Matt Stoller: Warren Buffett Says “Hormones” Will Fix the Housing Crisis

By Matt Stoller, the former Senior Policy Advisor to Rep. Alan Grayson and a fellow at the Roosevelt Institute. You can reach him at stoller (at) or follow him on Twitter at @matthewstoller.

Last week, Warren Buffett made some news with his folksy, charming as always shareholder letter.  Most people focused on his admission that he was wrong about the housing crisis.   Buffett pointed to his year ago statement that “a housing recovery will probably begin within a year or so.”  And he said, graciously, that this prediction “was dead wrong.”  This is rhetorically notable, because it’s so rare that our masters of the universe ever admit error.  But it is just more PR dressing up bad policies.

Buffett is a very important man, not just because of his immense wealth, but because he has the ear of policy-makers and the President.  I once went through a pile of phone records of Treasury Secretaries Hank Paulson and Tim Geithner, and Buffett seemed to be on speed dial (he was contacted more than George Bush, for instance).  Buffett’s advice to the President over the past few years has been that America built too many homes, and that the country is working through this excess supply naturally.  Eventually, that will lead the economy to turn around (a thesis Joe Weisenthal has tracked for months now in the data).  It’s actually not so different from Alan Greenspan’s somewhat-kidding-but-not-really advice to burn excess housing stock.  So when Buffett talks, it makes sense to listen.

Here’s what he has to say about the housing sector today.

This hugely important sector of the economy, which includes not only construction but everything that feeds off of it, remains in a depression of its own. I believe this is the major reason a recovery in employment has so severely lagged the steady and substantial comeback we have seen in almost all other sectors of our economy.

Buffett himself italicized depression.  He wanted this picked up by all of us.  But what I found most interesting is his cure for the housing market.

That devastating supply/demand equation is now reversed: Every day we are creating more households than housing units. People may postpone hitching up during uncertain times, but eventually hormones take over. And while “doubling-up” may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure.

Essentially, he argues that household formation is artificially low, and that this will naturally be cured by hormones, as it has in the past.  Only, the lack of family household formation is actually a new phenomenon.

Family households have been forming at an average rate of 651,000 per year since at least 1947 (when the first annual household data became available). During that whole period the only years showing “negative formation” are 2008, 2010, and 2011.

And what is behind this lack of household formation?  There are possibly many reasons, but one sure driver is student debt.  The average college graduate now carries $25k in student debt after graduation.  It’s no surprise that young people aren’t buying homes, but are increasingly renting and doubling up with others.

According to a recent Federal Reserve study, only 9 percent of 29- to 34-year-olds got a first-time mortgage from 2009 to 2011, compared with 17 percent 10 years earlier.

Student debt is just one facet of the punitive infrastructure we have set up towards debtors.  Another facet of this infrastructure is that housing market itself is broken because creditor middlemen known as mortgage servicers are skimming from both homeowners and investors.  These problems have created an atmosphere of deep uncertainty, and there is simply no private investment in the sector (the existing market of private MBS is likely overvalued, as deeply in the red as it is today).  The housing market is at this point nearly entirely backed by government guarantees through the FHA and the GSEs, aside from the hundred plus billion in direct government infusions.  One shock (like a war with Iran or something else on the radar) could tip it over once again.

You can be sure that Warren Buffett’s explanation, that all will be well soon, is the official line in Washington, DC.  Republicans don’t want to talk about housing, period.  And the administration has successfully purged all official dissent out of the Democratic Party infrastructure with its settlement.  This won’t hold, because reality, like a fart in church, will eventually and successfully intrude on the party in DC.

How long they can keep this afloat isn’t clear.  But there is a reason that hope, or in this case hormones, is the plan for housing.  Here’s more of Buffett’s letter, justifying some of his large investments.

The banking industry is back on its feet, and Wells Fargo is prospering. Its earnings are strong, its assets solid and its capital at record levels. At Bank of America, some huge mistakes were made by prior management. Brian Moynihan has made excellent progress in cleaning these up, though the completion of that process will take a number of years. Concurrently, he is nurturing a huge and attractive underlying business that will endure long after today’s problems are forgotten. Our warrants to buy 700 million Bank of America shares will likely be of great value before they expire.

Buffett helped cause the housing crisis through his massive ownership stake in Moody’s (he is the single largest shareholder), and he profited immensely from the government bailouts.  His assertions that the financial crisis was an “economic Pearl Harbor” was a similarly self-serving explanation that diverted attention from a crisis resulting from events he helped shape  to some sort of external causation.  He is now profiting from legal and regulatory forbearance against entities he owns.  If Wells or BofA were held accountable for their systemic abuse of the property rights system through foreclosure fraud, or if they were forced to reserve against second liens more accurately, it’s unlikely they would be good investments.  On the other hand, if that were to happen, we could begin to fix our housing market.

There is no honesty among our political elites, and by that statement, I don’t mean that they are liars.  There are liars everywhere, and truthtellers as well.  Most of us are concurrently both.  What I mean is that the culture of the political elite is one in which a genuine conversation about the actual problems we are facing as a society simply cannot be held with any integrity.  Instead, we have to chalk up problems in a very busted housing market, and a generation saddled with indentured servitude disguised as a debt, as one of “hormones”.

It sounds cute that way, I guess.  Eventually, we will see integrity in our discourse.  It’s unavoidable.  You can’t operate a society solely on intellectual dishonesty because eventually all your bridges fall down, even the ones the rich use.  For a moment, from 2008-2009, there was real discourse about what to do.  We’ll see a moment like that again.  Only, the environment won’t be nearly as conducive to having a prosperous democratic society as it was in 2008.  There will be a lot more poverty, starvation, violence, and authoritarianism when the next chance comes around.  Catastrophic climate change, devastating supply chain disruptions, political upheaval, geopolitical tensions and/or war – one more more of these will be the handmaidens of honest dialogue.

The tragedy is not that our circumstances will worsen dramatically, but that it just didn’t have to be this way.

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  1. different clue

    I wonder if it is possible to evolve an “ethical house culture” over the next couple of decades the way “health food seekers” began evolving an “ethical food culture” decades ago. It was legal to sell chemically polluted food with inbuilt nutrient defficiencies, but certain people wouldn’t settle for that. They created the customer base for “health food” which eventually became the bigger customer base for “organic food” today.

    In a similar way, I wonder if people will begin researching (and sharing what they find) the differences between houses whose various forms of ownership are physically registered in physical county courthouses . . . as against those houses whose various forms of ownership have been hidden or rendered untraceable or unprovable or un-assignable through passing through the various rooms in the mansion called MERS. Are there still houses whose ownership-evidence has not been contaminated by contact with MERS? People know what you mean when you say a bussiness or a government-person or agency is “all Mobbed up”. Would it make sense to refer to a house as “all MERSed up”? If it would, would it make sense for people who consider themselves too ethical to buy a stolen house from a fence to call themselves “ethical homebuyers”? Are there still a few million houses in existence which are not “all MERSed up”? Are “ethical homebuyers” prepared to spend their entire lives renting if that is the price of refusing to buy a house which is “all MERSed up”? Would enough such “ethical homebuyers” become a customer base which would fund the existence of “ethical Realtors” . . . Realtors who would not/will not sell a house which is “all MERSed up”? If such an ethical housing market emerged over the next few decades the way an ethical food market emerged over the last few decades to become the organic food market we know today, could such an ethical housing market start destroying bussiness in the MERSed up housing market so severely that the issue of social and legal decontamination would have to be addressed through the deMERSification of MERSed up houses, and their retro-relegitimization through forced re-registry of physical proofs of ownership in physical courthouses?

    Pardon my wordiness, but since The Enemy has made this issue complex on purpose in order to prevent us from understanding it, I have had to use a lot of words to try and make my meaning confusion-proof against The Enemy’s efforts to destroy meaning and prevent the emergence of the ethical housing market which I am hopefully suggesting.

    I certainly will not buy a MERSed-up house from any potentially criminal real estate fence selling MERSed-up and therefor possibly stolen houses. I’ll remain a co-op dweller and/or renter for life if that’s what has to happen.
    No current physical deed in a physical courthouse? No sale.
    Any trace of leproMERSy? No sale.

    1. CaitlinO

      Probably the best place to start if you want a house with clean title is to look for one whose last financing was in 1997/98 or earlier, by a credit union or small local bank who kept their loans on their books, and which was never foreclosed/short sold.

      It’s really not a matter of ethics, it’s a matter of protecting your down payment and the decades of payments you’ll make. How many people are going to discover that the house they had been religiously paying off every month doesn’t actually belong to them when they go to sell or are finally ready to send in the last payment?

      1. different clue

        Thank you for the good solid “first-footprint” starting-point advice. I hope other people read/consider it as well.

        Why would I invoke ethics as well as self-interested survivalism? Ethical movements and visions sometimes seem to have more persistence and staying power and ultimate victory then lowest common demoninator self-interest.
        After all, the people who are happy to buy and sell possibly stolen MERSed-up houses proudly claim the moral low ground of hard-headed self interest. Whereas the early
        “health foodists” pursued an ethical goal as well as a long-range survival goal. And the rigid avoiders of MERSed-up houses might gain strength and gain support for themselves as a MOVEment by proclaiming an ethical vision of themselves. “MERS is the new slavery and we are the new Abolitionists. In the long run, our goal is to exterminate MERS from the earth and exterminate the market in MERSed-up houses and exterminate every job and bussiness which is connected to MERSed-up houses.”

        But of course ethics are useless without the survival needed to live out the ethics; so yes, as you point out, mere survival is the first reason to boycott MERSed-up houses.

    2. polistra

      Very well written and inspiring.

      Strikes me that the whole concept of shares needs to be kicked out.

      A century ago, shareholder ownership was often better for a company than captivity by a senile family head. (eg Ford in the ’40s.) Now the situation is reversed. The stock system has been so wildly re-re-re-divided into untraceable and unusable pieces that family companies are performing better in general.

      Same basic concept in both areas. You’ll maintain a house better when you UNQUESTIONABLY own it than when you’re unsure of possession. You’ll run a company better when you’re using your own money than when you’re using little bits of money from people you don’t know.

      1. Mel

        There’s a memorable line in Michael Lewis’s _Liar’s Poker_:
        “When a trader is long and wrong he cuts and runs. He drops his position, cuts his losses, and moves on. He only hopes he hasn’t sold at the bottom, which is what people do who buy at the top.”

        Institutional investors, whose only responsibility is to the money they’re running, are not going to wade into management and corporate governance. They’ll drop a loser and go hunting for a winner. Net result is that the senile family head or SFH-equivalent will still make all the decisions.

  2. Hugh

    Buffett is just talking his book and he likes to use sexual imagery so his allusion to hormones is unsurprising.

    But just because he is a billionaire doesn’t mean he knows squat about macro. Or perhaps it would be more accurate to say that he has every reason to ignore macro.

    At the macro level, we have a very simple truth. We can have kleptocracy and billionaires or we can have jobs, housing, healthcare, education, infrastructure, and retirements for the rest of us, but we can not have both. Put even more simply, Buffett is not a sign of what our economy does right. He is a prime example of what is wrong with it.

  3. H. Alexander Ivey

    “For a moment, from 2008-2009, there was real discourse about what to do.”

    Matt, pardon me, but I was there, awake, and paying attention. Where was there a real discourse?

    1. different clue

      Good question. I too wonder about the “real discourse”.
      Did any of it ever once reach any corner of the MSM? Or do we have to go to obscure journals or weblogs to find it?

    2. psychohistorian

      I rolled my eyes when I read that too.

      What angers me is that it is looking more and more like we have to kill the system to get it to change to support the many over the few. A lot of what we have going works but the class system of social organization is broke and in need of replacement…… can and must be done without destroying valuable social infrastructure.

    3. citizendave

      I thought of William Greider, writing in The Nation. He offered big ideas, which I found plausible, and which induced some flickers of hope for meaningful change. If I had not read his work during that time, I would not have been so disappointed with how things have turned out.

    4. Yves Smith

      The was discussion in January-February 2009 about nationalizing Citi and BoA. did you miss that? As well as serious economic stimulus. People were hoping Obama would do a FDR and instead he’s turned out to be a pale imitation of his other role model, Ronald Reagan.

      1. different clue

        Was that discussed in Congress before God and C-SPAN? Was it discussed front-and-center in the flagship MSM? I remember hearing about it, but I don’t remember hearing about it from Congress or the flagship MSM. If it was and I missed it, then shame on me for missing it.

        1. different clue

          Now that I think about it, there were some mutterings here and there about what we “should and could” be doing. There was an article in Harper’s Magazine about Obama betraying the promise of the moment through his Hooverism 2.0 behavior and approach. There were some back and forths about “the stimulus..too big? too small? just right?” in the he said she said corners of the MSM. But it was presented as so much arm-racing and horse-wrestling between different interest groups expressed through Congress.

          What there WASN’T was a President leading and holding up his end of a massive psychological warfare campaign against all those people who wanted to preserve FIRE sector criminality and impunity and all those people who wanted to make the “stimulus” so small and tax-cut biased as to guarantee its lack-of-visible success. And WHY wasn’t there a President leading a psychological warfare campaign over these things? Because we had a President who was part of the conspiracy to rehabilitate the Republicans and restore them to power, to protect FIRE sector criminality and impunity, to keep his hopeful followers quietly supportive with his shuck and jive stringalong thing as on his conspiracy against Single Payer or even a chance for personal Medicare Buy-In on the Health Care Deform Act. (He also actively conspired to demoralize people with his plotting against Social Security and his conspiracy with McConnell to extend the Bush tax cuts in hopes of making them permanent, and so forth.)
          Perhaps that is what we miss having seen when we say we miss any “discussion” having happened.

          1. Lambert Strether

            “Because we had a President who was part of the conspiracy to rehabilitate the Republicans and restore them to power…”

            Not exactly. You’re talking about bipartisanship, which was what Obama ran on, and had written into the party platform (“A great nation now demands that its leaders abandon the politics of partisan division…”). Since Obama didn’t win the majority of the popular vote in his party (and lost all the big states) I’d wouldn’t call that a conspiracy, but the outcome of a factional struggle within the Democratic Party.

  4. Rich guy..

    “You can’t operate a society solely on intellectual dishonesty because eventually all your bridges fall down, even the ones the rich use.”

    Bridges!!! We don’t need no stinking bridges!!!

    1. K Ackermann

      Oh, you only think you don’t need a bridge, but have I got a bridge for you!

      Look how shiny… and what’s that I see? Is that an Apple logo?

  5. Conscience of a Conservative

    Good points about Warren Buffett and Moody’s. I think Buffett gets too much of a free pass these days from both the financial media and the media at large. However on housing formation I think he’s right. A bad economy may delay formation for a while, but at some point kids can’t live with their parents and if the economy improves then the process takes foot. We’ll probably not see a housing market such that existed pre 2008 for several generations, but it will level off and improve at some point. It would just be too dark and pessimistic to think that the home ownerhsip rate breaks through the floor of the late 80’s and early 90’s.

    1. Maria reads

      I’m not so sure about that. There are plenty of adult children living with their parents in many cultures — younger, healthier grandparents assist in childcare so that children can work, and as they get older, the children and more mature grandchildren assist in the elder-care. In situations where the men are unable/unwilling to marry, you have multiple generations of women living under a single roof raising the children (see some Latin American/Caribbean countries). The US and western Europe is actually an anomaly with its so-call “nuclear” family. As prices decline on the so-called McMansions, you may find that even upper-middle class families form multi-generational, multi-sibling households (especially in situations where an elder member of the family can live in the “in-law” or “nanny” suite.) The assumption that it is primarily the elder generation supporting the younger is probably false. Too many ‘baby-boomers’ failed to properly prepare for retirement or assumed their rising home values would fund their retirement when they downsized, or just plain got crushed in the market.

      1. Kmurp

        It might not be such a bad thing to have multi-generational living. It might help with child rearing and save Medicare / Medicaid some $ on the elderly as well.

      2. Josh

        As a member of “Generation Y,” I can say I have never heard a single friend or acquaintance even entertain the idea of remaining with their parents for the long run. I have heard many people my age state they’d like to be financially capable of taking care of their parents – perhaps even having them move into their own homes someday. This sentiment will most likely influence my generation not only to move out, but also become full fledged home owners. As bullish as Buffet’s “hormones” comment was, there is some truth to it.

  6. Clive

    Great article Matt, unfortunately I cannot help but to agree with your conclusion.

    What the elites tend to forget — repeatedly, once per era — is that the next generation (today’s c. 16 ~ 25 year olds) have less at stake in maintaining the corrupt status quo. Even if you are the child of a 1%’er, you either see and reject what the as-is state of affairs is or you acquiesce to it but don’t seek to enhance it. And of course, the remaining 99% certainly have little to gain (and virtually no chance of joining the 1%) by acting in a complicit fashion.

    For me (us???) in the we-want-it-now society, it doesn’t happen quickly enough of course. But that doesn’t mean to say it isn’t a work in progress. Crises can be a catalyst. Let’s just hope they aren’t truly dire crises with mass suffering. Personally, I don’t think they will be. But then again, I’m always an optimist…

  7. Expat

    So, my male hormones are telling me I need to drive a Ferrari. And most guys are in the same situation, right?

    This means that Ferrari must sell hundreds of millions of cars every year. Cool. I will buy some Ferrari stock and become as rich as Uncle Warren and pay on 17% taxes.

    Warren Buffet might be super-smart or he might just be lucky. Let’s face it. If Unlce Warren’s advice and strategy were so easy (he is not an alien with a 400 IQ and does not possess magical foresight), then we should have lots more Buffets roaming around.

    If Buffet were so frickin’ smart, then surely his advice to Washington over the past thirty years would have made every American a millionaire.

    Perhaps, instead, Warren Buffet is just another uber-rich scumbag like pre-retirement Bill Gates or Lloyd Blankfein who has an avuncular style and better image consultants.

    Like Chris Christie said, Warren Buffet should just STFU.

    1. NotTimothyGeithner

      “Warren Buffet might be super-smart or he might just be lucky.”

      Socrates was forced to drink hemlock, Cicero had his head and hands displayed on the Forum Rostra after his execution by Marc Antony, and plenty of smart people were born when the Catholic Church was the only place for intellectual discourse. The answer is luck. Modern concrete was an accident from some jackass trying to turn iron into gold. If the alchemist knew turning iron into gold was impossible, he probably would have become a priest and turned bullshit into gold. The world lucked out.

      In this case, Buffet can’t grasp a recovery without a housing rebound. Housing has led us out in the past, but unlike previous recessions, young people often replaced laid off workers and took advantage of lower interest rates. There is an incredible youth depression, and paying people to take out loans isn’t a sound business model.

  8. fresno dan

    “His assertions that the financial crisis was an “economic Pearl Harbor” was a similarly self-serving explanation that diverted attention from a crisis resulting from events he helped shape to some sort of external causation. He is now profiting from legal and regulatory forbearance against entities he owns.”


    I mean, the house should have appreciated at 22% a year for eternity…

    Capitalism – a profit and loss system except for financial types…

  9. F. Beard

    There is no honesty among our political elites, and by that statement, I don’t mean that they are liars. Matt Stoller

    The lying is to promote confidence to promote borrowing to promote consumption. But what is there to be confident about? A fundamentally dishonest money system that we have been warned about for centuries if not millenia? Most economists who did not see this coming? The belief that economics should be amoral? A scapegoat the poor and helpless mentality among the PTB?

  10. F. Beard

    It’s actually not so different from Alan Greenspan’s somewhat-kidding-but-not-really advice to burn excess housing stock. Matt Stoller

    Homeless people and “excess” housing stock, what a disgrace. Lack of resources is no longer an excuse for ignoring the poor, if it ever was. I am reminded of milk dumping in the Great Depression.

  11. Skippy

    Mr. Buffeted was just on TEE BEE and said… housing is a good way to cover the short on the american dollar…

    Skippy… Seems like the old joke… I want to die in my sleep… peaceful and clam…. and not like the screaming passengers in my car…

  12. Lloyd C. Bankster

    Good ‘ole Uncle Warren, always running his mouth. You can fool some of the people all of the time, and so forth. Is there a greater hypocrite on earth?

    I remember reading that OP-Ed he wrote for the NY Times back in 2010, you know, the one where he thanked Uncle Sam for the bailout, for doing the right thing, for saving the country, all that BS.

    What a joke. I had a good laugh that morning.

    Not one word about saving his own ass. Or how hard he lobbied for TARP. Or the fortune he made from it, starting with his personal investments in Goldman Sachs, Moody’s, Wells Fargo, GE, etc….

    Not a word about the counter-party risk Berkshire Hathaway was holding. Remember Warren, all those derivatives? Those god-awful things you once publicly referred to as “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal”, (and you got a wide round of applause for that one) meanwhile, privately Berkshire was loading itself up to the eyeballs with various derivatives contracts.

    Without all the bailouts and backdoor bailouts, Berkshire would’ve certainly gone tits up, if you’ll pardon my French. The same as Goldman.

    So yeah, if nothing else, it sure made a killing for good ‘ole Uncle Warren.

    1. F. Beard

      it sure made a killing for good ‘ole Uncle Warren. Lloyd C. Bankster

      Just how much more money does Warren need?

      He who loves money will not be satisfied with money, nor he who loves abundance with its income. This too is vanity. Ecclesiastes 5:10

      Solomon had more than a little wealth himself, btw.

    2. Kmurp

      I understand why people distrust Buffett but just stating that Berkshire has a number of derivatives on its books isn’t proof that he was talking his book. I’m not sure that GE would have gone under without TARP. Maybe it would have, but I thought that their big moment came when the money markets were frozen. I thought that’s when I first heard Buffett use the pearl harbor analogy on Charlie Rose. Maybe the timing of the events were different than I remember them.

  13. Jack Straw

    For whatever reason, this is frequently ignored:

    “HomeServices of America, Inc., a Berkshire Hathaway affiliate based in Minneapolis, Minnesota, has streamlined the experience for our clients, smoothing out the roadblocks to ensure that your individual needs are met – and taken care of.

    As the second largest, full-service independent residential real estate brokerage firm and the largest brokerage-owned settlement services (mortgage, title, escrow and insurance) provider in the U.S., we have the strength, expertise, and most importantly, commitment to help with virtually any real estate-related need.

    Formed in 1998, HomeServices became the conduit through which Berkshire Hathaway entered the residential real estate market.”

    There is a Wells Fargo tie-in to this, as well, and I don’t think HSA is a pimple on the ass thing for BH.

  14. Crushing Depression

    Grandpa’s just plain evil, but the press suggests we should love the folksy rodent: ‘and when it farts, we’ll be there’

    “Buffett helped cause the housing crisis through his massive ownership stake in Moody’s (he is the single largest shareholder), and he profited immensely from the government bailouts”

  15. skinla

    I don’t trust this guy Buffett. His name is Buffett for a reason, as in All You Can Eat “Happy Hour Buffet.” This dude is on crooked side. He put his money in Goldman Sachs (or Citibank?) and got paid handsome deal because taxpayers were supplying the bailout money to the same banks at the same time. Now, he is talking about “Single Family Homes are the Best Investment.” Of course, because you owed in the banks that caused the crash, then your banks get bailed out, next your banks gets Amnesty without punishment and, now, you can sit for All You Can Eat Buffet of wrecked single family homes.
    And, talking about hormones, Warren Buffett certainly won’t have any of that mojo left in him.

  16. alex

    Shorter Matt Stoller: Buffett is talking his book.

    Obviously. Yawn. Or at least that was my first reaction. But on second thought everything that says that Buffett is talking his book is a useful public service. The whole “Cult of St. Warren” thing is too widely accepted. Frankly the “hormones” thing doesn’t bother me at all. What is useful though is details of his (Berkshire-Hathaway’s) financial interests and how they’ve benefitted from government bailouts.

  17. John Regan

    Buffett should look at what is happening in Japan, like I did a few months ago:

    If you press young people down with debt enough, they stop pairing off and they stop having families. This is happening in Japan, and it’s happening here.

    The solution to all these problems is the same. Cancel the debt with a jubilee and start over. It’s really that simple, not that it could be called easy.

    1. F. Beard

      not that it could be called easy. John Regan

      Debt forgiveness would not be easy but a universal and equal bailout, including non-debtors, combined with leverage restrictions to prevent the problem from reoccurring would be.

      Or because the bankers got drunk, we must all suffer the hangover?

  18. R Foreman

    When the male hormones take over, we’re going to get violence. Outstanding job Warren.. keep up the masterful insight. That’s just what we need is increased anarchy. That’ll show those elite who’s in charge.

  19. MLS

    “Buffett helped cause the housing crisis through his massive ownership stake in Moody’s (he is the single largest shareholder)”

    I am no fan of Warren Buffett whatsoever, but this statement is pretty absurd. Helped cause? By owning Moody’s? Was Uncle Warren wandering into the Moody’s board room and management meetings telling them to rate crappy MBS as thought they were AAA? Was he also doing the same thing over at S&P? That would be odd since Berkshire was not a major shareholder of McGraw Hill.

    Consider the alternative – would Moody’s still have rated crappy MBS as AAA if Warren wasn’t a shareholder? I’m pretty sure they would, it was heavily in their interest to do so.

    1. Yves Smith

      The ratings agencies used to run like academies, with guys who were not all that well paid but actually cared about their work.

      D&B spun off Moodys’. Moody’s being a separate, public company was a big source of its ruination (from both an incentives and a practical results standpoint). I can give you a good deal more detail re the particulars, I do happen to know this case.

      Buffett was an investor in D&B. He sold his stake in the rump D&B but kept his share in Moody’s. If you don’t think he was consulted on the restructuring and his views weren’t given considerable weight, I’d say you are smoking something strong. And the restructuring was directly related to the outcome (there was also a power play w/in Moody’s….)

      1. MLS


        Agree completely that Moody’s status as a public company created an incentive where they could rate securities whatever the issuer wanted in exchange for fees. And no doubt Uncles Warren had at least some input into the divestiture of Moody’s by D&B. But that spinoff occurred in 2000, years before we had the mortgage crisis. To think that Buffett panted the seed and said to the soon-to-be-public Moody’s “now go ahead, I want you rate these dodgy securities AAA to make Wall Street and investors like me happy” is an enormous stretch. Did he recognize the potential conflict of interest of Moody’s rating their customer? Quite possibly, yes, but that’s a far cry from “helping cause” the subprime crisis. Curiously, S&P remains as a subsidiary of McGraw-Hill, a publicly traded company and they committed the same sins as Moody’s. Same goes for Fitch as a sub of FIMALAC. The incentives to rate a security according to the whims of the issuer in exchange for fees existed whether Warren owned the shares and had input at the board level or not.

        Add in the unintended consequences of the SEC designating a cartel of seven NRSROs in 1975, 30 years before the crisis, and you’ve got a whole host of causes much bigger than Buffett as a shareholder.

  20. Rehabber

    How much money does Buffet have tied up in consumer cyclicals linked to housing? Clayton Homes, Shaw Carpet, Whirlpool, Wells, HomeServices of America, Geico/GenRe, Costco, Wal Mart, DirecTV . . .

  21. b.

    “Eventually, we will see integrity in our discourse. It’s unavoidable. You can’t operate a society solely on intellectual dishonesty because eventually all your bridges fall down, even the ones the rich use.”

    The hormones will take over? Adrenaline? Pixie dust?

    Entropy is unavoidable. Everything else is just monkeys at the water hole, making noise. You might or might not be able to operate a society on intellectual dishonesty for more than, what, four decades going on two dozen? Done. But surely not a year longer?

    I read about the housing bubble in 2002 (at CEPR, no less). It sure is not over yet, not here, not in Canada, not in China. Stupidity might be unavoidable. Honesty has proven rather too avoidable for too many generations.

    Easter Island. Dishonesty goes a long way. The markets – and the nation – can stay dishonest longer than you can stay solvent, fed, or alive.

    Cue Jack Nicholson: “Nobody is gonna give it to you. You gotta take it.” Honestly.

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