” and “Hitler” for Medvedev,” and the Times might be describing what happened in Munich back in 1938.

But the Times does not stop with that howler, because it apparently did not suit the White House editor. How else to interpret the apparently thin-skinned Michael McFaul, Obama’s point man on Russia who told the reporters, quote/unquote:

“I dare you to think of a summit that was so substantive.”

Apparently, none of the reporters dared think of Reagan/Gorbachev.

In any event, the Times did not get to the verge of Chapter 11 by letting facts get in the way of its own, narrow-minded world-view, and since the headline promised “Progress,” the reporter gives us progress:

…the two leaders agreed to slash strategic nuclear arsenals, resume military contacts suspended after the war with Georgia and open an air corridor across Russia for up to 4,500 flights of United States troops and weapons to Afghanistan each year.

Of these three, the first is a no-brainer for both sides; the second is a clear win for Putin, who gets to “reset” things to where they were before he invaded Georgia; and the third, while nominally a victory for Obama, is even better for Putin: who wouldn’t want to let us fight a war his own country demonstrated could not be won?

What other signs of “progress” came out of the summit that we are “dared” to question? Again, we making nothing up:

Mr. Obama and Mr. Medvedev announced an agreement to open a joint early-warning center to share data on missile launchings. But Presidents Bill Clinton and Boris N. Yeltsin announced the same agreement in 1998. Mr. Clinton then announced it again with President Vladimir V. Putin in 2000. Mr. Putin and President George W. Bush recommitted to it as recently as 2007.

And none of them ever actually built the center.

Wordsmithing aside, what you really need to know about the event might just as easily be summed up in the photograph of Putin and Obama at the top of the story.

Obama, back to the camera, is leaning earnestly towards Putin, who sits, legs open, with about as blank a look on his face as any ex-KGB agent ever held in any meeting with any President of any country. He looks like the same Vladimir Putin whose eyes George Bush once looked into and declared he had seen the man's non-existent “soul.”

It is no wonder the Times buried this description of the two men’s meeting well off the front-page:

Their breakfast ran two hours, and Mr. Putin spent the first half in a virtually uninterrupted monologue about Russia’s view of the world, aides said afterward.

Substitute “Hitler” for Putin, and once again you’re describing Munch.

Reset? Sounds more like the computers crashed.

Ah, where’s a New York Post when you need it?

Jeff Matthews

I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will be ignored. This content is intended solely for the entertainment of the reader, and the author.

This Just In: Hunter S. Thompson Now Working for Credit Suisse!

We were somewhere around Barstow on the edge of the desert when the drugs began to take hold….
—From “Fear and Loathing in Las Vegas” by Hunter S. Thompson.


So begins the best opening line to a book since…well, if there’s a better one, I can’t remember it.

And while the link between the musings of a drug-addled, gun-crazy journalist and that of Wall Street’s Finest might seem weak at best, we here at NotMakingThisUp nominate the following headline (from the indispensible Briefing.com) as Exhibit A in the Case that Hunter S. Thompson did not shoot himself dead, but is in fact working at Credit Suisse:

Credit Suisse says strong case to be made that both GS and MS are overcapitalized…

Seems that certain research minds at Credit Suisse are making a call that Goldman Sachs (GS is the ticker) and Morgan Stanley (MS) might have too much capital.

Why would anybody in their right minds suggest—after what we’ve been through—that two of the remaining U.S. brokerage firms-turned-banks have too much money?

Let’s look at the story:

Credit Suisse notes that it was fewer than nine months ago that many questioned the sustainability of U.S. brokerage business models and only earlier this year that many doubted the notion that investment banking business models could generate adequate returns over the cycle.

So far, so good. It was indeed not long ago that the world seemed ready to implode and nobody in the investment business expected to live to see the next up-cycle.

This, however, is as far as rational thought took the Credit Suisse folks.

Then the drugs kicked in:

The firm now sees a strong case to be made that both GS and MS are overcapitalized. They estimate GS currently holds $6.6-8.6 billion of excess capital, equal in size to a buyback program for 8-11% of the co. They believe MS has the potential to repurchase up to $1.5 billion of its common stock (3% shares outstanding) with that opportunity materially expanding…
—Briefing.com

It is true that Morgan Stanley and Goldman Sachs have shrunk their asset base from Bubble-era peaks of 33-times equity and 22-times equity, respectively, to a low-teens multiple of equity.

That's a far more manageable chunk of leverage, and far less likely to require the Fed’s support down the road.

But given what we’ve just been through—i.e. the End of the World as We Knew It, to paraphrase R.E.M.—isn’t it a decade or two too soon for Wall Street’s Finest to be calling for the kind of mindless, capital-destroying, Returning-Value-To-Shareholders nonsense that got us into the crisis in the first place?

We here at NotMakingThisUp think so.

But not the normally sober folk at Credit Suisse—whose only excuse, as far as we can tell, is that the spirit of Hunter S. Thompson is alive and well and living among Wall Street’s Finest.


Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: inquiries will be ignored. This content is intended solely for the entertainment of the reader, and the author.

Nobel Freakonomics

We don’t read Paul Krugman much these days—not since the New York Times outsourced its newsroom to the White House press office—but we did catch his column, “Not Enough Audacity,” in which the Nobel Prize-winning economist frets that Obama’s health care efforts aren’t radical enough:

On one side there’s Barack the Policy Wonk, whose command of the issues — and ability to explain those issues in plain English — is a joy to behold.

But on the other side there’s Barack the Post-Partisan, who searches for common ground where none exists, and whose negotiations with himself lead to policies that are far too weak.

Now you’d think Obama’s masterful “command of issues” might have included the notion that the person nominated for Treasury Secretary should be a guy who paid his taxes on time. But leaving that aside, let’s look at the President’s “ability to explain those issues in plain English,” which skill leaves Krugman all weepy:

Mr. Obama offered a crystal-clear explanation of the case for health care reform, and especially of the case for a public option competing with private insurers. “If private insurers say that the marketplace provides the best quality health care, if they tell us that they’re offering a good deal,” he asked, “then why is it that the government, which they say can’t run anything, suddenly is going to drive them out of business? That’s not logical.”

This is very smooth, and it certainly seems “crystal-clear,” assuming you don't think about it for, oh, half a second.

But it is nothing like logical: Government has no profit motive. Private insurers do. So a government payer, even as badly run as it will be, will wreck the private insurers' business models.

Stock-market-wise, we couldn't care less how the health-care model gets resolved. In the investment business, you deal with facts as they are, not as how you wish them to be.

But we wonder: how did a Nobel Prize-winner like Krugman get fooled by a slick bit of rhetoric with no inherent basis in fact?

Well, the Times’ web site describes the economist thusly:

His professional reputation rests largely on work in international trade and finance; he is one of the founders of the "new trade theory," a major rethinking of the theory of international trade.

Let’s hope he’s not working on a major rethinking of the theory of human health care...


Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

Thanks, Michael

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“Now he’s gone and joined that stupid club.”

—Wendy O’Connor (Kurt Cobain’s mother) after her son killed himself, joining Jimi Hendrix, Janis Joplin and Jim Morrison, rock stars dead at 27.

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Okay, so we’ve been in a thankful mood recently (see “Thanks, Google” from June 15), and we’re going give thanks once more on these virtual pages.

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Not, however, to the Michael Jackson who married Elvis’ daughter, dangled his baby out a window, and re-jiggered his face into some sort of Dangers-of-Plastic-Surgery warning poster.

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The Michael Jackson who deserves thanking here is the genius who, when he was all of 23 years old, created a groove—the foundation of “Billie Jean”—that was as good as anything laid down on a record.

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That groove could put a crying baby to sleep—and in fact it did, many times.

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No matter how out of sorts she was, no matter how loud she was crying from that uncomfortable baby seat in the back of that tiny car, she stopped crying the second “Billy Jean” and its hypnotic base-line started to pulse.

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That crying baby is now a grown woman; Michael Jackson, dead and soon-to-be-buried—or whatever the hell his handlers decide to do. (Ashes buried on the moon? Body frozen alongside Ted Williams for a Second Coming? Corpse interred at a new Michael Jackson Morgue at Disneyland?)

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And although he was 50 when he died, way past the age of 27 when the likes of Kurt Cobain, Jimi Hendrix, Janis Joplin and Jim Morrison had all killed themselves in one way or another—Cobain with a shotgun, all doped up on heroin and Valium—the reality is Michael Jackson joined “that stupid club” a long time ago.

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But that’s how it seems to be for rock stars.

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Elvis was done by 27, even though he lived to 42. In fact he never made a song John Lennon thought worth listening to after he hit the big-time on the Ed Sullivan Show at 21.

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And Lennon’s first musical partner, Paul McCartney, wrote his last good song—“Maybe I’m Amazed”—when he was 27.

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It was McCartney, of course, who helped plant the seeds of Michael Jackson’s own musical demise when the pair collaborated on two songs that deserve their own special category—what the Brits call “Cringe-Making”—on any list of all-time Bad Rock Songs: “Say Say Say” and The Girl is Mine.”

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But we won’t remember Michael Jackson for his collaborations with a 40-year old ex-Beatle, or the tabloid stuff that came later.

We’ll remember him for a particular groove he created when he was 23 years old and the world was his.

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Jeff Matthews

I Am Not Making This Up

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© 2009 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.

Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

‘Woodstock for Capitalists’ Concluded: “The Edge of Death” and Other Matters

Lost Bragging Rights; Credit Default Squeeze Explained; Student Loan Business Unexplained; A Nephew Married and a Suspicion Confirmed; Charlie Munger, Rational to the Last; a Final Breakthrough Foretold


Lost Bragging Rights and a Mystery Explained

Warren Buffett loved his Triple-A credit rating.

He mentioned it frequently, and spoke of its importance as far back as his 2003 shareholder letter:

Among the giants, General Re, rated AAA across-the-board, is now in a class by itself in respect to its financial strength.

No attribute is more important…. When an insurer lays out money today in exchange for a reinsurer’s promise to pay a decade or two later, it’s dangerous – and possibly life-threatening – for the insurer to deal with any but the strongest reinsurer around.

In 2004 he crowed even louder about it:

Gen Re’s financial strength, unmatched among reinsurers even as we started 2003, further improved during the year. Many of the company’s competitors suffered credit downgrades last year, leaving Gen Re, and its sister operation at National Indemnity, as the only AAA-rated companies among the world’s major reinsurers.

So it is no big surprise when a shareholder at the Berkshire Hathaway 2009 shareholders meeting asks about the recent Moody’s downgrade of the Berkshire companies’ debt two levels, from AAA to Aa2, on “the severe decline in equity markets over the past year as well as the protracted economic recession.”

And it is no surprise at all when Buffett promptly admits that losing the Triple-A rating bugged him:

“I very much liked having a triple A. I was disappointed when Moody’s downgraded—we didn’t think that was gonna happen, but it did. It does cause us to lose some bragging rights.”

What is a surprise comes when, in the course of discussing the downgrade, Buffett reveals the answer to a mystery which prevailed for months prior to the meeting: what caused credit default swaps on Berkshire Hathaway—certainly nobody’s idea of a teetering financial institution on the brink of collapse—to soar to levels associated with companies more like Sears?

Turns out that, as we here at NMTU had ventured to guess (see “Is Buffett Worried? No, but Somebody Is,” from November 20, 2008), the spike had been caused by counterparties to the index put options Buffett had sold—prior to the market collapse—buying protection on Berkshire, driving the price of that protection up to absurd levels.

Here’s how Buffett explained it:

“When we write an equity put option—a billion dollar put—and somebody pays us $150 million, we get the cash and set up a liability. The other guy takes $150 million out of cash and sets up a $150 million receivable.

“Now, as the world has developed, the value of that asset has increased and he reports that through earnings, and we report that as a loss. BUT, we’ve got the cash, and he’s got an asset that’s due in 15 years or something.

“Now, his auditors say, you have to go buy a credit default swap [on Berkshire] to protect yourself against that receivable going bad…”

Hence the spike in credit default swaps on Berkshire Hathaway, which for a period of time made the Oracle of Omaha's 44-year-long accumulation of cash-generating businesses and insurance “float” appear to have no more going for it than Sears Holdings Corp.

Buffett concludes the discussion—by way of making his shareholders feel better about contracts that were, at that point, billions in the hole—with the observation that as the price of the credit default swaps increased, the cost to the counterparty of maintaining that put option soared.

“It explains why people may want to modify their contracts with us,” he adds, smugly.


One Industry Not to Expect Warren Buffett to Buy Into

“The only thing out of bounds,” Buffett likes to say before the questions begin, “is what we’re doing now.” But that doesn’t stop shareholders and money managers from fishing.

And, sometimes, they catch something—but not necessarily what they’re looking for.

Asked by a Montclair New Jersey shareholder to talk about the student loan industry—currently under a cloud given the recent near-death experience of Sallie Mae—Buffett lets Munger handle the question.

It turns out to be the briefest answer the entire day, and no doubt a disappointing one to the shareholder from Montclair:

“We don’t know a lot about it,” Munger says. Period.

For Buffett and Munger not to know a lot about a business…well, that’s one business not to expect Buffett and Munger to buy into any time soon.


Suspicion Confirmed

The clocks in the Qwest Center arena are approaching 3 p.m.

The crowd has thinned out, and the question and answer session is almost over.

The 51st and last question of the day now comes—oddly enough—from a young man with a microphone, standing in the audience near the front of the stage.

I say “oddly enough” because up until now, the meeting has been run entirely differently from years past.

Instead of shareholders asking questions unfettered from one of a dozen microphones placed around the Madison Square Garden-sized Qwest Center arena, Buffett chose three reporters—Carol Loomis of Fortune, Becky Quick of CNBC and Andrew Ross Sorkin of the New York Times—to ask questions submitted via email. In between each reporter’s turn, a shareholder chosen by lottery asked a question.

This new format distinctly limited the kind of “What Would Warren Do?” questions that had come to dominate the proceedings, and made for a much more relevant set of questions.

It also, however, slowed things down.

After all, when a person stands at a microphone to ask a question of the world’s most successful investor and his equally intelligent (and highly acerbic) business partner, that person doesn’t want to look like an idiot in front of 30,000 people and a worldwide press corps.

Thus, in years past, the questions—though generally off-topic, and sometimes way off-topic—tended to be asked quickly, and to the point.

That same person, however, when emailing a question to one of the three reporters, may write to his or her heart’s content.

And that's why the questions from the reporters today—even the really good questions—have tended to be verbose and sometimes convoluted, none more so than the one about Berkshire’s derivatives exposure, which conjured up “Slim Pickens in 'Dr. Strangelove' riding a nuclear bomb” and much other flowery imagery to make a simple point—i.e. that Berkshire’s derivatives positions had cost a bunch of money, and what did Buffett think of that?

Furthermore, although Buffett himself started the meeting by highlighting the new format—“They’re all Berkshire Hathaway-related questions…. We had a problem where they drifted off the last couple of years: what we should do in school, that sort of thing”—he hasn’t exactly been forthcoming in responding to those Berkshire-related questions.

Buffett has refused to do a post-mortem on the General Re acquisition; failed to address a great question on the difference between the money-center banks that collapsed and one (Wells Fargo) that didn’t; professed ignorance of earnings management at one of the most earnings-managed companies in the world (GE); and dismissed the Index Fund-style 2008 performance of the four money-managers in the running to succeed him at Berkshire with a figurative wave of the hand (“They did not cover themselves in glory, but I did not cover myself in glory so I’m more tolerant,” he said blandly).

Indeed, one of Buffett’s favorite questions the entire day was entirely theoretical: What would Buffett have done had he been in the same position as Bank of America’s Ken Lewis, who felt pressured by Paulson and Bernanke to withhold making public the deterioration of Merrill Lynch during the financial crisis?

“Boy that’s a great question,” Buffett says enthusiastically, then turns the question on its head. “If I’d been in Ben Bernanke’s or Paulson’s situation would I do differently? We were in a fragile situation in September, if B of A had rejected Merrill on a material adverse change clause…. I’m gonna ask Charlie what he would do.”

Munger stirs in his seat and says simply:

“You can criticize the original decision to buy Merrill and the contract they signed, and that would be legitimate, but once they signed that contract I believe the Treasury and B of A behaved honorably”

With Buffett wondering out loud what he would do if he’d been Ben Bernanke or Hank Paulson, a suspicion—that he actually prefers answering the “What Would Warren Do?”-style questions to the strictly-business questions in which he might embarrass a member of the extended Berkshire family in front of 30,000 people—takes root.

And it is confirmed when the young man with the microphone standing in the audience asks the 51st question of the day.

The young man’s name is Alex, and he wants to know “how we can improve the economy.”

“We can do what the government wants us to do and spend, and housing formations are important. I don’t know if that gives you any ideas or not.” Buffett says suggestively.

The young man then turns to a young woman beside him: “Mimi, you’re my best friend, would you be my wife?”

It’s a set-up. The couple embraces, the audience applauds, and Buffett concludes the day’s question-and-answer session on a decidedly non-business note:

“I have two comments to make. Alex is my sister Doris’s grandson, my grand-nephew; and Mimi is terrific.”

The meeting is over. The crowd disburses.


Charlie Munger, Rational to the Last

If, by concluding the session with a grand-nephew's marriage proposal in front of 30,000 people, Warren Buffett appears to affirm the transformation of the Berkshire annual meeting into something more pep rally than business meeting, Charlie Munger has changed his own contribution to the proceedings not one bit.

In fact, Munger has added more to the proceedings than in recent years, although always in the same rich, deeply skeptical, highly moral vein that made him sentimental favorite of a good portion of Berkshire’s “quality shareholders.”

Asked how to improve the “financial literacy” of Americans, Munger says dourly,

“I don’t think you can teach people high finance who can’t use a credit card.”

When Buffett is asked whether he uses “a normal free cash flow over the discount rate” calculation in making investments and responds with his standard line—“If you need to use a computer or calculator to make the calculation, you shouldn’t buy it”—Munger adds:

“Some of the WORST business decisions I’ve ever seen is when people do these complex calculations. The worst I’ve ever seen was when Shell did that with Belridge Oil.”

(I still have the Lucite paper-weight with the tombstone ad announcing that deal from almost exactly 30 years ago. Merrill Lynch, my alma mater, helped do some of those “complex calculations” for Shell.)

And when Buffett defends his ownership of Moody’s—the ratings firm that contributed mightily to the subprime crisis by slapping Triple-A ratings on junk assets—Munger says:

“I think the ratings agencies eagerly sought stupid assumptions…it’s an example of being too smart for your own good.”

But Charlie Munger is no grumpy old man. He is, above all things, rational.

A discussion of recent stability in lower-priced housing markets, improved home affordability and the current high rate of absorption—Berkshire owns the second-largest real estate broker in the country, and Buffett notes that household creation is running nearly three times the current construction pace—brings this matter-of-fact observation from Munger:

“If I wanted to buy a house in Omaha, I’d buy a house tomorrow.”

Defending last year’s no-better-than-S&P 500 performance of the four investment managers in the running to succeed Buffett, Munger says:

“I don’t think we would WANT a manger that could think he could just go to cash on a macroeconomic basis and then jump back in…we can’t do it ourselves.”

Dismissing a question about last year’s decline in Berkshire’s stock price, Munger focuses on the future:

“What matters is this, our casualty business is probably the best in the world; our utility business, if there is better utility I don’t know it…and I could go down that list. And if you think it’s easy to get into that position Berkshire occupies, you’re living in a different world than I inhabit.”

Charlie Munger is, as always, thinking big thoughts.

And some that are more philosophical than have ever been expressed at a public shareholder meeting.


A Final Breakthrough

Asked about the potential returns from Berkshire Hathaway by a shareholder who notes that Berkshire’s book value has grown 20% only once since 1995, Buffett focuses on the numbers:

“It’s absolutely impossible that we’ll come close to a figure like 20%...we hope that we achieve a few percentage points better than the S&P 500 a year. If we get a couple points better—I’ll feel better.”

Munger, on the other hand, focuses on the intangibles:

“I think this company will make a big and constructive contribution to its surrounding civilization in the years to come.”

Asked if Berkshire’s “sustainable advantage is largely you,” and what happens to this advantage when he is gone, Buffett first jokes that this focus on his eventual demise is “Defeatism,” then argues the sustainable advantage is the culture “embedded” in the Berkshire businesses—a culture reinforced by this very meeting:

“Our culture, our managers, our shareholders JOINED that culture, it gets reinforced all the time, they see that it works… it’s meaningful because there will be people that want to join up with us and they won’t have a good second choice.”

Munger goes a step further:

“A lot of corporations in America are run stupidly from headquarters as they try and force the divisions to come up with profits every quarter that are better than the last quarter…and a lot of problems creep into that business.”

He finishes that profoundly insightful knife at the heart of American capitalism with a hint of his own brand of fatalism:

“While Warren and I will soon be gone…the stupidity of management in the corporate world will likely remain to give Berkshire a competitive advantage in the future.”

Yet it is when Buffett and Munger are asked about the potential for economic upheaval in these uncertain times that Munger comes through with the most remarkably philosophical answer to a question at any annual meeting:

“Well now that I’m so close to the edge of death,” he says matter-of-factly, “I find myself getting more cheery about the economic future. We are going to harness the direct energy of the sun...

“What I see as a final breakthrough—you can see it coming over the horizon. I think it’s usually a mistake to think only about your probable misfortunes, it’s good to think about what’s good about our situation.”


Charlie Munger, rational to the last.

Good to think about, indeed.


Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

Thanks, Google

Google has been much in the news lately—and not in a good way.

Google’s ambitions—particularly in the book field, where it recently settled a lawsuit by publishers over its plans to scan every out-of-print book ever written so as to be searchable—have taken on Microsoftian overtones in the minds of authors, publishers and, now, Government lawyers.

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This is how the Wall Street Journal reported developments last week:

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U.S. Steps Up Probe of Google Book Deal

By Elizabeth Williamson, Jeffrey A. Trachtenberg, and Jessica E. Vascellaro

The Justice Department has sent formal demands to Google Inc. and publishers for information about a deal that would allow the search giant to make millions of books available online, publishing company executives and people briefed on the matter said Tuesday.

The civil investigative demands, or CIDs, are the strongest sign yet that the Justice Department may seek to block or force a renegotiation of the settlement, which was struck last year and has not yet been approved in court....

Google began scanning books in 2004 so the text could be searched online, and publishers and authors sued to stop the effort in 2005, alleging it violated copyright laws. Google settled the dispute last year, agreeing to pay $125 million to settle claims, cover legal fees and establish a registry for publishers or authors to get paid when their titles are used online....

The settlement has drawn criticism from a variety of industry executives who say it will give Google broad copyright immunity and make it difficult for competitors to enter the market for digital titles. Google, the Authors Guild and major publishing companies have held the agreement up as a landmark case that will expand digital access to books.

—The Wall Street Journal, 06/10/09


As a former Google shareholder and an author who could not have written a book without using Google as the primary research and organizational tool (it took about a year to write “Pilgrimage to Warren Buffett’s Omaha,” including research, writing, re-writing and more re-writing, plus everything else that goes with publishing a book the old-fashioned way), I admit to a bias in Google's favor.

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But I strongly suspect the Google book-scanning deal will probably help authors in ways they can’t currently imagine.

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For starters, it will put content in front of people who otherwise would never know that content existed. Just consider one such book, “A History of the Yankee Division,” a 283 page history of the 26th Division of the 101st Infantry in World War One, recently made available thanks to Google.

The book, which was published in 1919, is long since out of print and concerns a relatively obscure matter: the start-to-finish account, from formation to armistice, of what was known as the “Yankee Division,” so-called because it was comprised of New England soldiers.

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But that division included my grandfather.

Now, until last week, all I knew about my grandfather’s two war experiences was that he had seen trench warfare in France during the First World War, and had traveled extensively through China as a military advisor to the government in its efforts to stave off the Japanese during the Second World War.

I understood that his time in France had involved real combat. (“Oh, you’d be standing in formation and the man next to you would get a bullet right here,” he once told me, pointing to his forehead. “That was every day stuff, that was.”) And I also knew he had a small, velvet-lined box of decorations which he didn’t talk about, even when pressed. “You wave a gun and some Germans surrender,” he’d say, “and they give you a medal.”

But that was about it.

And then Google scanned “A History of the Yankee Division” from the University of Michigan library, and made the book available to the world.

And now I know where my grandfather trained, where he landed in France, and where he marched, rested and fought. I know the ground he occupied on the day of the armistice, and even name of the ship that took him home.

Also, I also learned something about one of those medals he never talked much about :

First Lieutenant George L. Goodridge of the 101st Infantry, on November 8, with about thirty men, secured a footing in an advanced enemy trench. The attacking battalion met with stubborn resistance…. Goodridge and his men held on until relieved November 11. He received the Distinguished Service Cross.

What, exactly, causes a soldier to merit a “Distinguished Service Cross”? You can find that thanks to Google, too. According to Army regulations:

The act or acts of heroism must have been so notable and have involved risk of life so extraordinary as to set the individual apart from his or her comrades.

So, thank you, Google.

And let’s hope the so-called Justice Department doesn’t kill a great thing before everyone else can benefit, too.



Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.