txlaw

“Nobody sat down and said, ‘We want 63 data centers,’” Moynihan said. “We inherited 63 data centers.” He intends to get that down to the single digits. Off topic, but I'd love to see Dell help BofA out with that problem. :P

Absolutely. Sometimes they call it the Paradox of Thrift. But you could just as easily call it the Paradox of Profit Preservation. That's why I believe that a fully funded and not pay-go social insurance program could be a huge strength if you could prevent people from gaming the system. You'd have a safety net that would keep people from being rolled by the economy and by bad luck (e.g., health problems), but that would eventually get those people transitioned to productive uses again. That's pie in the sky thinking, of course. Don't know how you implement such a system in the US. Not sure why Japanese corporations are so willing to keep on employees who could probably be cut. Is it just different business ethics? Does the homogeneity of the society have something to do with? Anyone have any insights?

Look up the data since 1990. At worst, their unemployment increased by 3% (from 2.2% roughly in 1990 to roughly 5.5%). For as bad as people say they suffered... that's nothing. http://www.tradingeconomics.com/japan/unemployment-rate Perhaps US corporations are more adaptable in that they fire excess labor at the first sign of bad news on the demand front, preserving profits to a greater degree. Y'all are assuming I'm talking about large to medium size corporations. I just mean US business in general -- i.e., the entrepreneurial vigor that allows people to adapt to this business environment. Our bankruptcy system clearly has had an impact on a potential recovery. Everyone agrees that a lot of debt needed to be either paid down or converted to equity, and the US BK process has speeded this up. That's why, in large part, the corporate sector is better off from a balance sheet perspective. I agree with Eric, though, that the Japanese lost decade was a victory in many respects when you take into account how low unemployment stayed. The demographics suck, but mostly with respect to their issues with debt. However, they can still print their way out of it . . .

I love this slide, actually. It shows that in a Japanese situation, when long term bond yields go really, really low, that's the best time to buy equities in terms of market pricing. Now, whether US equities will stay at this low level for the next five years is another question. That's one reason why I like the idea of purchasing equities with high dividend yields. You get a return of intrinsic value that can be used to cover underwriting losses in the P&L. It's even better if the underlying businesses earn in a basket of currencies other than the US dollar, although the US dollar may very well be undervalued at the moment. I am also part of the camp that believes that the US is different than Japan because M&A, our sophisticated bankruptcy system, and the adaptability of US business will cause realization of intrinsic value in equities in a more expedited manner than with Japan. I should also note that my style of equity investing in my own portfolio is way different than what HWIC is practicing. I am very concentrated and don't mind if my portfolio is well in the red at any given time, so long as I believe the intrinsic value is far in excess of my purchase price.

Fairfax began putting its hedges on when the SP500 was below 1100, so I do not think that they will be picking up large amounts of equity at these prices. Yeah, but remember that the bond portfolio is substantially larger than the equity portfolio, and they probably have some decent gains there compared to when they first put on the hedges. They can shift some of the bond portfolio gains to undervalued equities that will generate excess returns over the market over time.

Hey, I was one of the very first people on the board to give major props to Richard Koo -- I'm a big fan. I even said a couple of months ago that we'd have problems with the economy because of austerity measures and the continued deleveraging in the private sector. So it's entirely possible that yields will stay low for a long time, especially since over the last month or so, cash has likely been building up at a crazy pace in bank accounts. But that should allow FFH to keep its equity hedge instruments in place, take some bond gains, and redeploy into equities with nice dividends, which will effectively decrease the hedge from 100% to a lower percentage. We'll see what HWIC does.

Now that the 10-year is below 2%, I hope that FFH starts moving some money from its treasury position into equities, especially equities that have dividend yields that are substantially higher than 2%. It would be nice to see that 100% equity hedge come down a bit.

I'd bet on no technical recession, but as has been the case for a while now, it will still feel like a recession with wages stagnating and unemployment fairly high.

er..not really. The Dow dropped another 3,000 points after he wrote that article. haha. true, true. :) From that article you referenced: In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary. . . . But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. . . . Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over. . . . In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price. ----- I'd say he was spot on.

Haha, I should have known that you'd done the research on that. It does sound like Berkshire was a nice way for WEB to avoid the much higher personal income tax rates that his dividends would have been subject to had he been forced to realize that income back when he took the helm. However, the question remains whether you believe that there should be any investment vehicle to defer tax for the individual? Forget the fact that the corporate form is in some cases being used to defer the realization of personal income for the mega rich in a way not accessible to the mere rich or the normal schmuck. I always thought you were an advocate for a no-limit savings/investment account that could compound tax free so long as you did not tap the account for consumption. Essentially, this would be going even more towards a consumption tax. I would support this so long as the consumption tax were progressive in the way that I envision. Regarding whether or not "passive investments" made by corporations should be treated less favorably than productive enterprise investment: when you say "passive investments," I take it you really mean investments that have nothing to do with the business in which the corporation is engaged, rather than investments where the corporation is an investor that exerts no control over the business? Passivity in an investment, in and of itself, shouldn't be discouraged. A corporation that makes a strategic (but passive) investment in a new enterprise, for example, within its business mandate (or circle of competence) shouldn't be penalized for being an OPMI. Additionally, where a corporation derives most of its income from its real business, it's not clear to me that we should penalize them for holding financial assets that are unrelated to their core business. That would effectively force corporations to either hold cash or only hold government securities when they keep a capital buffer. It's really when the unrelated investments become the core profit center of the business that the problem arises. Of course, the obvious way to get around this would be for your corporation to be an insurance company, where the mandate in and of itself is to make secondary market debt and OPMI investments! Hello FFH. In any case, while I agree that it may be unfair that the tax code treats billionaires better than millionaires or thousandnaire, that has nothing to do with the policy position that WEB is advocating. Yes, I suppose WEB's credibility can be questioned. BUT that doesn't change the real arguments surrounding whether the tax code should be more fair. Criticizing WEB as a proxy for criticizing the policy he supports is like saying that the environmental policies that Al Gore advocates are wrong because he flies around in a jet plane or owns a mansion.

Is the low rate just applicable to the insurance company subsidiary? If so, then I suppose the reason is that the insurance industry as a whole takes on risk in return for the chance to earn a profit on passive investments after losses. I don't know enough about how this deduction works.

I didn't mean to say that he would use company assets for his consumption. I meant to say that if the personal holding company tax applied to Berkshire, then he'd likely be paying a dividend because it would make it uneconomic to retain 100% of earnings and purchase passive investments with the proceeds. One reason (but clearly not the only reason) why he has operating companies is that if he didn't, then he'd be in violation of the personal holding company tax -- it would violate the income test The PHCT is a tax on “undistributed personal holding company income” of a “personal holding company.” Let's put this differently: Would you object to repealing the personal holding company tax for everyone? If not, why not? Note that the reason why we have it is to prevent rich people from not distributing their corporate earnings, where the tax rates on corporate passive income is far lower than the tax rates on personal passive income. Sound familiar? Anyone we know of that doesn't distribute corporate earnings, and holds the bulk of his passive investments in his holding company instead of his personal brokerage? However, Buffett has got Berkshire organized in such a way that he doesn't trip the tax (ownership test and income test), but those thresh holds could easily be tweaked. For example, you could drop the ownership test to 30% or modify the income test. One could really crack down on these billionaires who reinvest undistributed earnings in passive investments (which they could just as easily hold in a brokerage account). This is the very behavior that the personal holding company tax was meant to discourage, but he dances within the lines of that law (meets the ownership test and income test). Are the ownership tests and income tests too generous? Or, as I mentioned earlier, my preferred method is just to insure that INTER-company dividends (from passive investments) are taxed as regular income. That will sure as hell discourage Berkshire as a vehicle for sheltering his passive investment dividends. I haven't read the article you posted about the PHCT, but based on the way you've described it, I might support repealing the PHCT. I'd have to think about it some more. It sounds like in certain cases, the tax code essentially forces the individual with the personal holding company to realize the income even if the person would simply plow that money back into investments or productive enterprise. Perhaps the reason the PHCT is there is because the tax code has drawn a bright line rule, assuming that in cases where it applies, the owner of the personal holding company is more likely than not to use the cash for personal consumption rather than for investment or productive enterprise. In an ideal world, so long as the capital within the personal holding company cannot be used for personal consumption, I don't see why we would force the owner to realize income. Put another way, I might support the idea you once had about removing the limits on contributions to tax-deferred retirement vehicles. Of course, that would have to go hand in hand with instituting a wealth-oriented consumption tax. Right now the tax code is jerry rigged to be in between a pure income tax and a consumption tax. One thing is clear from this discussion, smart people like WEB (and Ericopoly) can often find ways to get around the rules put in place by the tax code, and it's almost impossible to close all loopholes because there is very little political will to do so.

So you're saying that Berkshire is somewhat of a "personal holding company" and that Buffett could just use the tax-free/advantaged dividends distributed to it by the holding company's investee companies to buy things for his own personal consumption. I suppose that's true. But that's true of any corporation where there are managers in place. Managers use companies as ATMS all the time. But the only way, I think, that Buffett could use the money for his own consumption is to treat that as an expense of the holding company, which could expose him to committing tax fraud if the expense isn't justified. Of course, you can justify a lot of things under the tax code, and I'm not sure how it works. Anyways, I don't want to get into the weeds here because you probably know more about the intricacies of the tax code than I do. The bottom line is that we shouldn't get too caught up in the fact that it's WEB saying that billionaires are coddled. There are plenty of regular folks who believe that billionaires are being coddled. Raise taxes on the rich folks, I say. Class warfare all the way!

A consumption tax would most elegantly address that, not an income tax. I don't see the connection between income taxes and consumption. Especially when the conversation turns towards coddling the billionaires, who are the least likely to consume their entire income. One could justify a lower tax rate for them on these grounds. The words elegance and tax are not usually used in the same sentence. It would be much harder to administer a consumption tax than you think, and it ought to be progressive, taking into account the individual or household's ability to consume (i.e., wealth). The income tax in its current form is a poor proxy for a tax system based on consumption. The connection between income taxes and consumption arises from the fact that taxes are only due once income is realized. Realized income is available to use for consumption. Cash that is locked up in a vehicle like Berkshire is not available for consumption unless shares are sold (generating realized income) or unless one borrows against the value of the shares. Being able to borrow against the value of financial assets to consume tax-free is a loophole that should be closed.

And what Partner24 said.

Keep in mind that when Buffett bought into BYD, he got the low cost IT manufacturing business plus auto business at a earnings yield of about 7%. So there was a lot of optionality with respect to growth of the auto and new battery tech side of the business. This was also a strategic decision for MidAm that has a number of benefits, since battery tech will be hugely important to MidAm going forward. The auto story at BYD has always been inflated by the media. The real story is that this is a materials science/chemistry company that is attracting top engineering talent from Chinese universities, that has a manager in place that Munger has described as Edison/Welch-like, and that focuses on process innovation. It's also in a space that is hugely important -- manufacturing green technology that will allay Chinese concerns about oil dependence and the environmental impact of so many combustion engines coming online. The Chinese will subsidize building out an EV infrastructure and purchases of EVs for fleets because they have to be worried about this big problem. The downsizing of the sales force makes sense. It doesn't make sense to try to compete against other car companies for sales, as EVs are high cost vehicles that don't have as great a range as normal cars. BYD vehicles should be fleet vehicles for the government and for companies. The recent announcement that BYD, Hertz, and GE will expand their EV leasing business in several Chinese cities is a step in the right direction. I don't own any BYD at the moment, but I consider it a Phil Fisher stock. It's a company that you buy at a reasonable price and hold onto for the long run.

+1 I have yet to see him advocate a tax that would materially impact him. Because dividends received by natural persons, as opposed to legal persons, are realized income that is immediately usable for consumption. But I don't want to get into this debate again . . .

yep..and I posted something similar earlier in this thread as well. People were starting to get optimistic seeing the stock up 25% this morning. People who bought this morning are already down around 17%. BAC has been very volatile recently, with frequent daily moves of over 10%, both directions. Daily moves of a stock do not mean anyone is right or wrong. Lots of posts based on emotion (almost to the level of Yahoo finance message boards...or the lvlt thread :P). Skeptics disingenuously attribute optimism on this thread to BAC price movement, rather than on what the WEB preferred investment says about the prospects of the company and the common. Why? By the way, if there weren't so many other bargains around, I'd be buying LVLT. Did anyone see that Amazon AWS has selected Level 3 for its Direct Connect service? (Boom-- I just LVLT'd this thread!)

Nobody is disputing that WEB got a better deal than anyone else in the room or that the risk profile of common versus preferred equity is generally different. What many longs, including me, are saying is that WEB would not have invested in preferred stock at a yield of only 6% if he did not believe the common was worth more than the warrant strike price, given the other opportunities that have presented themselves over the past month. Further, given WEB's shrewdness, he likely believes the common is worth quite a bit more than the strike price. Now, just a couple days ago, people went from saying that BAC needed to issue capital immediately in order to avoid being deemed undercapitalized by the regulators to saying that BAC common would go to $0 because of solvency issues. Does anyone who has followed WEB closely believe that he would put an investment in preferred equity--at a yield of only 6%--where there is a risk of the common going to $0? He did learn from the Solomon Brothers investment. Finally, I would add that price is another variable that you must take into consideration when assessing the risk of common versus preferred or debt. If you believe that in a reorg, common shareholders will retain $7 of intrinsic value, then if you can obtain a purchase price of, say, $1 for the common, then buying debt that trades at a yield of, say, 2%, is actually more risky. The point being is that price matters. Remember Howard Marks' words: "There’s no such thing as a bad asset. It’s a question of pricing."

Bingo. +2 Yup.

No point in arguing over this ad nauseam. Actually, no. My exposure to BAC is through warrants and LEAPs, and I'm basically flat on the investment. Also no point in arguing over this ad nauseam , since you refuse to believe that Buffett had an opportunity cost with this investment. I did say that BAC did not need to raise capital. And the preferred investment was accepted after WEB brought it to BAC not because BAC needed to raise capital. It was accepted by Moynihan in order to instill confidence in customers so that they can avoid the noise in the markets re: the BAC stock price.

What the stock does in the short-term is meaningless. Cheers! Not if the only reason BAC did this deal was to create confidence in the company (and the stock). They didn't do it for capital. They did it solely for confidence. If the market shrugs it off that's a very bad sign even if BAC isn't in trouble financially. Perception is important here, as you have repeatedly said and I agree with. The closer BAC common gets to 0 the worse they are, even if financially they are sound. Confidence in the company and its businesses is different, though not completely separate, from confidence in the stock. The confidence needed to be instilled was with BAC customers, not stock market participants. I agree, however, that if the market shrugs off the investment and the stock tanks further, that could mitigate some of the value of this expensive capital.

Wrong. Once again, you're perspective is the opposite of what most value investors think. The recent downturn in the markets has presented many opportunities for WEB. Furthermore, he is still looking for elephant acquisitions. Why put money into a 10-year instrument at a yield of only 6% when he is almost sure to get superior opportunities during the next 10 years by just waiting patiently and then deploying cash opportunistically. The reason is because he was giving up these other opportunities for equity exposure to BAC.

This is absolutely correct. There is debate right now over whether the price of the capital was too expensive. Maybe so. But there was at least a price paid for the common exposure when you think about WEB's opportunity cost. There are plenty of investments that WEB can and probably did make that will do much better than a preferred investment in a bank at 6%. 1) It's a debt investment in one of the biggest banks in the world. It's basically an alternative to cash. Risk is not the same in every investment so you can't say "there are better places for him to put his money". 2) He isn't just getting a 6% yield on his money. He also got at the money long term warrants that have significant value! You don't have to be the worlds best value investor to know that a 10 year "free look" on BAC is very, very, valuable. Shit, even Blodget would like to have that! The point is that the warrants are not free when you think about the opportunity cost. Think about it. Berkshire could buy a great business for $5 billion that would return economic value far greater than a fixed 6% yield for ten years.

Funny because I was thinking if it's possible to stop people using handle such as Buffet or Munger ot Graham if they are poles apart in thinking. Handle might create an association bias and people might take time to respond which they would have ignored in general. But I guess it's an online forum and people can chose any handle they want. Are you 12? This is standard cognitive science. Names mean something, and our brains can't help but make associations. Or maybe I should just change my handle to 'Warren Buffett'.. That was a wry joke. Clearly, folks did not get it.