THE BASIS POINT

Buffett: Dumb Money No Longer Available

 

Warren BuffettWarren Buffett said Wednesday that the finance firms who “brewed this toxic Kool-Aid” of risky mortgage and other derivative products “found themselves drinking a lot of it in the end.” No big surprises here as the credit bubble unwinds. Supporting a point we’ve been making, Buffett also said money is cheap but the re-pricing of risk is what’s prolonging the credit crunch. Jumbo mortgages are a good example to explain: rates have come down but Jumbos are not showing a commensurate drop because they’re still being priced for the risk that there’s still not many secondary market takers for these deals until higher credit standards are proven.

Banks still have to sell off or eat the back log of bad mortgage or other securities they have on (or off) their balance sheets, and new pipelines of well-underwritten securities need to replace this. It takes time to do this even in a cheap money environment, because when proper risk management back with a force in mortgage and other credit underwriting departments across the globe, not as much paper is approved for sale on secondary markets.

Buffett made his comments at an event where he announced the Canadian launch of Business Wire, a press release distribution company Berkhshire Hathaway bought in 1996. Interesting sign of the times when conservative Berkshire Hathaway sees massive, repeatable long-term profits by owning a corporate spin business

 

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