oec2000

Part of the price pop can be attributed to the weakening of the C$ vis-a-vis the US$.

In terms of relative value, the markets are setting up for FFH to have lots of better opportunities to deploy capital than to buyback stock. I hope the guys at HWIC are salivating and conserving their capital for bargain basement sales. I bet no one is complaining about their equity hedges today. :D

Thank you!

I hope this is not the situation. If, after seeing AIGFP blowup from selling CDS on "riskless" bonds, bankers were still selling CDS to make free money, they surely deserve to fail. But then again, maybe this is why the European authorities cannot get to grips with the crisis. I always thought that the Euro sovereign debt problem was a finite one and all it required was the political will to agree on a comprehensive package to deal with the problem - i.e. do a real stress test on the banks and come out with whatever bailout funds are required. But if there are substantial CDS side bets, we could be looking at "deja vu all over again."

1) We should not ignore survivorship bias when identifying successful investors who used leverage. The unsuccessful ones are "dead" and not known - we don't know how many unsucessful Cornfalls :) there were for every supremely successful Cornwall. 2) While it is true that Buffett and Watsa have leverage from the use of float, I ownder whether the leverage from float added significantly to their compounded returns. While I haven't looked at numbers from their earlier years, if you look at BRK's and FFH's exposure to equity-type investments, they are not materially larger than their underlying shareholders' equity. So, the leverage from float is in effect mostly invested in "safer" investments like bonds. With their investment prowess, Buffett and Watsa would likely have been able to achieve returns of around 20% without leverage if they had been running closed-end funds - this are the returns they have achieved for BRK and FFH. It seems like the leverage from float merely offsets the taxes they have to pay in the insurance company structure. I suspect that a key reason for the use of float is that it gives them access to permanent OPM capital. In Buffett's case, it is also a source of profit (to the extent that his cost of float is negative). 3) Most here are thinking of using leverage for equity type investments which is why there should be a stronger focus on risk. Callable margin is definitely much riskier than what Buffett and Watsa are doing. A 30-year fixed rate mortgage taken out on a fully paid home is much less risky. LEAPs can be risky or risk reducing depending on how they are used. Before employing leverage, it is useful to ask why we need to use it; do we really need to get to our destination a few years earlier? While not the same, I see some similarities to the Sino-Forest discussion here when some justified taking the risk by using the examples of how others made it big by taking risk. It is not a good idea to use 20-20 hindsight to find examples that justify your view.

The irony is that those who don't need to use leverage are the ones who can most afford to use it. If I have a $10m net worth, I can safely take a $1m HELOC against my home. If I have a net worth of only $0.2m, taking a $0.5m HELOC is much riskier.

You're right - it is a bad example. Since the male/female ratio is about 1:1, there is no shortage of mates so there is no reason for me to share my wife if I only have one. On the other hand, if I had more than 1, than maybe the argument would make more sense. That's why we have laws against polygamy, I suppose. ;D Seriously though, what do you think of the idea of progressive grading in education? This was my original question to you; not why you thought the video was dumb. I honestly think it may not be bad idea if college entrance requirements are adapted to take into consideration socioeconomic status and quality of high school. It is not so different a concept from progressive taxation but helps people where it really matters. This "teaches a man how to fish" as opposed to progressive taxation which simply "gives the man a fish."

The statute of limitations for dire macro forecasts has to be on horizons of less than 30 years. I think he was just wrong. And the current problems were not foreseen by Hayek, so I'm not giving him any credit for whatever malaise we currently have or how bad it will get. Wasn't there a fairly severe recession around 1980? Anyway, my "jury" comments were not in support of Hayek (don't really understand or subscribe to any particular school of economics) but about the quality of the growth over the past 30 years. I don't have the numbers to hand but I remember comparing the growth of debt over that period to the growth of GDP was was surprised by how high the ratio was. Made me wonder what the growth rates would have been without the debt explosion.

True, but there is a major difference in that he gets paid while borrowing the insurance float.

It should be noted that the improvement in the economy over the past 30 years has occurred on the back of a huge explosion in debt and a sustained decline in interest rates. Yet the man in the street is not really in that good shape: http://online.wsj.com/article/SB10001424053111904265504576568543968213896.html?mod=WSJ_hp_mostpop_read Is the US like the subprime borrower who is feeling good while he is still enjoying the benefits of his teaser rate mortgage? It may not feel so good when time comes to start paying down the debt. I think the jury is still out.

What did Buffett say about the use of leverage? If you are smart enough, you don't need it; if you are not, you have no business using it. Still, it sound really tempting if you can lock it in for 30 years without the risk of recall! :)

This goes to my point about tackling root causes. That's why I feel that calls to increase tax rates on the rich are too simplistic. It does not recognise the fact that the rich will always use their power and resources to seek out, negotiate and make use of loopholes to reduce their taxes. IIRC, it's like the situation when the Clinton administration tried to control executive pay by limiting its tax deductibility and created the opposite result - it caused an explosion in (if my memory is reliable) stock option grants which increased CEO compensation much more than before. The wealth disparity issue has other causes that are not so easily redressed by fiddling with tax rates. Take negotiating power. People with unique and highly sought after skills have huge pricing power. Star celebrities and hot shot traders will probably ask for and get paid more to compensate for higher taxes. At the other end of the spectrum, the less skilled's pricing power will be determined by how easily their jobs can be exported to low cost economies. We all understand how much moats drive corporate returns; it should not be difficult to understand that similar dynamics apply to individual returns. You can raise tax rates for the ratings agencies and cut the rates for airlines but the disparity in returns will persist. Rather than merely raising taxes on the rich and then transferring them to the less skilled, perhaps the solution is to use the taxes to improve educational and vocational training facilities to help them develop more valuable and less transferable skills that will improve their pricing power. This is why I think it is useful to think in terms of the education and sports analogies. Because our views in these fields are less likely to have been "poisoned" by partisan talking points, people are more likely to make more thoughtful comments. So, for e.g. in education, I suspect few will advocate a straight transfer of grades from strong to weak students while many would support providing help (extra classes, tutoring) to the weak. While the particular video posted by Onyx may have been "stupid," I don't think the concept of levelling the playing field in education is so different from progressive taxation - it is not inherently stupid.

You really think that success in the classroom is very different from success in life? Do you really think George W Bush would have gone to Yale and HBS if he had been born as Bill Clinton or Barack Obama? And, I'm sure all of us have come across people who excelled in school despite working less hard than others; and, people who put in intense effort but somehow never seemed to do very well. Success in the classroom is as dependent on luck (innate skills, socioeconomic class, ability to afford tutors, quality of school and teachers etc). I'm all for fairness and progressive taxation. All I am saying is that causes and solutions are more complicated. Hedge fund manager taxation is a great example. Everyone knows it is ridiculous that they pay capital gains tax rates on their carried interest. Why is this allowed to persist? Is the problem with the tax code or is it with the rules on lobbying or campaign finance? As for the benefits that a billionaire hedge fund manager brings to society, the argument is no different for millionaire/billionaire showbiz or sports celebrities. Is it a legislative problem? No. It is simply a reflection of the values of a particular society at a particular time and you cannot legislate that away.

Myth, You confuse my opposition to broad-based knee-jerk policies of wealth transfer determined by people who are not paying the bill (the Bs) to a total opposition to wealth transfers. I share your concerns about the growing wealth disparity in the US, am aware of Buffett's criticisms of the tax system and have said earlier that wealth transfers are OK if done judiciously. However, I do not share your view that the solution is to blame the evil bankers or the richest 1% of the population. Neither is the solution as simple Obama's prescription to tax everyone earning more than $250k. My original comments were made in relation to misguided central bank policies that transfer wealth from savers to borrowers without proper consideration of the unseen costs (Martin's point). The US has run current account deficits for decades because the nation suffers from a deficit of savings. When you use every opportunity to push interest rates down, you incentivise people to spend rather than save; to speculate rather than invest; and you penalise the prudent (savers) and reward the irresponsible (spenders). Instead of trying to understand and address the root causes of the growing wealth disparity (no, it is not because bankers are evil; they are normal people who are simply responding to the power of incentives), too many people blindly jump on the class warfare bandwagon. The wealth disparity may have occurred for reasons we do not understand well (even though I have read explanations that it is a result of the US's change to a service economy and the globalisation of manufacturing). It is not just on evil Wall Street that these disparities have widened. It is happening in sports, in the arts and even in liberal Hollywood. While conservative tax policies may have contributed to it, the globalisation of production brought on by economic liberalisation in China and India may have played a larger role in the income distribution problem here. It was inevitable that the lower income groups performing less skilled jobs here would be the first to be affected by competition from China. The issues and solutions are a lot more complex than simply taxing the rich more (even though this should be part of the solution) and more thoughful responses are required than the ones either Obama or the Democrats have advanced. To quote Lincoln: "You cannot strengthen the weak by weakening the strong. You cannot help small men by tearing down big men. You cannot help the poor by destroying the rich." I believe that the best solution for the vast majority of disadvantaged people is to give them incentives and access to opportunities to improve their lot. This what is transforming China and India where people would prefer opportunities to prove themselves rather than receive handouts. The education and sports analogies are apt because these are areas where we provide suppport for the underdogs by providing them encouragement and opportunity (college scholarships and draft picks) rather than giving them free points. No matter what the system, we will always have winners and losers but it seems clear that a system that rewards winners produces the best overall results for the team. Is it any surprise that a country that rewards consumption and penalises savings ends up as a debtor nation?

Afaik drafts (not a subject I am particularly familiar with) operate only in a few team sports in the US. In any case, it does not appear that such systems operate to effectively hold back the great athletes (nor help the bad ones), income or achievement-wise. The vast majority of international sports do not have any levelling mechanisms. The only sport I can think of in which there is a formal system to handicap competitors consistently is one in which the competitors can't complain and don't get paid - horse racing. If they can weigh down faster horses, why can't they do the same to Usain Bolt? ;D Using Buffett as an analogy, do you not think that being born in the US significantly boosts the prospects of a child who shows promise as an athlete compared to a similarly talented child in Mongolia or Somalia?

In 2009, we could get similar or even better returns while taking lower risk by buying preferreds instead of common. Today, bank common (and derivatives) offer the potential for significantly higher returns over preferreds in return for not materially higher risk. That's my take, anyway, fwiw.

Without disagreeing with the point made by Moore and others here about the attraction of individual stocks (which makes sense), I have a tough time figuring out how Europe gets through its current problems without a significant slowdown brought on by fiscal austerity and a delevering of bank balance sheets. Europe today has much higher govt debt as well as budget deficits to GDP than the US had in 2008 and will not be able to apply the same degree of fiscal response to an economic slowdown that the US could in 2008-9. This is likely to be aggravated by a central bank that is culturally more hawkish than the Bernanke Fed. Just wanted to hear from others who follow Europe more closely whether they share this view or whether they see some other more positive points that I have missed. Also curious whether Europe has similar long term entitlement spending issues (on healthcare and social security that the US faces) that could start to become problems once the current fiscal austerity brings balance sheets into shape thus prolonging the economic headwinds. Not my intention to turn this into a macro discussion of whether to invest in Europe or not but I believe it is useful to understand the macroeconomic landscape when figuring out what specific stocks to buy. (The kind of understanding that helped direct some of us into favouring FFH over other financials in 2008, for example).

Care to share your arguments on what's wrong with the concept and why it cannot be extended to all fields of human endeavour? Instead of letting Tiger Woods earn $50(?)m a year and the 1000th ranked golfer earn $100k(?)m and then trying to tax Woods more to redress the imbalance (which Tiger might be able to avoid by using smart tax professionals), we could provide the solution at the source by handicapping Tiger's scores and limiting his earnings. Or, to use a more extreme example, why shouldn't we level the playing field for someone who had the misfortune to be born with a physical handicap?

Thanks. Maybe I am anchored to the crazy yields we saw in 2009 but the RBS-Ps don't scream out to me just yet, especially with suspended dividends. I was short RBS common in the low teens but have covered most of my positions. Seems to me the US banks are much further ahead in terms of restructuring and capital strengthening and offer much better risk/reward tradeoffs. The yield on BAC-L is not far off RBS-P's. I'm more attracted by the potential returns on bank common, warrants and LEAPs given that they are trading at such huge discounts to book.

Oec2000, here is your answer! http://www.youtube.com/watch?v=lOyaJ2UI7Ss We don't have to stop at education. Imagine the possibilities: We could extend this to sports and, best of all, politics. Would love to see politicians' reactions to the idea that someone else be given the power to transfer some of their votes and campaign funds to less fortunate candidates!

Al, I thought RBS suspended the dividends on all their preferreds as a condition of the govt support they received. Did I miss something?

Isn't his point that artificial intervention (i.e. supressing interest rates) doesn't work anyway in balance sheet recessions (as we have seen in Japan and in the US more recently). Therefore, the Fed should not use this policy so freely under the guise that it costs nothing and hurts no one. The more important implication is that such policies create the unintended consequence of encouraging financial leverage and speculation in the reach for yield. Without such policies the housing bubble and the subsequent financial collapse would not have reached such gargantuan proportions. It may not be too far-fetched to consider that such wealth transfers, if practised often and long enough, create disincentives to the A's to invest in their education and skills. I cannot quote any studies to support this view but I believe it is instructive to look at the Asian focus on education. Why do Asian families place so much emphasis on education? Because, in societies with woefully inadequate social support structures, people realise that education is their only route out of poverty. I am not against wealth transfers but think it should dished out more judiciously and only to the truly needy. It is interesting that people are very quick to support wealth transfers from the rich to the poor based on the principle that the fortunate should help the unfortunate. I wonder what people's reaction would be if, using the same principle, we adopted similar policies in education. Why not have a progressive grading system where we transfer grades from the stronger students to the weaker to level the playing field for college entrance and employment? If you worked your butt out to get your CFA, what would your reaction be to being asked to give away one of your levels to someone less fortunate so that he needs only to pass 2 levels and you have to pass 4? I am totally in favour of wealth transfers to the truly deserving. However, I feel most of these decisions are best left to the C's themselves to make. Bill Gates is an example of a C who is making these decisions in ways that are much more thoughtful and productive than decisions that any B person can make. I suspect if you ask the average man in the street in China or India, he will tell you that he is better off with less government today compared to when the Bs made all the decicions for the As and Cs back in the 1960s and 1970s.

I think they will need to find Paulson's bazooka to make it work. The 440b may be too little. The European bailout is also not directly comparable to TARP and we should not assume the results will be the same. With TARP, the banks being bailed out had balance sheet problems but not P&L problems (once the BS problems were cured). In other words, they could earn their way out and pay back TARP. in Europe, the parties being bailed out are governments who have chronic P&L problems (budget deficits) which, given current economic conditions, are paradoxically difficult to cure. Budget restraints to close the deficit gaps actually work to increase the deficits in the short run as the economy contracts. It is a much harder problem to solve because governments cannot play the margin game that banks can. Political resistance to cutbacks make life even more difficult.

The longer it takes them to fail, the smaller the event will be (CDS contracts have a maturity date). That doesn't really answer the question, but it does explain perhaps why kicking it down the road isn't so dumb. Firstly, CDS are not all that matters. Kicking the can down the road does not help the holder of Greek debt (ironically, some of them may actually hold CDS as hedges and will suffer if they expire). But the main point is that delays only create a further explosion of Greek debt. At current rates, the increase will be exponential and unsustainable for long. Secondly, Greece is not the real problem. It's contagion to the bigger economies. Delays greatly increase the risk of contagion which is why kicking the can could be disastrous. Thirdly, you overlook the likely possibility that Greek CDS holders may be taking their gains and recycling them into buying cheaper Spanish and Italian CDS.

In TRE's case, even cash, which is arguably the easiest asset to value, cannot be reliably determined (since much of it is held by intermediaries whose accounts TRE have themselves admitted they cannot verify). This gives you an indication of the scale of the problem here.