Sunday, May 03, 2009

Buffett and Munger Share Lessons of Turmoil

OMAHA, Neb. (AP) -- Billionaires Warren Buffett and Charlie Munger said Sunday the most important lessons of the recent financial turmoil are that companies should borrow less and build a system that imposes severe disincentives for failure.

Berkshire Hathaway Inc.'s top two executives offered that frank assessment of what led to the current recession at a news conference held a day after 35,000 attended the company's annual meeting in Omaha. The two men also said most of the nation's biggest banks are not too big to fail, but consumers shouldn't be worried about bank failures because of protections built into the system.

Buffett said having severe disincentives for failure and proper incentives for success is key to ensuring large financial institutions are run well. He said people didn't become more greedy in the last decade, but it wasn't hard for them to take advantage of the system.

''I think the most important lesson is the world needs a whole lot less leverage,'' said Buffett, who is Berkshire's 78-year-old chief executive and chairman.

Buffett said jokingly that if the system were set up so that an executive would be shot if the company fails, then the company would definitely borrow less.

Fannie Mae and Freddie Mac show that intense regulation can't prevent problems because those mortgage finance firms were some of the most regulated companies before government seized control of them amid mounting mortgage losses, Buffett said.

However, assigning blame for the economic mess doesn't make a lot of sense because so many people made mistakes that contributed, he said.

''I think that virtually everyone associated with the financial world contributed to it,'' Buffett said.

Munger, Berkshire's 85-year-old vice chairman, said a combination of factors caused the financial crisis. He said the nation tolerated way too much debt, immorality and stupidity, and now it's paying the price.

''We have failed big-time on multiple fronts,'' Munger said.

He said gross immorality persisted in the consumer credit and derivatives businesses, and many people were victimized.

Then the accounting profession failed to catch problems and tolerated too much foolishness, Munger said. He said accounting rules that allow companies to report huge profit just before failing doesn't make sense.

''We do not need insane accounting that rewards people that can't handle the temptation,'' Munger said.

But it still might be hard to get Congress to pass sensible rules for investment banks and derivatives, Munger said, because of the amount of lobbying investment banks have done.

''We're going to have a hell of a time getting this fixed the way it should be fixed,'' Munger said.

Buffett said he's not sure how the government will handle the results of the stress tests officials are conducting on the 19 largest U.S. banks, but he doesn't think the government should rule out the failure of most of the banks.

''These 19 banks are not too big to fail.'' Buffett said.

The stress tests are designed to determine which banks would need more cash if the economy weakens more. Federal Reserve officials have said the banks will be required to keep extra capital on hand in case losses escalate, which means some banks would be forced to raise money.

Buffett said he hopes the government didn't simply try to classify the kind of assets banks hold to determine how strong they are because, for example, not all home equity loans carry the same risks. He said a checklist approach won't reveal which banks might need help.

''I would hope there is a somewhat more sophisticated analysis done,'' he said.

But Buffett said consumers should not worry about bank failures because the Federal Deposit Insurance Corp. is there to protect them with the resources it collects by charging banks fees, so taxpayers don't pay when the FDIC rescues banks.

''I'm not worried at all about a run on the banks,'' said Buffett, whose company holds large stakes in Wells Fargo & Co., US Bancorp, M&T Bank, SunTrust Banks Inc. and Bank of America Corp. All of those banks, except M&T, are included in the government stress tests.

Given the ages of Buffett and Munger, there is fervent speculation on who might replace them. Buffett said Sunday that investors would know if either had health problems.

''If I know of anything serious -- or anything that might be interpreted as serious -- health problems, Berkshire would disclose it,'' Buffett said. ''We don't want rumors flying around.''

But Munger joked there might be a high threshold for disclosing anything about his health: ''In my case, I'm so nearly dead anyway that it's a minor detail.''

Both Munger and Buffett said they feel great.

Berkshire's Class A stock lost 32 percent in 2008, and Berkshire's book value -- assets minus liabilities -- declined 9.6 percent, to $70,530 per share. That was the biggest drop in book value under Buffett and only the second time its book value has declined.

But Buffett always measures the company's book value performance in relation to the Standard & Poor's 500 index, which fell 37 percent in 2008, so he's not bothered by stock price fluctuations.

''We don't consider it our worst year by miles,'' Buffett said Sunday.

Berkshire owns more than 60 subsidiaries including insurance, clothing, furniture, and candy companies, restaurants, natural gas and corporate jet firms. Berkshire also has major investments in companies such as Coca-Cola Co. and Burlington Northern Santa Fe Corp.

Farmer may have given swine flu to pigs

Pigs in Canada may be first in recent outbreak to test positive for virus

One-third of 161 sick Americans visited Mexico, or had contact with visitor

WHO reports 659 confirmed cases of H1N1 virus in 16 countries

Hong Kong hotel guest tests positive; 300 quarantined

(CNN) -- More than a week after the swine flu outbreak rattled the world, with cases of infected people popping up from Mexico to South Korea, the new virus strain has shown up in a herd of swine.

The catch, Canadian officials say, is that the animals may have caught the flu from a human.

Canadian officials on Saturday said they have quarantined pigs that tested positive for the virus -- scientifically known as 2009 H1N1 -- at an Alberta farm in what could be the first identified case of pigs infected during the recent outbreak. They said the pigs may have been infected by a Canadian farmer who recently returned from a trip to Mexico, the epicenter of the outbreak that has sickened nearly 660 people.

The farmer "may have exposed swine on the farm to an influenza virus," said Dr. Brian Evans of the Canadian Food Inspection Agency.

"We have determined that the virus H1N1, found in these pigs, is the virus which is being tracked in the human population," he added.

Evans and other officials said it is not uncommon for flu viruses to jump from humans to animals, and that it does not pose a risk for consuming pork. The number of pigs infected was not disclosed.

The infected farmer had flu-like symptoms and is recovering, Evans said.

Meanwhile, as the number of confirmed swine flu cases reached 659 worldwide, the World Health Organization said Saturday it had started distributing 2.4 million doses of a common anti-viral drug to 72 nations. So far, 16 countries have confirmed cases of swine flu, the WHO said. Watch latest developments as swine flu sweeps world »

Dr. Michael J. Ryan, the WHO director of its global alert and response team, said the doses of the drug Tamiflu came from a stockpile that was donated by Swiss health-care giant Roche in 2005 and 2006.

Roche, which produces the common anti-viral drug Tamiflu in a statement said it was working with the WHO to prepare for the virus. The drug should be taken within 48 hours of experiencing symptoms, according to the drug's Web site.

Mexico has the most confirmed swine flu cases, with 397 infected people and 16 deaths, the WHO said. Mexican Health Minister Jose Angel Cordova Villalobos reported that the country has confirmed 421 cases and 19 deaths.

Several other countries, including Canada and Italy, had confirmed additional cases that had not yet been added to the WHO's total.

The United States has the second-highest number of confirmed cases, with 161 sickened and one death, according to the Centers for Disease Control and Prevention and the WHO.

President Barack Obama spoke with Mexican President Felipe Calderon on Saturday afternoon to discuss both countries' "efforts to limit the spread of the 2009 H1N1 flu strain and the importance of close U.S.-Mexican cooperation," the White House said in a statement.

Other than Mexico and the United States, the WHO confirmed cases in 14 other countries: Canada, with 51; the United Kingdom with 15; Spain with 13; Germany with six; New Zealand with four; Israel with three; France, with two; and Austria, China, South Korea, Denmark, the Netherlands, Switzerland and Costa Rica, each have one. See where cases have been confirmed »

Ryan said the WHO was still preparing for a pandemic.

"At this point we have to expect that phase six will be reached," he said, referring to the organization's highest pandemic threat level. "We have to hope that it is not reached." And he noted that a pandemic describes "the geographic spread of the disease, not its severity."

The latest developments come as parts of Asia discovered they were not immune to the spread of the virus.

Hundreds of guests and staff were under quarantine in China on Saturday after health officials determined that a hotel guest had contracted the H1N1 virus.

Nearly 200 hotel guests and 100 staff members were ordered to stay in Metro Park Hotel in Hong Kong for seven days to stop the spread of the H1N1 virus, a government spokesman said.

The quarantine was ordered after a 25-year-old Mexican man stayed in the hotel and became sick, according to the spokesman. It is the first confirmed case of the virus in Hong Kong, local medical officials said.

South Korean officials on Saturday confirmed their first case -- a 51-year-old nun who recently traveled to Mexico for volunteer work.

In the United States, the CDC announced 19 additional cases, in 21 states. Dr. Anne Schuchat, interim deputy director for science and public health for the agency, said 13 people are hospitalized. Go behind the scenes at the CDC »

She said one-third of the U.S. cases were linked to exposure in Mexico; the others were infected in their own communities.

New York has the highest number of confirmed cases, with 50. Texas has 28 and California has 24.

The other states include: South Carolina with 13; Massachusetts with eight; New Jersey with seven; Arizona and Delaware with four each; Illinois and Indiana with three each; Colorado, Florida, Kansas, Michigan and Virginia with two each; and Connecticut, Kentucky, Missouri, Minnesota, Nevada, Ohio and Rhode Island each have one.

New York's health department on Saturday confirmed another dozen cases, bringing its total to 62 -- though the additional cases were not reflected in the CDC's tally.

Connecticut also announced an additional confirmed case, while Iowa and New Mexico and reported their first cases -- though neither were immediately included in the CDC total.