WarrenA few weeks ago on a Friday, a transaction described as abacus was made the subject of an SEC complaint. I think it ran about 22 pages. And I think there's been probably sort of misreporting, not intentional, obviously, but misreporting of the nature of that transaction in at least probably a majority of the accounts that I read about us. The transaction, the abacus transaction, there were four losers in, but we're going to focus on two of them. Goldman itself was a loser. They didn't intend to be a loser, I'm sure. They couldn't sell a piece of the transaction, and they kept it, and I think they lost $90 or $100 million because they kept it. But the main loser, in terms of actual cash out, was a very large bank in Europe named A.B.N. Amroll, which subsequently became part of the Royal Bank of Scotland. Now, what did ABN Ambril? Why did they lose money? They lost money because they, in effect, guaranteed the credit of another company. A.B.N. Ambril was in the business of judging credits, deciding what credits they would accept themselves, what credits they would guarantee. And in effect, they did something in the insurance world called fronting a transaction, which really means guaranteeing the credit of another party. We have done that many times at Berkshire. We get paid for it. And people do not want the credit of the XYZ insurance company. but they say they'll take a policy from X, Y, Z, if we guarantee it. And Berkshire has made a lot of money, guaranteeing things over the years. So A.B.N. Ambril agreed to guarantee about $900 million of the credit of a company called ACA. They got paid for that, and this is in the SEC complaint, it's not mentioned very often, but they got paid, what, 17 basis points. That's 1,000ths of 1%. So they took on a $900 million risk of guaranteeing credit. They got paid about a million six. And the company whose credit they guaranteed went broke, and so they had to pay the $900 million. It's a little hard for me to get terribly sympathetic with the fact that a bank made a dumb credit deal. But let's look at ACA because they were sort of the nub of the transaction. ACA, and you wouldn't really know this by reading most press accounts, ACA was a bond insurer. Now they started out. out as a municipal bond insurer. They guaranteed various credits. And they were like AMBAC, they were like MBIA, they were like FIGIGC, they were like FSA, and all of those
[3:14]
Warrencompanies, and we wrote about this a few years ago, and the report, all of those companies started out insuring municipal bonds. Some of them started 30 years ago. And there was a big business in insuring municipal bonds. And then the profit margins started getting squeezed in municipal bond business. So what did they do? Instead of sticking to the business they knew and accepting lower profits, they went out and got into the business of ensuring structured credits and all kinds of different other deals. I described their activities a couple years in the annual report as being a little bit like May West, who said, I was snow white, but I drifted. And they, these bond insurers, and almost all of them did it. These bond insurers drifted in to insuring things they didn't understand quite as well, but where they could make a little more money. ACA did it, MBIA did it, Ambik did it, Fijic did it, FSA did it, and they all got into trouble, every one of them. Now, is there anything wrong with a bond insurer insuring a structured credit or something other than municipal? No, but you better know what you're doing. In the case of the abacus transaction, it was sort of a mutual, a negotiation as to which bonds were included. Now, in the end, the bonds that were included in the abacus transaction, all went south very quickly. That wasn't quite so obvious they were going to do that in early 2007, as you could see by studying something called the ABX index. But the market, the housing bubble, really mania, started blowing up in 2007. Now, there could be troubles in these states that we insured. You can say they have big pension obligations and maybe the guy who's shorting them on the other side knows more about that than we do, but, you know, that is our problem. I mean, if we want to insure bonds, in the case of ACA and in case of MBI, they have teams of people do it. We just do it with a couple of people at Berkshire. But I see nothing whatsoever. I mean, if we lose a lot of money on these bonds, I am not going to go to the guy on the other side of the transaction. and say, gee, you took advantage of me. I don't care if John Paulson is shorting these bonds to me. I don't, he has no worries that I'm going to claim that he had superior knowledge about the finances of these states or anything of the sort. So that was basically the abacus transaction. I think the central part of the argument is that Paulson knew more about the bonds than the bond insurer did.
[5:58]
CharlieMy guess is the bond insurer employed more. people than John Paulson did in his business. And they just made it, they made a, what turned out in retrospect to be a dumb insurance decision. And for the life of me, I don't see whether it makes it any difference whether it was John Paulson on the other side of the deal, or whether it was Goldman Sachs on the other side of the deal, or whether it was Berkshire Hathaway on the other side of the deal. Let's say we had decided to short the housing market in some way in the early 2007. I don't think anybody should blame us for taking our position. If we did it, we didn't do it, but, uh, or if we take them the long side.