Wednesday, August 10, 2011

Munger On Investment Banks, Economics, and More

More excerpts from the Charlie Munger interview in the Stanford Lawyer:

On Investment Banks
"The investment banks of yore, chastened by the '30s, were private partnerships, or near equivalents. The partners were dependent for their retirement on the prosperity of the firms they left behind and the customs and culture they left behind, and the places were much more responsible and honorable. That ethos, by the time the year 2006 came along, had pretty well disappeared. Our regulators allowed the proprietary trading departments at investment banks to become hedge funds in disguise, using the 'repo' system—one of the most extreme credit-granting systems ever devised. The amount of leverage was utterly awesome."

On Economic Collapses
"I think it is dangerous to have big disasters in a modern economy. I regard pre-World War I Germany as an advanced, decent civilization. After all, little Albert Einstein got a very good, subsidized primary education in German Catholic schools. But in its economic misery, Germany became dominated by Adolf Hitler. We've seen some god-awful people come to power in various miseries in various countries. Enough misery has huge dangers in a world where we have new pathogens, atomic bombs, and so forth. So we can't afford to have huge economic collapses."

On Economics & Psychology
"They say it's not economics if you think about the consequences of good and evil, and good and bad business accounting. I think what we're learning is that when you don't understand these consequences, you don't have an adequately skilled profession. You have big gaps in what you need. You have a profession that's like the man that Nietzsche ridiculed because he had a lame leg and was very proud of it. The economics profession has been proud of its lame leg."

"If you totally divorce economics from psychology, you've gone a long way toward divorcing it from reality."

On Eliminating Standard Error
"Warren and I have skills that could easily be taught to other people. One skill is knowing the edge of your own competency. It's not a competency if you don't know the edge of it. And Warren and I are better at tuning out the standard stupidities. We've left a lot of more talented and diligent people in the dust, just by working hard at eliminating standard error."

On Being Risk-Averse
"I think that many CEOs get carried away into folly. They haven't studied the past models of disaster enough and they’re not risk-averse enough. One of the very interesting things about Berkshire Hathaway is how chicken it is, how cautious, how low is its leverage. But Warren and I would not have been comfortable with more risk, entrusted with other people's net worths. There was no reason for our financial institutions to stretch as much as they did, with the leverage, the shady people and the compromises."

"I think the culture is simply going to have to learn to work more the way Berkshire Hathaway does, instead of the way Citigroup did."

"The culture of Goldman Sachs as a partnership was morally superior and better for the surrounding civilization than the culture that came after it went public."

On Resisting Reform
"...there are powerful forces intrinsic to the system that resist reform. But I have lived in my own life with responsible investment banking. When I was young, First Boston Company was an honorable and constructive firm and very much served the surrounding civilization. Investment banking at the height of this last folly was a disgrace to the surrounding civilization."

On Derivatives Trading
"If there aren't a lot of new jobs in derivative trading, maybe the engineers will have to do more engineering."

It's probably too much to ask but during attempts to fix some of what is broken in the financial system it would be nice if the merits of the above views were given some real consideration.

Adam

Related post:
Munger on Derivatives
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