The Oracle of Omaha released his annual report this morning and with it the always important Chairmans letter. Here is a link to the entire report and it is also embedded belo (if you are having trouble reading the embedded copy below, here is a link to a better copy).

Do take some time to read the letter. As always, he cuts nicely to the chase and speaks truth to power. Something that we need in much more abundance right now.

Here is a sampling of his thoughts:

This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasuryand the Fed have gone “all in.” Economic medicine that was previously meted out by the cupful has recentlybeen dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on welcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation. Moreover, major industries have become dependent on Federal assistance, and they will be followed by citiesand states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won’t leave willingly.  

 

The present housing debacle should teach home buyers, lenders, brokers and government some simple lessons that will ensure stability in the future. Home purchases should involve an honest-to-God down payment of at least 10% and monthly payments that can be comfortably handled by the borrower’s income. That income should be carefully verified.

Putting people into homes, though a desirable goal, shouldn’t be our country’s primary objective. Keeping them in their homes should be the ambition.  

 

Derivatives are dangerous. They have dramatically increased the leverage and risks in our financial system. They have made it almost impossible for investors to understand and analyze our largest commercialbanks and investment banks. They allowed Fannie Mae and Freddie Mac to engage in massive misstatements of earnings for years. So indecipherable were Freddie and Fannie that their federal regulator, OFHEO, whose more than 100 employees had no job except the oversight of these two institutions, totally missed their cooking of the books. 

 

Indeed, recent events demonstrate that certain big-name CEOs (or former CEOs) at major financial institutions were simply incapable of managing a business with a huge, complex book of derivatives. Include Charlie and me in this hapless group: When Berkshire purchased General Re in 1998, we knew we could not get our minds around its book of 23,218 derivatives contracts, made with 884 counterparties (many of which we had never heard of). So we decided to close up shop. Though we were under no pressure and were operating in benign markets as we exited, it took us five years and more than $400 million in losses to largely complete the task. Upon leaving, our feelings about the business mirrored a line in a country song: “I liked you better before I got to know you so well.”

Actually, if you read nothing else do read the section on derivatives.

Warren Buffett Berkshire Hathaway 2008 Letter