Edited by Eric J. Fry, Howestreet.com 14 May 2008
Charles Munger, at the Wesco Financial Corp. shareholder meeting:
“Include me out,” quipped Charlie Munger last week, referring to the seemingly revitalized financial sector. “A lot of rot has crept into the financial system…We’ve got plenty of scandals coming.”
“There is a lot of Gresham’s Law out there. A lot of bad practices pushing out the good practices,” said Munger. “The amount of knavery and folly that has been revealed in the last nine months is unbelievable. How did it happen? Greed was part of it. Terrible accounting was part of it…
“One thing about accounting, the liabilities are always 100% good. It’s the assets you have to worry about…
“A modest amount of liquidity will service the true needs of a civilization. A large amount of liquidity will bring out the worst in human nature.
“My nomination for the next crisis will be in the derivative books…I’m not sure when the denouement will come, but there will be one helluva mess in the derivatives books…When Berkshire bought Genera Re a few years back, it has a derivatives book…Gen Re needed a derivatives book like I needed a case of syphilis. When we went to sell these derivatives, we discovered that we couldn’t get the prices that they were supposedly worth…They were Good-until-reached-for assets…
“The Berkshire model is coming back into favor. The idea of buying a share of common stock for less than the underlying value of that stock is gaining favor.”
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