Buffett Reflects on and Thinks About the Details of the 2008 Financial Crisis

"This is the largest financial event in history in terms of participation scale,

but it proved that all participants’ behaviors were very poor."

Sorkin: Returning to 2008,

from a macro perspective,

what do you think caused the 2008 crisis?

Buffett: Many tributaries converged to form the Missouri River.

(But I think the most important factor was) people believed that real estate would only go up and not down,

and the residential market size reached $2 trillion.

This is a very large asset class.

People (through asset securitization) used it as currency,

but then they found out it wasn’t always rising.

They borrowed against real estate,

and this entire chain of events was influenced by this.

At the top of the chain,

people were busy issuing mortgage loans on properties they knew they didn’t need to hold,

and after issuing, they could immediately package and sell them to investors in Norway.

Some people refinanced through these loans,

whether mortgage borrowers’ monthly payments were too high,

or whether they falsely reported their income seemed to have no impact on them.

Those providing refinancing also participated.

Essentially,

(Participants) engaged in huge speculative behavior on real estate.

Out of 75 million American households buying homes,

50 million participated in mortgage activities,

only 25 million avoided being impacted.

50 million mortgage households leveraged their homes,

many depend on it for survival,

and then their asset prices collapsed.

This is the largest scale financial event in history,

but it proved that all participants’ behaviors were very poor.

They believed in (the idea that real estate only goes up),

when people believe in some absurd things,

such things will happen.

Sorkin: Early 2008,

some hedge funds holding subprime loans collapsed,

were you worried at that time? Do you remember how you felt?

Buffett: I wasn’t worried.

Because I always assumed (if) I participate in the US economy throughout my life,

its value would increase significantly over time,

but it would also have some bumps along the way.

Our economic system determines that we will experience some cyclical craziness,

so I never try to predict the market,

nor do I try to predict the future of business,

I just try to adapt to everything that happens.

In the summer of 2008,

I did receive a call from a top Wall Street firm,

trying to sell us hundreds of billions of Freddie Mac stock.

I knew there might be big problems.

2“I wrote down the page number where I found the problem on the front page,

and I knew we wouldn’t invest in it (Lehman).”

Sorkin: I don’t know if you still remember,

after Lehman Brothers collapsed,

before Fannie Mae and Freddie Mac got into trouble,

you received a call from Dick Fuld (Richard Dick Fuld,

Chairman and CEO of Lehman Brothers),

he told you,

his stock was being shorted.

Buffett: Yes,

anyone who told me that,

I would be highly suspicious.

I like the people who short Berkshire,

how can short sellers hurt you?

Sorkin: Fuld said you had an investment opportunity of 3 to 5 billion dollars,

were you interested at that time?

Buffett: I was interested in hearing his pitch.

Sorkin: How did you respond?

Buffett: I told him,

tell me your idea,

first tell me your offer,

then I will know if I am interested in investigating it.

Then,

he threw out some tentative ideas.

In fact,

I remember he asked if Hank Paulson (Henry “Hank” Merritt Paulson,

then US Treasury Secretary) could call me about this issue.

On Friday morning at 6-7 am,

Hank called me,

he proposed some completely unqualified endorsements,

he might have hoped I would provide financing for Lehman,

but his pitch was overdone.

I think he also realized that was wrong.

Anyway,

that afternoon I opened Lehman’s 10K report,

it was 250-300 pages long.

I wrote down the page number where I found the problem,

and I knew we wouldn’t invest in it.

My office still keeps this note.

Sorkin: What did you see?

Buffett: I just saw a lot of things that made me worried about their financial condition,

and the scenarios that had already happened on Wall Street at that time,

and possibly also to them.

3“We might be the best quick buyers at the $1 billion level.”

Sorkin: Now we come to the weekend of September 12, 2008.

You are now receiving a call not from Lehman Brothers but from AIG,

asking if you are willing to invest $10 billion in it.

Buffett: I told them,

don’t expect us,

I know time is very precious for you,

so don’t waste time on us.

So,

at that point,

I declined.

Not long after,

they re-entered our view.

I said at the time,

I couldn’t solve this problem,

we would pay about $27 billion,

we have the financial capacity,

but I didn’t know where we would go from there.

The real situation then was,

they sent me a lot of materials at 8 pm on Friday,

telling me they were in crisis.

Sorkin: What do you think,

does their call to Warren Buffett mean anything?

Buffett: It means,

they know that if we see something,

our actions can be very swift.

We might be the best quick buyers at the $1 billion level.

And for this case,

they knew I was very interested in insurance business.

They might be on the verge of collapse in a few days,

so they were also very desperate.

4“If I were the Federal Reserve Chair at the time and realized what was happening,

I think regardless of whether I had the ability to intervene,

I would choose to intervene.”

Sorkin: Many people still see Lehman Brothers’ collapse that weekend as a key moment of the crisis,

and debate whether the US government should have intervened at that time.

The next morning,

The New York Times and The Wall Street Journal both published columns praising (the US government not intervening).

Buffett: Yes,

everyone at that time thought,

“Let these Wall Street guys go,

we’ve had enough of them.”

Long ago,

the Federal Reserve Chairman said,

whatever they want to do,

they can do it.

Under the Dodd-Frank Act,

this might have changed somewhat,

but…

(Note: The Dodd-Frank Wall Street Reform and Consumer Protection Act,

passed on July 21, 2010, is a US federal law,

considered one of the most important laws enacted during President Obama’s term.)

Sorkin: So you think,

if the Federal Reserve wanted to intervene,

they could have done so at that time.

Buffett: If I were the Federal Reserve Chair then and saw what was happening in the US,

I think regardless of whether I had the ability to intervene,

I would choose to intervene.

The Supreme Court might have arrested me as a criminal,

but from the perspective of national interest,

that’s what I had to do in that role.

Sorkin: So you think the Fed made a mistake?

Buffett: I don’t know.

Because,

they had to promise too much to the public.

Many people faced losing their homes,

seeing their assets shrink significantly,

and various personal issues.

However,

you have to promise that all AIG employees will be rescued,

and the public will be protected,

doing so is very difficult.

Sorkin: At that time,

how much political pressure was on Hank,

the Fed, and others needing rescue?

Buffett: Huge.

Ben Bernanke (then Fed Chairman),

Hank Paulson,

Tim Geithner (then President of the New York Fed),

and George W. Bush were in fierce debate,

but the American public wouldn’t buy it.

5“I think the silent hero of the entire event is Ken Lewis, CEO of Bank of America,

who bought Merrill Lynch.”

Sorkin: Lehman Brothers went bankrupt,

Bank of America acquired Merrill,

AIG was rescued.

But afterward,

people started worrying about the future of General Electric,

Goldman Sachs,

and Morgan Stanley.

Buffett: After Lehman’s bankruptcy,

the largest holders of commercial paper were money market funds,

these things collapsed one after another like dominoes,

and whatever Hank and Bernanke did had to consider reactions from Congress.

Congress didn’t realize how serious the problem was,

but Bush did.

I didn’t vote for him,

but his awareness of the severity of the problem earned him high marks.

Sorkin: Later that week,

I received a call from Goldman Sachs,

do you remember that call?

Buffett: I remember that call.

Haha,

when Goldman Sachs asks you for money,

you will remember.

Sorkin: What was your thought at that time?

Buffett: I thought the Treasury had reliable people in charge,

the Fed had reliable people in charge,

the President was reliable,

but Congress worried me.

I believed Goldman Sachs would be fine,

as long as the markets weren’t completely shut down.

I think the silent hero of the entire event was Ken Lewis (CEO of Bank of America) buying Merrill on Monday.

I think he got some advice to buy Merrill at about $30 per share (note: in reality,

Bank of America bought Merrill Lynch for about $29 per share,

spending $30 billion).

He made the decision on Saturday,

announced the acquisition on Sunday.

At that time,

no one knew exactly how much Merrill was worth,

but he said we would pay $30 (per share) to buy it,

which was a fair price.

(If not), Merrill’s stock might have been only 30 cents on Monday.

Sorkin: Do you think that was a big mistake?

Buffett: For the entire financial system,

that wasn’t a mistake.

Merrill performed very well after being acquired,

but at that moment,

if Bank of America hadn’t announced the acquisition on Sunday,

it might have been another Lehman.

In the Lehman moment,

if they had decided to use money to bail out Lehman,

they would have had to tell Merrill to fend for itself,

and the whole situation would have been very different.

6“Confidence is built step by step,

but fear is instant.”

Sorkin: Looking back at that history,

are there things you think you should have done but didn’t? Which investments were missed?

Buffett: I can look back at any week,

and find such things.

If at that time,

we had waited 4-5 more months,

Berkshire could have bought many things at a cheaper price.

The stock prices in March 2009 were much lower than in October 2008.

In late October 2008,

I wrote a column in The New York Times,

long-term I was right,

but the prices 4-5 months later were much cheaper.

Sorkin: Do you ever think,

this system has taken us so far,

but still might bring us back to the Great Depression,

where are those red lines?

Buffett: If the crisis isn’t handled properly,

it could last longer.

But we always get out of crises,

and we have already come out of this one.

At some point,

the government must step in to resolve the crisis.

There is only one force in the world capable of forcing people to deleverage,

and that is the government.

If for some reason they don’t do it,

the crisis will come.

Sorkin: For the public,

and for the new generation,

can they learn any lessons from this crisis?

Buffett: No.

Because people will always panic,

and that’s also why the Fed was established.

In the 19th century,

our country experienced all kinds of panics.

When people are afraid,

panic occurs.

Confidence is built step by step,

but fear is instant.

And,

this is not affected by IQ,

even PhDs get scared.

I know some people,

you might be surprised to hear their names,

at that time,

they chose to believe only in gold,

not in anything else.

The power of fear is enormous.

Sorkin: Do you think the crisis ten years ago has any connection or influence on current politics,

governments, and institutions?

Buffett: Yes,

people’s long-term memory.

It was the same in 1929,

it takes a long time to resolve it.

When they feel extreme fear,

some things leave a mark,

etched in their minds.

They want to know who caused their fear.

And they shouldn’t really blame themselves.

I mean,

not everyone should be a financial expert.

Falsely reporting a little income on a mortgage application,

thinking house prices will keep rising and refinancing based on that, etc.,

who should be blamed for these things?

Sorkin: So,

should someone be responsible for this crisis? That’s also a political question.

Buffett: Many people did very foolish things,

but I don’t think anyone should be held responsible.

I mean,

there are always some people doing false things.

To some extent,

these people were attracted by the real estate market,

because you could make easy money from it,

you could lend in Bakersfield, California, and sell easily to Norway.

Then,

it became a chain of contracts,

the value of one security contract depends on another.

I once looked at a securitized product,

and I had to read 300,000 pages of materials to understand the primary securities and the subordinate securities based on them, etc.

And,

for quite some time,

everyone was fine,

so everyone got used to this way.

The crisis will happen here.

7“The crisis will come at some point,

but I am not worried about the crisis.

Because I manage my behavior properly.”

Sorkin: Are you worried about another crisis?

Buffett: Crises will come at some point,

but I am not worried about the crisis.

Sorkin: Why?

Buffett: Because I manage my behavior properly,

even if another crisis occurs,

Berkshire will be very healthy.

Sorkin: Right now,

what are you worried about?

Buffett: Rising asset prices attract people who don’t understand them into the market.

People are interested because assets appreciate,

but they don’t truly understand them.

When you see neighbors who are much less smart than you getting rich from rising asset prices,

and you don’t get rich,

your spouse will ask you: can’t you figure it out (and make big money)?

It’s really contagious.

This is always part of the capital system.

But if you ask me which assets are in this state now,

I haven’t observed any yet.

Sorkin: Can we better handle another crisis now?

Buffett: That’s an interesting question.

I’ve never read the full 2,000+ pages of the Dodd-Frank Act,

I only read the summary.

I have a view,

which might be wrong.

But I do think,

this law might have hindered the Fed’s ability to act quickly and cooperate with multiple parties during a crisis.

I would say,

that’s a terrible mistake.

We need a Federal Reserve with strong powers!

You might not like it,

it might do some things you dislike,

but a country with a $10 trillion housing market,

over 75 million homebuyers,

you need a force capable of reducing leverage.

Sorkin: During that week,

these people kept calling you,

how did you evaluate at that time?

Buffett: I did call it the “Pearl Harbor of the US economy” on CNBC,

I had never used such a metaphor before.

I felt I had never experienced something like this.

And,

in terms of immediate panic,

the crisis was even worse than 1929.

On September 29, 1929,

the Dow Jones hit a high of 381 points before crashing.

I was born in August 1930,

by then the Dow was back to 250 points,

and it didn’t cause such widespread panic.

It hit Wall Street,

but at that time, Wall Street’s influence was far less than now,

probably due to 401(k)s and many other factors.

Housing affects everyone.

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Author: The Intelligent Investor

Ten years after Lehman Brothers’ collapse,

on September 12, 2018, CNBC aired the original documentary “Crisis On Wall Street: The Week That Shook The World.”

In this documentary,

CNBC anchor,

bestselling author of “Too Big to Fail,” Andrew Ross Sorkin,

interviewed many key figures caught in the vortex at that time,

trying to show the public how close the US and the world came to a total economic collapse in 2008,

and how it led to the most severe financial crisis for generations.

The documentary features a series of compelling interviews.

High-level US government officials and CEOs of major US banks,

who gathered together,

tried to save Lehman Brothers from bankruptcy.

Wall Street CEOs Jamie Dimon,

John Thain, and others described the dramatic all-day negotiations.

Former US Treasury Secretary Hank Paulson recounted his despair when realizing Lehman’s bankruptcy could drag down the global financial system.

Will such a large-scale financial crisis happen again? Sorkin repeatedly asks this question to those who reunited because of this documentary.

They recall the nightmare faced ten years ago,

breathing the same air as the fate of global finance.

The protagonist of this article is Warren Buffett.

When banks started to go bankrupt in 2008,

executives sought help from Buffett,

hoping he would provide financial support in critical moments.

Later,

he called this event the “Pearl Harbor of the US economy.”

In the interview,

he discussed some details of the crisis,

regulatory,

institutional,

market interconnectedness,

and Berkshire’s own considerations,

including interesting insights into human nature.

He said,

“When people are afraid,

panic occurs.

Confidence is built step by step,

but fear is instant.”

“Crises will come at some point,

but I am not worried about the crisis,

because I manage my behavior properly.”

This documentary was released in 2018, ten years after the crisis.

This perfectly timed reflection makes Buffett’s insights more relevant today.

Especially with the Silicon Valley Bank collapse triggering a chain reaction,

spreading from the US to Credit Suisse across the Atlantic,

worrying investors about the stability of European and American banking systems.

At this moment,

looking back at Buffett’s thinking during the 2008 crisis,

his approach to decision-making,

the weight given to information,

and his consistent investment principles,

will be very enlightening for us.

**$CBK **