Buffett discussed his investment in Freddie Mac and why he ended up ditching it prior to the housing collapse. He noted they’d made a large investment in Phillip Morris bonds (though he was uncertain if that was the precise company). This investment vexed him because Freddie Mac is dealing essentially with government guaranteed credit and this investment fell outside their intended purpose.
Buffett explains, “So here was an institution that was trying to serve two masters; Wall Street investors and Congress and they were using this power to do something that was totally unrelated to the mission. They gave me some half baked response that they were increasing liquidity.” He went on to say that they were arbitraging government credit for something the government didn’t want them to do. Buffett then dished out an oft used quote, “there’s never just one roach in the kitchen” to describe his lack of faith in the company.
One of the interviewers asked him about his concern of derivatives and his quote “derivatives are weapons of mass destruction” from a prior shareholder letter. Buffett noted that derivatives involve a very long settlement period; anywhere from a year to a 100 years (as some of General Res had) while stocks settle in 3 days. As they get larger and larger they become problematic. He said there is also an ability to inject enormous amounts of leverage without appreciating the magnitude of the bet.
Wells Fargo (WFC) CEO’s
John Stumpf was among the many Wells Fargo managers interviewed. When differentiating Wells Fargo from other lenders that had gone bankrupt Stumpf said “culture eats strategy for breakfast every day.” He was describing the culture at Wells which he believes to be markedly better than that of its banking peers. He went on to describe Wachovia, the bank Wells acquired in 2008.
“Wachovia was a very fine company, but the problems they had were not one off aberrations and there were some weaknesses in their culture that allowed for that.” I elaborated about the Wells Fargo culture in a previous article, but Stumpf’s main point in this interview was that Wells truly focused on the customer. In deciding against subprime loans, he reasoned that those types of loans could not possibly work for their customer and making the loan just for the sake of profit was inconsistent with their goals.
In a separate interview with Richard Kovacevich, the former CEO of Wells Fargo, Kovacevich described the acquisition of Wachovia. Contrary to material I’ve read he had said the decision to make the acquisition was not contingent on the passage of the legislation allowing the losses of a target bank to be used against the profits of the acquiring bank. Kovacevich said even if the bill was not passed, the deal would still have happened.