So How Exactly Does Buffett Get Information Like This?

Reader Hubert soliders on in the lonely task of continued Lehman spadework. He highlighted this section of FCIC testimony from Warren Buffett:

I think that if Lehman had been less leveraged there would have been less problems in the way of problems. And part of that leverage arose from the use of derivatives. And part of the dislocation that took place afterwards arose from that. And there’s some interesting material if you look at, I don’t exactly what Lehman material I was looking at, but they had a netting arrangement with the Bank of America as I remember and, you know, the day before they went broke and these are very, very, very rough figures from memory, but as I remember the day before they went broke Bank of America was in a minus position of $600 million or something like that they had deposited which I think J.P. Morgan in relation to Lehman and I think that the day they went broke it reversed to a billion and a half in the other direction and those are big numbers.

Hubert muses:

So LEH-BAC had a $2.1 billion swing in derivatives on one day. Multiply this around 15 or 20 bigger institutions and many smaller ones and the LEH Black Hole is getting substantiated….

JPM “got” the collateral in front of bankruptcy and they just divided it up as drove the market against LEH positions. I guess they told the LEH guys to hand over everything on their balance sheet and they divided the spoils. And the LEH guys might practically get LEGAL IMMUNITY for doing so. The story would go how derivative counterparties screwed unsecured LEH creditors.

This point does not appear to be sufficiently well understood.

Now perhaps Buffett read of the Lehman-Bank of America issue in the Valukas report, but I missed it in my admittedly selective reading, and I have not seen any one comment on it. I pinged a contact who is pretty deeply involved in the Lehman bankruptcy. His observation:

Very interesting. I don’t know where he would have got any of this information.

The people who would have this data are: Lehman, BA, Alvarez & Marsal [the Lehman bankruptcy overseers] or their lawyers. Regulators may also have this data and some other dealers may also have some knowledge.

Now if any of the first set of people shared this information with Buffett, that would seem to be mighty inappropriate. This is internal financial information, that’s generally considered to be non-public (not that this could be traded on). You might have some loose lipped employees, but Buffett said he read this, not heard it. Similarly, regulators are typically very protective of information they get from entities they supervise.

Now perhaps a reader knows where this tidbit came from and can clear up this mystery. But if not, this is mighty curious.

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  1. Rick

    I believe Lehman reached out to Buffet with hopes of finding a last minute savior. Buffet eventually passed but explains why he might have access to the internal info. I think this is discussed Sorkin’s TBTF.

    1. Yves Smith Post author

      Correct, but he presented it as a phone conversation (from Fuld IIRC) and and immediate turndown, no data exchanged.

  2. jake chase

    So all you savvy analysts (and regulators) out there parsing those bank financial statements: what exactly do you know about these derivative contracts and their collateral requirements? Gives a new meaning to the idea of solvency.

    Solvent: in the case of a bank, one operating with the unlimited backing of the Fed and the US Treasury. All others are insolvent.

    1. nonclassical

      Here’s what we know, courtesy of Robert Johnson-ex-Senate banking committee designee=oversight:

      We know from a variety of people derivatives valued circa
      $880 Billion, 2001, and $600 Trillion, 2007-this within Robert Johnson’s expose’.

      We also know 6 U.S. “investment banks” control 95% of these

      We also know the entire U.S. economy=circa $6.5 Trillion per year, and entire world economy $65 Trillion per year.

      Gore Vidal stated (therefore) we are in a 20-30 year economic demise, and will never be the “same”-whatever that
      may mean..

      1. Paul Tioxon

        Finance decoupled from the real economy produces money, as you say, paper profits without corresponding wealth that anyone can see or hear or feel but only count, as in $600 TRILLION. If we view money as language, a binding cultural phenomena, we may be able to see these geometrically increasing profits approach asympote as the equivalent of St Anselm’s argument for the existence of God. It is something we can talk about and even logically agree, but after it is proposed, it is no more than empty words.

        If you can conceive of a supreme and omnipotent trading strategy, and this strategy can produce all of the money in an infinite amount, its capacity to create money will exceed the actual material wealth of nations with economies. But if the all of the measurable productive capacity of the nations of the world is actually one tenth of the the supreme and omnipotent trading strategy, which produces an infinite amount of money, what is the value of the money when it exceeds the value of the world economy?

        Meaningless, but not worthless. It has worth, because it is still recognized culturally as money, for all debts public and private. What would happen if we eliminated this meaningless sector altogether and just got by the on wealth we actually produce, instead of the money we make when we talk back and forth in investment banking trades that is a decouple meta-system consisting only of money?

        1. Mark

          @Hubert – well said. the thing is that finance provides other functions besides the creation of fictitious capital via sociologically baseless mathematical formulas; supposedly ‘efficiently’ allocates capital to productive sources away from declining industries, intermediates btwn lenders&borrowers, allows consumption to be moved temporally, supports price formation and allocates risk (currency, interest rate, default, etc).

          but finance’s functionality, and not its dis-functionalities (which we all witnessed many a times) is in part b/c of the frameworks in place i.e. international monetary frameworks…so eliminating this useless sector means retooling them which is necessary if we want to stop living in such volatile conditions prone to crises

          1. Paul Tioxon

            I was referring to the Magnetar Trade (A supreme and Omnipotent Trading Strategy), and similar metaphysical finance. Not finance that can be retooled or even recognized as banking which helps to build homes and factories, highways and skyways, and internet world wide webs. There was a reason why future options trades were banned by Germany for so long, it’s voodoo investing.

    2. Matt

      You can get a better feel for the derivative situation by looking up the OTC and DTCC derivative reports. The bulk of derivatives are in FOREX and interest rate swaps. Credit derivatives such as credit default swaps are dominated by government securities (read PIGS) with much smaller amounts in companies and MBS and CDOs etc. Since counting both buy and sell side is a double count, the DTCC claims the total outstanding credit default swaps is about 33 Trillion, with the net being less than 1 Trillion. As an exercise you can read the derivative community’s clearing of the Lehmann brothers derivative positions.
      Unless credit default contracts were super senior contracts that must be fulfilled before the bankruptcy judge gets involved, it is hard to see how there could be such a large derivative industry. So don’t think a derivative contract is junior or equal to any other commitment.

  3. Dave M

    @Rick: True. Lehman was trying to get Buffett to help, so they gave him access to their books (well beyond just the basic financial statements). If I remember the story correctly, Buffett basically looked at the figures and laughed.

    1. Yves Smith Post author

      I’ll need to check, but this is very specific as to the timing of the data (right before failure and then right after). Buffett was not in the picture then. So this is the wrong timeframe to have to do with Fuld’s flailing about to find a buyer.

  4. Hubert

    Buffetts information provided by LEH dated before bankruptcy – the Derivative value swing with BAC took place while entering bankruptcy. Besides us not knowing much, I know as far: the Sorkin book is a very poor guide for finding out what happened in the crisis in general and to LEH in particular.

    Possiblity 1: LEH counterparties came together on Saturday and looked at LEH aggregate postions. They took that home and drove the positions on Monday against LEH. There need not be an explicit understanding to do this. This probably went on with implicit understanding. It is common practice when any fish big enough is on the hook – and LEH was a whale.
    Possiblity 2: The LEH derivative marks were wrong from the beginning. But those derivative in question here were collateralized – so the counterparties, here BAC, had certainly no interest in providing free colateral to LEH on the cusp of Chap 11.
    Possibility 3: That would leave a mix-up of collateralized and uncollateralized derivatives between BAC and LEH, with LEH overvaluing the uncollateralized ones.
    Or any combination of 1 & 3. But we really do not know and are apparently not supposed to find out ….

  5. Thomas

    Buffett put $10bn into Goldman a week after Lehman failed. Maybe someone there told him while he was negotiating with them.

  6. Jonathan Bernstein

    Actually when LEH was pitched to BRK, Warren liked it, but actually asked Fuld for realistic terms on a convertible preferred. And Fuld balked. If Fuld had taken the deal, LEH would have received the Berkshire imprimatur and would have had a much better shot at survival. Maybe JPM and the rest would have been less likely to have attacked under the circumstances. Or maybe not.

    In any event, when Buffett got to look at LEH, he did NOT laugh.

    1. Yves Smith Post author

      Buffett talked structure without having looked at the books. He made an immediate counteroffer re structure and Fuld rejected it. So no due diligence would have ensued.

    2. Hubert

      Buffett called Lehman a “Carny”. If you really think Buffett would have put money into Lehman, you take the Sorkin book too literally. Buffett made some mistakes in the crisis but LEH would have been such a phenomenal one. All he did was some sniffing around to get information …….
      Again: Sorkins “Too big to fail” is the Hank Paulson & Co. PR version of what happened.

  7. Chucky

    Well, if I read that right, that would be read, as in an e-mail, instead of heard, from an insider which would make it more apparent that he was part of an inside trade and also that his credit agency was also manipulating data. I mean, hell, who’s going to have the balls to subpoena Warren Buffett’s e-mails? Given the fact of how connected he is.

  8. Slight

    Chain of logic:

    Buffett stated something about internal company data –> I can’t find that data

    Your implication:
    Buffett might be a corrupt and abusing inside information.

    More likely:
    You’re ignorant of the situation.
    You’re making wild accusations on minimal diligence.

    Nevermind that he didn’t trade on this information..
    Or, that if he was to trade on this, it would be as part of a financing group(in which he would be acknowledged to be privy to inside information)
    Or that, numerous parties would and probably did approach Buffett for additional support in the Lehman financing proposals they were considering, and so…

    Yes, it does seem very feasible that he could have this data and that no, it does not imply anything wrong with Buffett’s character. No, you are not about to uncover some great conspiracy.

    Your (and this is important as it is very representative of your work in general) willingness to imply malfeasance and tarnish reputations, on the back of minimal real knowledge of the situation, is disgraceful. And I say this because it’s the truth. Although, I am fully aware all my comment does is raise your own sense of pride and accomplishment.


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