Stanford Law Professor Joseph Grundfest interviews Charlie Munger, vice chairman of Berkshire Hathaway: Legal Matters (ht CalculatedRisk)
A few of Munger’s comments, among many others.
- I would argue that a majority of the horrors we face would not have happened if the accounting profession developed and enforced better accounting. They are way too liberal in providing the kind of accounting the financial promoters want. They’ve sold out, and they do not even realize that they’ve sold out.
- Unlimited leverage comes automatically with an option exchange. Then, next, derivative trading made the option exchange look like a benign event. So just one after another the very people who should have been preventing these asininities were instead allowing foolish departures from the corrective devices we’d put in the last time we had a big trouble—devices that worked quite well.
- Our regulators allowed the proprietary trading departments at investment banks to become hedge funds in disguise, using the “repo”
system—one of the most extreme credit-granting systems ever devised. The amount of leverage was utterly awesome. The
investment banks, to protect themselves, controlled, to some
extent, the use of credit by customers that were hedge funds.
But the internal hedge funds, owned by the investment banks,
were subject to no effective credit control at all. - Derivatives trading, with no central clearing, brought back the bucket shop, because you could make bets without having any interest in the basic security, and people did make such bets in the billions and billions of dollars. Some of the most admired people in finance—including Alan Greenspan— argued that derivatives trading, substituting for the old bucket shop, was a great contribution to modern economic civilization. There’s another word for this: bonkers. It is not a credit to academic economics that Greenspan’s view was so common.
- You have a profession that’s like the man that Nietzsche ridiculed because he had a lame leg and was very proud of it. The economics
profession has been proud of its lame leg. - I think that many CEOs get carried away into folly. They haven’t studied the past models of disaster enough and they’re not risk-averse enough.
- The culture of Goldman Sachs as a partnership was morally superior and better for the surrounding civilization than the culture that came after it went public.
- Investment banking at the height of this last folly was a disgrace to the surrounding civilization.
