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May 5, 2008
Posted: 836 GMT
LONDON, England – The world’s richest person, Warren Buffett, didn’t get that way by being a fool. He says he only invests in businesses he understands. At his annual shareholders meeting held this past weekend the Oracle of Omaha, as he is known, once again said he believes the U.S. economy is in recession. His definition of recession is easy to understand: “I would define that as a situation where people are doing less well than they were three months, six months or eight months earlier and most businesses find themselves in that position too.” He said housing remains a huge problem. I’ve been banging on about this for several months, even longer, about a recovery in housing being a key to a recovery in the U.S. economy. I’ve also said it would be wrong for people who bought more house than they can afford to be bailed out by the government. Buffett, a man far wiser than me, echoed my sentiments when he said the government should help those who were misled on what they would owe, but the government shouldn’t help people who bought more house than they could afford of who’s home value has declined .He said that borrowers shouldn’t be protected against mistakes. Amen to that. Meanwhile, Wall Street is acting like the worst is over in terms of the subprime crisis. The engineering of the buyout of Bear Stearns by JP Morgan drew the line in the sand in terms of being a watershed event. Had it been allowed to fail, the knock on effect to the financial system would have been massive. But there’s a big difference between not allowing a major financial institution to fail, and the worse being over. That’s also something I’ve been talking about for a long time. Buffett isn’t optimistic either. He says the sorry state of the housing market will hurt bank results for “a couple of years,” and that the industry’s write downs and losses aren’t over “by a long shot.” When I interviewed Alan Greenspan the week before last, he also expressed skepticism at the worse being over. He doesn’t see house prices bottoming out until the second half of next year. Buffett also said he read an annual report of a major investment bank, all 270 pages. He said there were 25 pages which he didn’t understand. Now if the world’s smartest investor can’t understand certain parts of an investment bank’s report, is it any wonder we ended up in the mess we’re in? Buffett’s track record is legendary, annual returns of 21.5 percent over 43 years. So when he says there’s more pain too come, I’ll believe him more than someone on Wall Street who thought they were smart with their financial engineering but proved to be a fool, triggering the worst financial crisis in the post-war period. Posted by: CNN International Financial Editor, Todd Benjamin |
 
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