Tuesday, December 11, 2007

Warren Buffet on Super Siv Idea (M-LEC)

Becky: All right, if you want to talk abotu something complicated, let's talk about that Super-SIV plan. Has anybody explained this to you in a way that actually makes sense. Do you think this is a good idea?

Buffett: Well, it's been explained to me. And, I don't think it accomplishes a whole lot. What it's designed to do is to get assets over in a place where people will buy the commercial paper against them. And they'll buy that if the banks are backing it. So, right now you have a whole bunch of funds, particularly money market funds, that have financed these SIVs and they financed them in many cases because of the bank that was sponsoring them. And the SIVs do not have the liquidity and they don't have the assets at market value to pay off the commercial paper. So, there's a freeze in the financing of them.

The super-SIV would solve that by having the banks, in effect, back up the commercial paper, the super-SIV. But it doesn't make the assets better. I mean, one fundamental proposition is that even though we were taught when we were young that a princess could kiss a toad and it would turn into a prince, it didn't really work out. (Laughs.)

You can't turn a financial toad into a prince by kissing it, or by securitizing it. Or by transferring its ownership to somebody else. If there are problems with an instrument, there are problems with an instrument. And soem of the SIVs own things where the market value is down significantly and if sold presently, they couldn;t pay off the commercial paper.

Becky: So that's the problem? It's not the market that's setting a price on it, we're setting an artificial price?

Buffett: The market is the market. Yeah, an artificial price is a price you don't like. (Laughs.)