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MONEY  09/18/2008
WHAT WOULD BUFFETT DO?

My father was born and raised on farms in South Dakota. Devastated by drought and erosion, at the height of the “Dirty Thirties,” my granddad’s farm was worth almost nothing. Look at pictures of Dust Bowl farm families. That might as well be my Dad, my Uncle Paul (now a farmer in Iowa), and my late Aunt Mary pictured next to the dour countenance of my grandparents; a poster family for the Great Depression.

My Dad worked several jobs to pay his way through Loras College in Dubuque and Creighton University in Omaha. He learned the value of hard work at a young age. No matter how late he was up the night before, he had to milk the cows at 4 AM.

My Dad often told the story of the time when, as a child, he went to town with his mom. He asked my grandmother if he could have a nickel for an ice cream cone. My stoic grandma sobbed on the streets of Yankton, South Dakota, because she couldn’t even spare a nickel for her oldest boy. She later told him, “Richard, don’t be a farmer. Be a doctor.”

With those life experiences, values, and singular advice, my father became a successful and beloved dermatologist in Omaha, Nebraska. And, with a bright and beautiful South Omaha woman named Beverly Dillon, he raised six children.

When my Dad’s dermatology practice took off in 1960, a young stock analyst, who came highly recommended by Omaha doctor friends, approached my father. That stock analyst’s name was Warren Buffett. Like other Omaha professionals at the time, my Dad, based solely on referrals -- not sophisticated number crunching or media reports -- invested a small, but still significant, sum with Mr. Buffett.

My mom and Dad enjoyed a steady rise in profit from their investment. By the mid-60’s their shares of what was originally called Buffett Associates, Ltd (later, Berkshire Hathaway) rose to over $70 a share. With their first two sons heading to college in 1967 and 1968 respectively, my parents needed money for tuition. So they asked Mr. Buffet to cash out their shares for a nice profit.

At the time it seemed like a logical thing to do. After all, how high could a stock go? They didn’t want to risk that their investment might decline at a time when they really needed the money.

When I checked this morning, Berkshire Hathaway was trading at $124,900 a share.

Friends of my parents who didn’t sell their shares in Berkshire are now worth over 80 million or even 100 million dollars. But in humble, self-effacing Omaha, you wouldn’t know it. Many of these life-long Nebraskans still live in the same homes, play golf at the same clubs, and attend a religious service of some sort (likely Catholic) every Saturday or Sunday. Their wealth changed, but their wealth did not change them.

My Dad always told me the Buffett story with a smile. He added one little tidbit. Mr. Buffett approached my Dad at a social function and uncharacteristically upbraided him for selling his Berkshire shares. I doubt it was because Warren thought my Dad was showing lack of trust. More likely it was because Warren had my father’s financial interests at heart.

Old-time Omahans are like that.

Though my deeply conservative and pro-life mother quietly railed against Buffett for his generous support of population control and anti-nuclear organizations (not popular positions in a red state like Nebraska), I suspect it was also a bit of misdirected anger for having sold those Berkshire shares. After all, my mother was one of the better customers at Berkshire-owned Borsheims Jewelry.

But, in the end, my parents treated Warren Buffett with the same respect and kindness they offered every other person they met in Omaha, no matter what that person’s values or station in life. This is what made me love my parents and my parent’s friends. Though I disagreed with them on fundamental social issues, they were good, decent, fun-loving people, who cared for each other, their families and friends, and for the less fortunate in their community. The level of philanthropic giving in Omaha is unprecedented for a city that size. These were people who didn’t seek attention for their good deeds (in fact, they eschewed it), but who clearly understood that, except in times of great emergency, government was not the answer to what ails us. Private citizens, acting alone or in consort, are.

I am back in New York City after my two-week sojourn to the Midwest to cover the Republican National Convention. Amidst this week’s swirl of events surrounding Wall Street, and against the backdrop of the sage advice offered by the same NYC-based know-it-alls on CNBC, MSNBC, Fox, Bloomberg, and CNN who helped enable this mess by their pronounced and self-serving lack of investigative honesty, I am reminded of the good-natured upbraiding my father received from Mr. Buffett.

And I ask: what would Mr. Buffett say to us today? What comeuppance would we receive? Because surely we all deserve it. For, when I look at the growing list of casualties or near-casualties in our midst – Bear, Countrywide, IndyMac, Fannie, Freddie, Lehman, Merrill, AIG, with perhaps Morgan, WaMu, and Goldman soon to follow – it’s clear that all of us are culpable in the current financial mess.

And it starts with the absurd actions at the very top, with a regulatory AWOL Republican administration, which routinely rails against big government, suddenly defending its takeover of private insurance giant AIG (carrying on the Crotty family tradition of bad investments, I bought $5000 worth of AIG a month ago). If that’s not the dreaded Socialism that Republicans rail against, what is? What’s more, these same Republicans are enabling future abuses by bailing out or promising to bail out other culprits at the heart of the subprime mess.

The other party is equally culpable. Just yesterday we heard Democrats like House Speaker Nancy Pelosi absolve their party of all blame in the current financial meltdown, when, in fact, it was the Democrats who pressured lenders into LOWERING their credit standards so that primarily Democratic constituents could become members of “the ownership society,” even though many couldn’t afford it and shouldn’t have qualified in the first place.

With the creation of Fannie Mae in 1938 and Freddie Mac in 1970, the federal government unwisely got into the housing loan business. The government promised it would cover their debts, essentially enabling these two huge institutions to take enormous risks. This was part of a larger plan to make every American a homeowner. The Community Reinvestment Act of 1977 enshrined in law the wacky principle that banks HAD to loan in low-income neighborhoods. While not solely to blame for the current crisis, Fannie, Freddie, and the CRA taken together sent a message to banks, thrifts, and mortgage service companies that standards should be loosened, and that subprime loans to those who couldn't afford a loan were A-Okay. The bogus Democratic Party notion that reasonable credit standards should be widely loosened or forgotten when it comes to poor people combined with the GOP willingness to relax almost ALL regulation created this crisis.

Back in Omaha, we shook our heads at people who drove fancy new cars, but lived in ramshackle homes. Desperate for status, they leaped at the vacuous symbol, instead of the hard work, discipline, patience, and real education required to comfortably live at a level where one could legitimately afford such a car. The irony was that those who had the big money (and the guy with the most money of all, Mr. Buffett) drove conventional cars, or even old beaters. Status symbols didn’t matter as much to Omaha’s rich. Even the word “rich” was distasteful. When, as a kid, I asked my mom, “are we rich?” she would calmly reply, “No, honey, we are comfortable.” Omaha’s well-to-do understood that the truly “rich” (not just in money and things, but in bedrock values) worked hard and long for it, and even then, never made a show of it.

By demanding that lenders lower their standards, Democrats enabled poor and middle class people with insufficient income and credit to side-step critical benchmarks on the road to financial independence. Why? Because Democrats are the party of populist panderers. Democrats rarely talk about waiting one’s turn or working one’s way up. Democrats rarely talk about personal responsibility or the values of hard work, experience, and stable unified families. While there are all sorts of Democrats (some more moderate than others), they, as a rule, lean towards a Santa Claus version of governance. All they ask in return for their outsized generosity towards anyone who claims to be too poor, too marginalized, too victimized, or too oppressed, is their vote. And no surprise that in pursuit of the first Democratic general election victory in eight years, the woefully un-prepared and inexperienced Barack Obama is singing that old familiar Democratic refrain: “Santa Claus is Coming to Town.”

But there is no Santa Claus. There is no Easter Bunny. Just as extremist Republicans cannot pray away the reality of evolution and homosexuality, so too Santa Claus Democrats cannot wish away the reality of banking fundamentals.

So, it’s no surprise that when guilt-tripped into radically loosening their lending standards over the last several years, banks did what any sensible lending institution would do when pressured to loosen the purse strings: bundle up the loans and ship the risk off to someone else.

And Wall Street was all too willing to supply insanely Byzantine ways for banks to bury that risk. Because, in the end, nobody – from mortgage banks to real estate brokers -- made real money during this decade’s housing bubble UNLESS the housing loans went through. So, whatever it took, however it was justified, on whatever slim foundation on which it was based, it was in everyone’s interest – and the politicians most of all – that as many loans as possible got made.

Loan default? Someone else’s problem. Price declines? Not going to happen. What about the dotcom implosion? Enron? This is different, dude. No assets? No income? No problem, man. It’s all about the sales. “Always Be Closing,” right Mr. Baldwin? Er, sorry, we meant, “Always Be FOREclosing.”

Now, as Pastor Wright might say, the chickens have come home to roost. Over the last eight years Democratic egalitarian instincts met the perfect codependent match in Republican supply-side economics. Surplus money, easy credit, outsourced risk are the three pillars of our current debacle. And as both sides get busy blaming each other for the mess, those of us in the sensible center know that the blame belongs to all Americans who conned themselves or conned others into denying the reality on the ground.

It’s funny. Sometimes the fate of a nation depends on luck. Right now we’d be really lucky if someone of good sense and good character, who knows how to run a business and steer clear of risky shell games, someone of independence and quiet confidence from that American center where simple verities arise, gave us a piece of his brilliant mind.

Mr. Buffett, are you listening?

I know this is a poor time to sound “derivative,” sir, but a bankrupt nation turns its lonely eye to you.
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