What Buffett really said about the SEC Goldman SachsInvestigation
Posted on 08 May 2010.
Tags:Berkshire Hathaway,Buffett,Goldman Sachs,Munger,SEC
What Buffett really said about the SEC Goldman Sachs Investigation(From the Berkshire Hathaway Shareholder’s Meeting 2010)
Abacus was made the subject of an SEC investigation.
There’s been misreporting, non-intentional obviously, but there has been a misreporting of the nature of the transaction, in the majority of the reports that I’ve read.
Thiswill take a little time, but I think it’s an important subject.
I would like to go through that transaction ﬁrst and then we’ll get to have further questions.There were four losers, I will focus on two of them.
Goldman Sachs itself was a loser, but they didn’t intend onbeing a loser.
They intended to sell a portion of the transaction, but were unable to sell.
The main loser in termsof actual cash value was a very large bank in Europe by the name of ABN AMRO.
They subsequently became part of the Royal Bank of Scotland.Why did they lose money?
They lost money because they, in effect, guaranteed the credit of another company ACA.
ABN was in the business of judging credits, deciding which credits they would accept themselves and which creditsthey would guarantee. In effect, they did something in the insurance world called fronting, which really means guaranteeing the transaction of another party.
We have done that many times at Berkshire, we get paid for it.
People may not want the credit of XYZ insurance company, but they say they’ll take a policy of XYZ company, if we (Berkshire) guarantee it.
Berkshire has been paid a lot of money over the years and Charlie you can remember years back in the 1970
s when we lost a lot of money because we guaranteed some not so honest people and we lost a lot of money, Lloyd’s of all things, but they found ways not to pay it.So ABN agreed to guarantee about $900 million worth of credit for ACA.
That is in the SEC complaint that they received about 17 basis points, that is
17 hundredths of one percent.
They got it about $1,600,000 and thecompany they guaranteed went broke, so they had to pay the $900 million.
It is a little hard for me to get terriblysympathetic. ACA was a bond insurer and they started out as a municipal bond insurer.
ACA, MBIA…all those companiesstarted out insuring municipal bonds.
It was a big business insuring municipal bonds and then all of a suddentheir margins started to get squeezed so instead of accepting lower proﬁts they got into the business of insuring structured credits and other kinds of activities. I described their activities a couple years ago as being a little bit like Mae West who said, “I was like snow white, but I drifted.”
Almost all of these bond insurers drifted to make alittle bit more money. ACA did it, they all did it, and they got into trouble, every one of them. Is there anything wrong with bond insurance? No, but you bet ter knowwhat you’re doing.