ERICOPOLY

Perhaps somebody will put together a list of "value" philanthropy. I know it costs about $1,000 per year for college in Nicaragua -- a local philanthropy grants scholarships to students on the Nicaraguan island of Omatepe... a $6,000 gift will give somebody a career in medicine. Then there is the Central Asia Institute where they will build a school in Pakistan/Afghanistan for $12,000. But what else? My knowledge is limited here. I'd love a list of where you get the most bang for your buck. I'm not interested in valuing an American life over the life of a person elsewhere -- if it costs 10x in America what it costs in Nicaragua, I'd rather benefit 10 people over there versus one person here.

Is BP responsible for the spilled methane damage too? http://seattletimes.nwsource.com/html/businesstechnology/2012150009_apusgulfoilspill.html

No, the Australians. I thought everyone was aware of this custom.

Interesting. However my suspicion has always been that they hold down costs by deregulating the clothing on the beaches, effectively communal breast examinations.

Well, is Australia bankrupt?

Partner, The official in uniform holding the speedgun is the banks' regulator. MTM is the vigilante mob feeding their judgement with emotions. It's wild west justice.

They have 580,000 acres. At $4,000 per acre you arrive near present market cap.

Dear FASB, The market is there to serve, not to instruct. Regards, Eric

The only thing I really know about the mentality of wildcatting is what I learned from a book I read in January, The Big Rich. It was a very entertaining story about the Bass/Murchison/Richardson/Hunt families. These guys typically had no education, some were cattle traders. They'd somehow convince people to back them and then go drill. If they missed, they blew the entire wad of cash (not their cash anyhow). But if they hit it right, they'd become the richest men in America (they did). They just think differently about risk, especially when it's not their own money on the line. I guess it's kind of like speculating in real estate with somebody else's money as a down payment and the banks' money -- makes sense to do it if you can. And people would give them the money as a get-rich-quick lottery ticket. Generally speaking they weren't really being rewarded for inventing anything new -- rather, just taking something out of the ground. There are many people in society that could have done what they did, but they were there first and got the money. Sort of silly the way the market rewards some people extremely well for essentially gambling. Particularly interesting is the societal impacts of allocating billions of dollars to essentially ignorant people -- they seem to be responsible for funding the religious conservatives in America. This at least woke me up to the reality that some people believe dinosaurs coexisted with humans -- without them, I doubt I would have ever run across such people. What would we do without them? It's very different than what happens when Bill Gates gets allocated the capital.

This is true.

Very good, question which sums things up. I think we all agree on the answer for this considering the share price over the last few years. Thanks, because I wish I had just asked that question earlier. Insurance reserves are marked to model/myth. If it's adequate for insurance, why don't people agree it is also adequate for banks? Does Mr. Market know more about the risks in Markel's porftfolio than Markel? I say NO! I therefore trust mark-to-model. Munger says, "To a man with a hammer, everything looks like a nail.". I say, sure, mark-to-market probably seems fair for valuation of passive investments, but when it comes to in-house underwriting I'd say the model may very well know more about the default characteristics than the passive investor (Mr. Market). So that's why I support mark-to-market for passive investments, but for in-house underwriting I support mark-to-model. The hammer is "mark-to-market". Everything looks like a nail to some people.

My post was too long. I should have just asked a simple question: would Mr. Market's input on Fairfax's reserving bring more transparency to investors?

Translation: It's only fair that somebody else pays the costs if I make a mistake. Just let me keep all the profits! I'm liking what Obama said tonight -- it's time we accept the external costs of our fossil fuel society and get serious about finding new energy sources. http://www.thedailyshow.com/watch/wed-june-16-2010/an-energy-independent-future I suppose he was also the latest in a long line of presidents to promise a government health care plan: http://modern-us-history.suite101.com/article.cfm/us_presidents_and_healthcare_reform But who was the first to get something done? Didn't mean to make this a political debate. Let's just say I'll believe it when I see it. I agree with you. I don't however think he is insincere, but I do think he is relatively powerless. One of his responsibilities though as chief executive is to attempt to bring the people to the table to discuss the problem. You can't do that without opening your mouth to state what the challenges are.

Insurance companies can reach for more return by exposing their investment portfolios to mark-to-market risk the way Prem does. Or they can invest in short-term treasuries to eliminate most of that risk, and focus on underwriting profits instead. There is a choice in business model for the insurance company. I think it's appropriate for investments to be marked to market for insurance companies -- after all, where do we expect them to find the capital for paying claims? I also think it's appropriate for banks to mark investments to market. However, I was attempting to make a more subtle point regarding the underlying business that they are involved in. If a bank makes a loan to hold on their books based on their intimate understanding of the borrower... is the performance of that loan determined by the market which isn't going to have the time to understand the borrower anywhere near as well? That's why conforming loans are easy for a bank to sell in the secondary market -- the market understands the Fannie/Freddie guidelines. But for borrowers that don't fit the Fannie/Freddie guidelines, the banks' underwriters investigate the situation for the individual borrower and keep it on their books. It will get even harder for non-conforming individuals to get a loan because the secondary market won't understand the individuals custom circumstances. So it will probably drive up the cost of loans for such people as a means of the banks offsetting their risk to tangible equity levels -- I suspect that's the cost of this "transparency". But if you ask Mr. Buffett, TCE isn't what matters anyway -- he wants to look at the earnings power, at least that's how I understand his investment in Wells Fargo. Even in the depths last year, Wells Fargo pre-tax was earning double the losses on loans -- so there was a huge margin of safety there. Other banks were at roughly break-even -- you could see which bank was in the stronger position without knowing how things were marked to an illiquid market. Insurance companies are lucky that Mr. Market isn't looking over their shoulder telling them how much they have to reserve for the claims estimates. That's the subtle difference... banks make a loan based on their assessment of the borrowers ability to repay. If they are comfortable with the risk and if they have the expertise, they can make the loan -- but under FASB proposal Mr. Market is looking over their shoulder and (due to temporary illiquidity in general) can say -- oh, no way the loan is worth that much, you need to boost reserves! Well, there isn't a Mr. Market looking at Fairfax's reserves... but if there was it would be stupid, don't you agree? All you would need to do is set up a secondary market where other insurance companies could bid on the accuracy of one-anothers individual claims liabilities -- oh, if the market bids are too low, then so sorry, you have to boost your reserves! (suspension of disbelief -- for a moment pretend that they wouldn't be malicious about this, given that they are competitors) Alternatively, how about if Fairfax were invested solely in cash, yet were asked to solicit bids from third party insurance companies on how much their entire book of business is worth (similar to Berkshire bidding on somebody's runoff business)... supposing they were asked during a period of illiquidity in the markets and then forced to put up more capital if the bids came in too low? There must be a point where the market will "fair" value for your reserves, in which case you are accurately reserved and therefore you have no need to boost your reserves. But if the market only offers you 1/2 of "fair" value, then you had better start selling equity (during an illiquid market) to raise capital and boost your reserves.

Translation: It's only fair that somebody else pays the costs if I make a mistake. Just let me keep all the profits! I'm liking what Obama said tonight -- it's time we accept the external costs of our fossil fuel society and get serious about finding new energy sources. http://www.thedailyshow.com/watch/wed-june-16-2010/an-energy-independent-future I suppose he was also the latest in a long line of presidents to promise a government health care plan: http://modern-us-history.suite101.com/article.cfm/us_presidents_and_healthcare_reform But who was the first to get something done?

To answer your question, TCE is "tangible common equity" Prem need not care -- his primary business is not that of making loans. Prem might care if he were asked to boost reserves every time the market got scared that a hurricane was imminent. But I suppose FASB can do what it wants -- they aren't the bank regulator and the regulator can always choose to work off the old system.

Fact: Thomas Jefferson lost the election to John Adams if you take away the slaves' 3/5 vote. Gee, I wonder why there were so many Southern presidents!

My casino analogy actually works very well to explain why gas taxes are needed. People waste a lot of gas on "entertainment". In the free market, they'll do that -- they'll opt for the cheap entertainment even though it's suboptimal for society. If you want gasoline efficiency you can raise the tax on gas -- then people will make the switch to fuel efficient cars. The technology for a more fuel efficient fleet already exists today, but people won't switch to it because they get entertainment value out of Mustang 5.0 muscle cars and out of Lexus SUVs, etc...

I might have mentioned the word "oil", but suppose instead we're just talking about a gasoline tax. The tax dollars need to be collected anyway (look at our deficit). Therefore it merely promotes more efficient cars -- and we go through periods of excitement over them (1970s) when gas is expensive, but then fall back into buying enormous cars or little ones with racy engines when prices collapse again (1990s). There is nothing efficient about sending our dollars to Saudi Arabia. A tax mechanism to promote the purchase of more fuel efficient cars simply means we keep more money within our economy. It's not a disaster if we buy less oil to fuel gas guzzlers, is it?

A few things: 1) the demographic trends I spoke of did not include the natural decay of existing housing stock (disrepair/ teardowns/ fire, etc...) 2) some of the bank inventory is due to people who lost their jobs 3) some people moved back in with their parents -- in other words, new household formation is currently depressed Previously I mentioned only the demographic growth, but it's not the only thing that will eat into that housing backlog that the banks own. Perhaps the most effective way to measure where we're at would be to do the following: 1) count the absolute growth in the housing supply vs the normalized trend household formation over the past 10 yrs. 2) take that number and weigh it against future normalized trend household formation less current pace of home building. This will tell you how long it takes to get back to "normal". Of course, "normal" needs a normal job market in order to get those homes filled.

According to that report, Wells Fargo's Q1 TCE would fall 30%, USB's would fall 27%, Bank of America's TCE would fall 20%, and Citigroup's would fall 10%.

I don't think destroying the marine life in the gulf and warming the atmosphere&oceans is the kind of "good" that society needs. The government has the power to raise the market price of oil enough to encourage new energy sources to be developed economically... and individuals can do that while making a buck.

Yes, there are human reasons that guide us to allocate capital in non-efficient ways. Another would be managed mutual funds -- collectively as a society we waste money on that. It probably has "entertainment value" to each of us individually as we try to pick the winning fund that will beat the market. That's another example where free markets don't lead us to the most efficient use of capital -- it's because we are humans, and our human brains interfere with rational decision making. An incident like what BP is facing is one where (as Ken Peaks stated) it would wipe out many operators (perhaps BP too) if they were held accountable. I am willing to wager that in a totally free market if the liability caps were lifted people would still drill in deep water. They could play the game the way many of us play call options -- collect the upside but possibility of total wipeout. Total wipeout of course would mean that the corporation would be wiped out, not the business executives. They could just let that company go bust and start a new company with new capital and drill on nearly the same spot. They would make (a ton of) money long term because they don't have to clean up the entire mess... they are only on the hook until the assets of the corporation are wiped out. So even with unlimited liability they don't pay the bulk of the cleanup cost. They would probably even structure the corporation such that the assets (the oil rights) would be owned by one entity, but that entity wouldn't be the one liable in the event of a spill (the liability would be structured in another corporation that does the drilling). Right, so I'm getting to a point here... if the cost of extracting the oil isn't fully absorbed by the people producing the oil, then the market price of oil will not be efficient. It will be too low. Then it may artificially crowd out more efficient alternative energies. Thus, it is more than possible for the free market to interfere with our arriving at the most efficient energy solution. I was listening to a program on NPR today where somebody estimated the cost of raising all the docks in the world at a few trillion dollars. That's what global warming will lead to -- water expands when it warms, and so warming oceans leads to higher sea levels (this isn't even counting the ice melt contributions). Then you have Holland which will have to put their finger in their dikes, etc... You have people who will lose their waterfront property. So when you take your free market... where can you explain to me is the fund that is being set aside out of oil profits to pay for all these costs? Oh yeah, no wait... the free market promises that you keep the profit and somebody else picks up the tab. And that's why the government is necessary!

Imagine that... in a casino the expected losses are known... yet people still play! That is how free markets behave.

Gospel of Wealth: http://www.evancarmichael.com/Famous-Entrepreneurs/642/Andrew-Carnegie-Gospel-of-Wealth.html I wonder if Buffett and Gates were influenced by Carnegie to any degree.