The Anatomy of Financial Crises: Understanding Their Causes and Consequences

Crises have been a feature of the financial landscape for hundreds of years. They often appear with little warning, as the sub-prime mortgage crisis of 2007 and the Asian crisis of 1997-1998 illustrate. It's not always clear what causes crises, whether they can be avoided and how their impact can be reduced. A recent book, titled Understanding Financial Crises (Oxford University Press), by Wharton finance professor Franklin Allen and Douglas Gale, a professor of economics at New York University, tackles this subject from a number of different angles. The authors review the history of financial crises in addition to offering their own approach to examining the underlying causes. Allen and Gale also discuss asset price volatility, the interaction between banks and markets, bubbles and financial contagion, among other topics.

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We are smarter than me: How the wisdom of crowds can help businesses succeed

In We Are Smarter than Me (Wharton School Publishing), authors Barry Libert and Jon Spector -- and a community of more than 4,000 people who contributed insights to the book -- illustrate how businesses can profit from the wisdom of crowds. Using case studies from product development, manufacturing, marketing, customer service, finance and management, the book, whose subtitle is How to Unleash the Power of Crowds in Your Business, shows what works, and what doesn't, when managers try to build community into their decision making.

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Transcript: Pimco’s Bill Gross on recession, investments and subprime

Bill Gross, founder and managing director of Pimco, discussed interest rates, recession, investments, Mohamed El-Erian, subprime and government intervention with Chrystia Freeland, the FT’s US managing editor.

FT: US interest rates?
MR GROSS: Long.

FT: Hillary Clinton?
MR GROSS: Long.

FT: Oil?
MR GROSS: Short.

FT: Manhattan real estate?
MR GROSS: Short.

FT: Hedge funds?
MR GROSS: Short.

FT: Mitt Romney?
MR GROSS: Short.

FT: The euro?
MR GROSS: Short.

FT: Ben Bernanke?
MR GROSS: Long.

FT: Barack Obama?
MR GROSS: Long.

FT: China?
MR GROSS: Long! [laughs]

Interview I

Interview II

The Global Economy’s Inevitable Hard Landing

In recent weeks, the global liquidity and credit crunch that started last August has become more severe. This is easy to show: in the United States, the euro zone, and the United Kingdom, spreads between Libor interest rates (at which banks lend to each other) and central bank interest rates – as well as government bonds – are extremely high, and have grown since the crisis began. This signals risk aversion and mistrust of counterparties.

To be sure, major central banks have injected dozens of billions of dollars of liquidity into the commercial banking sector, and the US Federal Reserve, the Bank of England, and the Bank of Canada have lowered their interest rates. But worsening financial conditions prove that this policy response has failed miserably.

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Warren Buffett's "Bet on America": The Complete CNBC Interview

In a live interview this morning on CNBC's Squawk Box, Warren Buffett called his purchase of a big Marmon stake as a "bet on America over a long time." He also revealed that while he has been approached by financials companies about buying a stake, "we have not seen a deal that causes me to start salivating." A summary appears in the WBW post Warren Buffett tells CNBC He's Been Approached by Financials But Hasn't Seen Anything He Likes So Far.

Interview Transcript

Thomas Russo Says Marmon Stake to "Deepen" Berkshire's Business: Video

Berkshire Hathaway Inc. to Acquire 60% of Pritzker Family Company, Marmon Holdings, Inc.

Berkshire Hathaway Chairman and CEO Warren Buffett and Tom Pritzker, Chairman of Marmon Holdings today announced that Berkshire will purchase 60% of Marmon Holdings, Inc., a private company owned by trusts for the benefit of members of the Pritzker Family of Chicago.
The closing is anticipated to occur in the first quarter of 2008. Prior to closing, Marmon will make a substantial distribution of cash and certain assets to the selling shareholders. At closing Berkshire will acquire 60% of Marmon for $4.5 billion. The remaining 40% will be acquired through staged acquisitions over a five to six year period for consideration to be based on the future earnings of Marmon. The transaction remains subject to customary closing conditions, including regulatory approvals.

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Marmon Holdings Inc's Profile

Marmon Holdings Inc's Financials

Warren Buffett Watch's 8 Predictions for '08 - And Beyond

1. Recessions can't be avoided forever.

2. We'll survive future recessions just as we've survived past problems.

3. Recessions will create opportunities.

4. All stocks won't be cheap.

5. The crowd will make mistakes.

6. Investors will mistakenly think falling stock prices are bad.

7. Good times will prompt bad decisions.

8. There will be more dancing at another wild party followed by another painful hangover.

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The Art of the Deal

How the Nahmad family made billions trading art, and why so many people in the art world can't stand them.

On the evening of Nov. 6, in the packed Rockefeller Center salesroom of Christie's auction house, four buyers were vying for a 1955 Picasso oil of Jacqueline, the artist's second wife. As the bidding quickly rose above $20 million, five members of a family of international art dealers named Nahmad watched from their seats in the middle of the expensively attired crowd. David Nahmad, 60, together with his two older brothers, had purchased the painting in May 1995 at Sotheby's for $2.6 million. The winning bid: $30.8 million, including the auction house's 12% commission. The family made a tenfold gain over a 12-year holding period. It was a profitable night, indeed, for the Nahmads. Earlier a Modigliani they had bought privately in London five months before for $18 million had also sold for $30.8 million.

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The great dying: a memo to market dinosaurs

“Just as some species become extinct in nature, some new financing techniques may prove to be less successful than others.”

The remark was made to the US Congress in September by Anthony Ryan, assistant Treasury secretary. Only when we know the true magnitude of the current financial crisis will we be able fully to appreciate the significance of his words.

Analogies between finance and evolution are in themselves nothing new. “The survival of the fittest” is a phrase that aggressive traders like to use. “It’s Darwinian out there” is a stock utterance by hedge fund managers after an especially tough week. Back in November 2005, a conference hosted by Goldman Sachs, the investment bank, was entitled “The Evolution of Excellence”.

Yet, as became clear at that gathering, when financial practitioners use such terms they seldom understand just how apposite they are. A long-run historical analysis of the development of financial services, going all the way back to the days of Charles Darwin, strongly suggests that evolutionary forces are as much at work in the realm of money as they are in the natural world.

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Charlie Munger's 10 Rules for Investment Success

Those of you lucky enough to attend a Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) annual shareholder meeting have undoubtedly heard Charlie Munger say, "I have nothing to add."

In reality, the guy has quite a bit to add. Thankfully for us, Munger is almost as forthcoming with his investment thoughts as his pal Warren Buffett. In his must-read book, Poor Charlie's Almanac, Munger puts forth a 10-step checklist that even the most inexperienced investors could benefit from.

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Mark Sellers, Intelligent Investor

I recently chatted with Mark Sellers, founder of Sellers Capital. The hedge fund boasts roughly $115 million in assets and annualized returns of 35% (before fees) since inception, including a 45% year-to-date return.

In the hour or so I spent on the phone, I learned a great deal about topics like measuring downside risk, evaluating management, and dealing with volatility:

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Warren Buffett Updates

This is a transcript and video clip of the first part of Warren Buffett's live interview this morning on Squawk on the Street with CNBC's Becky Quick, in which he talks about the Federal Reserve, the U.S. dollar, the economy, and how his retail businesses are doing this holiday season.

Video and Transcript (1 of 2)

This is a transcript and video clip of the second part of Warren Buffett's live interview this morning on Squawk on the Street with CNBC's Becky Quick. In this section, Buffett talks about the super-SIV proposal, the Bush administration's plan to encourage lenders to freeze some variable mortgage rates and about why he supports Hillary Clinton and Barack Obama for president.

Video and Transcript (2 of 2)

Berkshire Hathaway Is Poised to Surpass $150,000

Berkshire Hathaway Inc. is poised to close above $150,000 for the first time as investors bet on Chairman Warren Buffett's ability to steer the company through turmoil in financial markets.

The company's Class A shares have risen 34 percent since Aug. 15, beating the 5 percent advance by the Standard & Poor's 500 Index. Berkshire traded as high as $151,650 today, a record and 100 times the next highest-priced company on the New York Stock Exchange, Nasdaq Stock Market or American Stock Exchange, according to data compiled by Bloomberg.

Buffett may find bargain-priced securities as more than $70 billion in bank losses from bad home loans in the U.S. drive shares lower worldwide. His stock investments generated twice the return of the S&P 500 during the past three decades, according to research by Gerald Martin of American University in Washington and John Puthenpurackal of the University of Nevada, Las Vegas.

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Buffett says economy close to recession

Billionaire investor Warren Buffett said the United States could slip into a recession if the jobless rate increases, he told CNBC television on Tuesday.

In a series of interviews throughout the day, Buffett, who built Berkshire Hathaway (NYSE:BRK-A - News) into a $205 billion conglomerate, gave a sobering view of the economy's prospects, including the assessment that holiday retail sales were not looking good despite a post-Thanksgiving holiday burst.

Consumer spending is seen as a key buffer preventing a weaker U.S. economy from sliding into recession as the housing market continues its free-fall and the banking sector remains challenged by a credit crisis.

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Fool Awards 2007: Investor of the Year

The Motley Fool online editorial team, through colorful debate and careful deliberation, has settled on five nominees for the 2007 Investor of the Year award. We've set the nominees, but the final vote belongs to you, the readers.

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Interview Excerpts: Volcker, Soros, Others Weigh In on Mortgage Crisis

An examination of the current U.S. mortgage crisis shows that it is comparable to some of the biggest financial disasters of the past half-century. Here are excerpts from interviews about the mortgage crisis with George Soros, Paul Volcker, William Seidman and Robert Shiller.

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Tug of War: Rationality vs. Regret

ASIDE from having opposable thumbs, what makes us human surely includes our sense of humor, the awareness of our own mortality — and, I would argue, the ability to want what we can’t afford.

Wanting something you don’t have the money to buy is painful enough. The torment is made even worse when you can almost, just about, very nearly afford it — honey, can you do the math again? — but probably can’t.

My husband and I found ourselves in this bind when we stumbled upon a gem of a house recently — just the sort of home we had hoped to find someday.

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Tracing Business Acumen to Dyslexia

It has long been known that dyslexics are drawn to running their own businesses, where they can get around their weaknesses in reading and writing and play on their strengths. But a new study of entrepreneurs in the United States suggests that dyslexia is much more common among small-business owners than even the experts had thought.

The report, compiled by Julie Logan, a professor of entrepreneurship at the Cass Business School in London, found that more than a third of the entrepreneurs she had surveyed — 35 percent — identified themselves as dyslexic. The study also concluded that dyslexics were more likely than nondyslexics to delegate authority, to excel in oral communication and problem solving and were twice as likely to own two or more businesses.

“We found that dyslexics who succeed had overcome an awful lot in their lives by developing compensatory skills,” Professor Logan said in an interview. “If you tell your friends and acquaintances that you plan to start a business, you’ll hear over and over, ‘It won’t work. It can’t be done.’ But dyslexics are extraordinarily creative about maneuvering their way around problems.”

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Dollars and Depression

The falling dollar has emerged as a source of profound global macroeconomic distress. The question now is how bad that distress will become. Is the world economy at risk?

There are two possibilities. If global savers and investors expect the dollar’s depreciation to continue, they will flee the currency unless they are compensated appropriately for keeping their money in the US and its assets, implying that the gap between US and foreign interest rates will widen. As a result, the cost of capital in the US will soar, discouraging investment and reducing consumption spending as high interest rates depress the value of households’ principal assets: their houses.

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Whitney Tilson: Look beyond generalisations

I'm always surprised by the sweeping generalisations made by financial commentators during times of market distress. To say that in the current environment shares of companies in the financial sector are "oversold" or "already discounting a recession" or "poised to fall much further" is a simplistic view that doesn't reflect the diversity of businesses, companies and risks present among financial firms.

Out-of-favour sectors, of course, are great places to prospect for investment ideas - precisely because of the market's tendency to make broad generalisations. The fact is that within any giant sector such as financial services, there will obviously be companies in better or worse competitive positions, with stronger or weaker balance sheets and more or less capable management. In times of uncertainty, the less discriminating the market is of such differences, the more opportunity for smart investors to take advantage.

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Bill Miller Still Sees Value in Beleaguered Financial Stocks

Legendary fund manager Bill Miller can still draw a crowd, even after a couple of disappointing years.

The manager of Legg Mason's (LM) Value Trust (LMVTX) fund, who beat the S&P 500 for 15 years in a row until his streak ended in 2006, spoke to the press Tuesday about his concerns that the mortgage crisis could push the U.S. economy into recession and his views that, in the long term, many financial, consumer and homebuilder stocks are still good investments.
Value Trust is well off the S&P's performance this year, too. But to underscore how exceptional that 15-year run is, the funds with the longest active streaks beating the S&P 500 are at only eight years.

Miller's exceptional long-term performance means, among other things, that a lot of market watchers pay attention to what he says.

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Bill Miller's simple plan for Citi

Bill Miller, the legendary Legg Mason Value Trust fund manager, owns shares of Citigroup, the embattled financial services giant that is looking for a new chief executive officer. And Miller has a suggestion about the type of person that the bank should hire to replace the ousted Charles Prince.

He said the bank should find someone who has a similar management style to Hewlett-Packard CEO Mark Hurd. Hurd replaced Carly Fiorina in 2005 and has led a dramatic turnaround at HP, mainly by cutting costs and focusing the computer company on what it does best.

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The Next Dominos: Junk Bond And Counterparty Risk

The subprime problem, we were told, would not spread to other markets. It would be "contained." And it has, according to Jim Grant. He quipped last week that it has been contained on planet Earth. The risks coming from rising defaults in the US (now above 600,000 and rising from just 200,000 a few years ago) are clearly spreading to markets far beyond the subprime world.

This week's Outside the Box talks about the next two dominoes that could fall: junk bonds and counterparty risk in the various credit default swap markets. Ted Seides is the Director of Investments at Protégé Partners, LLC, a hybrid fund of funds that invests in and seeds small, specialized hedge funds. He writes this week's piece in Peter Bernstein's Economic and Portfolio Strategy, one of the most respected of market analysis letters. You can learn more about the letter at www.peterlbernsteininc.com.

This piece is a little longer than most letters, but it is one of the more important editions of Outside the Box this year. This is a must read. You absolutely need to understand the nature of the systemic risk we are facing, and Ted does a great job of explaining in very clear terms the nature of the risks that we have created din our modern markets. I have left the footnotes in, and they are at the end of the letter.

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Buffett's Berkshire buys $2B in TXU bonds

Warren Buffett put $2 billion of Berkshire Hathaway's cash to work at the end of last week when the company purchased high-yielding bonds issued by Dallas-based power producer TXU Corp., according to a person familiar with the deal.

TXU was bought earlier this year in a landmark $45 billion leveraged buyout led by Kohlberg Kravis Roberts. As with many LBOs carried out in buoyant markets, banks agreed to make large so-called bridge loans to help finance the deal, but they got stuck with those loans when demand dried up for LBO-related debt. TXU can now use the proceeds from the bond sale, whose total size was $3.9 billion, to help pay down the bridge loans. The bonds were issued through a subsidiary.

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The Many Errors in Thinking About Mistakes

“I think it’s a very difficult subject,” said Paul J. H. Schoemaker, chairman of Decision Strategies International and teaches marketing at the Wharton School of the University of Pennsylvania. “There’s a lot of ambivalence around making mistakes.”

On one hand, as children we’re taught that everyone makes mistakes and that the great thinkers and inventors embraced them. Thomas Edison’s famous quote is often inscribed in schools and children’s museums: “I have not failed. I have just found ten thousand ways that won’t work.”

On the other hand, good grades are usually a reward for doing things right, not making errors. Compliments are given for having the correct answer and, in fact, the wrong one may elicit scorn from classmates.

We grow up with a mixed message: making mistakes is a necessary learning tool, but we should avoid them.

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The Long and Short of It at Goldman Sachs

FOR decades now, as a writer, economist and scold, I have been receiving letters from thoughtful readers. Many of them have warned me about the dangers of a secret government running the world, organized by the Trilateral Commission, or the Ford Foundation, or the Big Oil companies or, of course, world Jewry.

I always scoff at these letters. The world is far too complex a place to be run by any one group. But the closest I have recently seen to such a world-running body would have to be a certain large investment bank, whose alums are routinely Treasury secretaries, high advisers to presidents, and occasionally a governor or United States senator.

This all started percolating in my fevered brain last week when a frequent correspondent, a gent in Florida who is sure economic disaster lies ahead (and he may be right, but he’s not), forwarded a newsletter from a highly placed economist at Goldman Sachs named Jan Hatzius.

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The Weitz Funds Conference Call Transcript

This is Wally. I'm here with Brad Hinton and Tom Carney, and we welcome you to the call. I hear there are 48 people at this point. It's been a while since we did one of these calls. I think we felt like we got to the point where we didn't have much to say a year or two ago and now there does seem to be more to talk about and we invited questions. We got quite a few and the three of us will spend, we haven't timed this, but maybe 15 minutes or so talking about the things that seem to be of most interest. Strangely enough there is one stock that seemed to dominate the questions and most of them were politely worded.

At any rate, we're going to start right in with Countrywide Financial (CFC). I wrote some about it in the third quarter letter to shareholders. Things change daily in the mortgage world these days though, so here is a summary of where we are and how we got where we are and what we plan to do going forward.

With Countrywide we really focused on credit; knowing that there were a lot of mortgages held at the bank, that they were holding residuals from securitizations, that they had a pipeline that held lots of mortgages in between the time of origination and the time they were sold. We stress-tested the portfolio and I think we've really been pretty much on target so far about their exposure to credit losses.

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Warren Buffett's Video Tour of Berkshire Hathaway Headquarters Continues: Why 'Durable Competitive Advantage' Matters

Buffett: The picture of the Berkshire is right here. Here we are. Nice orderly office, and right up there is a photo of the big Hathaway Mill in New Bedford, Mass. That was there in 1960, well, I bought the first stock in '62, then in '65 when I took control, now it was over a million square feet. It had probably 50 million dollars of replacement value of machinery and equipment in there. When we finally gave up on the textile business 20 years later, we got less than $200,000 sold for scrap iron. And for that building which is over a million square feet, I got minus $250,000. I have to give up money. So that's, it shows you that gap accounting figures and fixed assets and all that, really don't mean much. It's much better on the Coca-Cola trademark than it is on a bunch of buildings and machinery.

Becky: You know, I never thought about it before, but part of what we're focusing on is just the idea of you going global and looking around and that's an early example of globalization and how it changed your investment theory.

Buffett: In the early, a century plus ago, if you lived in New England, you measured your wealth by looms and bobbins just like people in the Midwest measured their wealth by acres of land. And it turned to dust, basically.

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