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All absolutely true, but note the lack of derivatives and hedges. The Goldman transaction was a straight equity deal, with a big emphasis on dividends. In a n

All absolutely true, but note the lack of derivatives and hedges. The Goldman transaction was a straight equity deal, with a big emphasis on dividends. In a nutshell, it was a chance to squeeze one of the 'casinos' hard, while still staying out of the whole CDO/default swap/derivative mess. Both Munger and Buffett have a habit of stealing your wallet while telling you you're an idiot for letting them do it. The article and the Goldman deal are reflections of that attitude.

Daniel_Newby 17y ago
"The Goldman transaction was a straight equity deal, with a big emphasis on dividends." No. They were derivatives. Goldman was to pay those heavy dividends by executing credit default swaps they had purchased from AIG. Trouble is, the securities underlying the swaps were overcommitted, meaning the swap prices would be driven way down in an open market. And Goldman didn't own the securities. And the securities hadn't necessarily defaulted. And AIG had no money. This was solved by the Munger/Buffet helping arrange for the taxpayer to pay off AIG's gambles at 100% without Goldman even delivering the securities underlying the swaps. Make no mistake, the Goldman deal was a naked derivative play combined with brazen government corruption.
- megaduck 17y ago
  There's no question that Goldman had to pay off those dividends with some kind of shenanigans. IIRC, they were up to their eyeballs in default swaps and CDOs, both of which were beyond toxic at the time. That 10% payout was going to have to come from somewhere. However, my understanding was that from Berkshire's perspective, it was a straight equity investment for preferred stock. They didn't really care where the dividend cash came from, so long as they got paid. So, if it was a derivative play, it was an indirect one. Berkshire never had those default swaps on its books. That's how I remember it going down, at least. It's entirely possible that I got some of this wrong.
Nelson69 17y ago
The Berkshire and Goldman deal was, but Goldman plays in derivatives. Where are the fundamentals there? Or when is Goldman going to announce their new business model? You'd hope someone like Buffet, with his cache and savvy could suggest some reasonable ways to end "too big to fail." All things right now make me think we'll have another bust in a couple years, nothing is fundamentally different.
- DaniFong 17y ago
  You cannot avoid playing in derivatives. Do you have a bank account? Do you own U.S. currency? Is all of your wealth in gold? In any of these cases the price is set by the market and strongly effected by derivative trades. You need to understand derivatives just to do a reasonable job avoiding them.
nandemo 17y ago
Warrants are derivatives.
- lsternlicht 17y ago
  Actually depending upon how the warrant is structured it's most likely a pseudo-derivative, not a pure play on pricing action.
- megaduck 17y ago
  If you classify options as derivatives, then you're right. However, if you use that definition then the Berkshire/Goldman warrants are the simplest derivative that I've ever seen. The Goldman warrants are an option to purchase an additional $5 billion of stock at $115 per share, any time in the next 5 (now 4) years. Basically, they're a plain vanilla call option. What's really interesting about those warrants is that they behave identically to an equity purchase, only without the downside. Berkshire literally can't lose money. Plus, if the warrants are ever exercised, then Berkshire simply gets more equity. It never gets tarted up with default swaps and tranches and triggers and all that crap. The deal is the complete opposite of the 'casino' mentality that Munger is decrying. So, yeah, you might be technically correct. However, you've also got to look at the spirit of the thing.

Daniel_Newby 17y ago

"The Goldman transaction was a straight equity deal, with a big emphasis on dividends." No. They were derivatives. Goldman was to pay those heavy dividends by executing credit default swaps they had purchased from AIG. Trouble is, the securities underlying the swaps were overcommitted, meaning the swap prices would be driven way down in an open market. And Goldman didn't own the securities. And the securities hadn't necessarily defaulted. And AIG had no money. This was solved by the Munger/Buffet helping arrange for the taxpayer to pay off AIG's gambles at 100% without Goldman even delivering the securities underlying the swaps. Make no mistake, the Goldman deal was a naked derivative play combined with brazen government corruption.

megaduck 17y ago
There's no question that Goldman had to pay off those dividends with some kind of shenanigans. IIRC, they were up to their eyeballs in default swaps and CDOs, both of which were beyond toxic at the time. That 10% payout was going to have to come from somewhere. However, my understanding was that from Berkshire's perspective, it was a straight equity investment for preferred stock. They didn't really care where the dividend cash came from, so long as they got paid. So, if it was a derivative play, it was an indirect one. Berkshire never had those default swaps on its books. That's how I remember it going down, at least. It's entirely possible that I got some of this wrong.

Nelson69 17y ago

The Berkshire and Goldman deal was, but Goldman plays in derivatives. Where are the fundamentals there? Or when is Goldman going to announce their new business model? You'd hope someone like Buffet, with his cache and savvy could suggest some reasonable ways to end "too big to fail." All things right now make me think we'll have another bust in a couple years, nothing is fundamentally different.

DaniFong 17y ago
You cannot avoid playing in derivatives. Do you have a bank account? Do you own U.S. currency? Is all of your wealth in gold? In any of these cases the price is set by the market and strongly effected by derivative trades. You need to understand derivatives just to do a reasonable job avoiding them.

nandemo 17y ago

Warrants are derivatives.

lsternlicht 17y ago
Actually depending upon how the warrant is structured it's most likely a pseudo-derivative, not a pure play on pricing action.
megaduck 17y ago
If you classify options as derivatives, then you're right. However, if you use that definition then the Berkshire/Goldman warrants are the simplest derivative that I've ever seen. The Goldman warrants are an option to purchase an additional $5 billion of stock at $115 per share, any time in the next 5 (now 4) years. Basically, they're a plain vanilla call option. What's really interesting about those warrants is that they behave identically to an equity purchase, only without the downside. Berkshire literally can't lose money. Plus, if the warrants are ever exercised, then Berkshire simply gets more equity. It never gets tarted up with default swaps and tranches and triggers and all that crap. The deal is the complete opposite of the 'casino' mentality that Munger is decrying. So, yeah, you might be technically correct. However, you've also got to look at the spirit of the thing.