Monday, September 20, 2010

Is Berkshire's Charles Munger Still Making Sense? is reporting some surprising statements from Berkshire Hathaway's long-time vice chairman, Charlie Munger, in Munger Says `Thank God' U.S. Opted for Bailouts Over Handouts.

From the article:

“You should thank God” for bank bailouts, Munger said in a discussion at the University of Michigan on Sept. 14, according to a video posted on the Internet. “Now, if you talk about bailouts for everybody else, there comes a place where if you just start bailing out all the individuals instead of telling them to adapt, the culture dies.”

Bank rescues allowed the U.S. to avoid what could have been an “awful” downturn and will help the country as it deals with the housing slump, Munger, 86, said. He used the example of post-World War I Germany to explain how the bailouts under Presidents George W. Bush and Barack Obama were “absolutely required to save your civilization.”
. . .

“There’s danger in just shoveling out money to people who say, ‘My life is a little harder than it used to be,’” Munger said at the event, which was moderated by CNBC’s Becky Quick. “At a certain place you’ve got to say to the people, ‘Suck it in and cope, buddy. Suck it in and cope.’”

There is much with which to disagree in Mr. Munger's sentiments. For one, it would seem that the U. S. in fact had an "awful" downturn despite the bailouts. For another, it is difficult to see how a managed bankruptcy of Citigroup or Bank of America (or both) would have destroyed civilization as we know it. For a third counterexample, shouldn't the corporations have adapted, such as by wiping out the common shareholders as appropriate and having the bondholders convert their bonds into equity?

Come to think of it, didn't GM do just that? And somehow civilization survived?

A miracle!

Once again, let us review matters. The bailouts were bailouts of bank holding company bondholders, as well as of senior bondholders of Fannie and Freddie (as well as of mortgage-related securities). They were bailouts of counterparties of AIG. They were in many cases bailouts of common shareholders of numerous companies large and small. The bailouts have sustained all sorts of companies and individuals associated with them. The companies that took the lead in the fraud and the bubble, and their bondholders, received aid. Mr. Munger approves of such aid. Who paid for this aid? Why, it was we the people. What does he think of we the people?

In contrast, he appears to take a hardhearted viewpoint to individuals who may have believed in the media's touting of housing as a great, no-lose investment. But it's individuals and not corporations that have hunger, feel the sting of adverse weather when sleeping outdoors rather than in a home, and that ultimately built this country.

Munger applauds the bailouts of owners of stocks, bonds and mortgages who invested unwisely or unluckily. The fate of the little guy who was simply caught up in a bubble of historic proportions and that had at its root extensive mortgage fraud that the FBI stopped investigating after the 9/11 attacks changed priorities troubles him little if at all. Even though all the little guys collectively paid for the bailouts.

It's one thing to cultivate an image as a curmudgeon. That's Munger. It's another to equate the bailouts that so infuriated a nation with saving civilization. Charles Munger is 86 years old. It is certain that a brain scan would reveal that his brain is shrunken. He's "talked his book" one time too many and in an unduly offensive manner, in my humble opinion.

Time for him to suck it in and step down.

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