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Dear Mr. Buffett_ What an Investor Learns 1,269 Miles From Wall Street Part 12

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32 Ibid. Ibid.

33 Ibid. Ibid.

34 "SEC, CFTC Formalize Cooperation Agreement," "SEC, CFTC Formalize Cooperation Agreement," CNBC.com, 11 March 2008. 11 March 2008.

35 Roddy Boyd,"The Last Days of Bear Stearns," Roddy Boyd,"The Last Days of Bear Stearns," Fortune, Fortune, 28 March 2008. 28 March 2008.

36 Kate Kelly,"Fear, Rumors Touched off Fatal Run on Bear Stearns," Kate Kelly,"Fear, Rumors Touched off Fatal Run on Bear Stearns," Wall Street Journal, Wall Street Journal, 28 May 2008. 28 May 2008.

37 Roddy Boyd,"The Last Days of Bear Stearns," Roddy Boyd,"The Last Days of Bear Stearns," Fortune, Fortune, 28 March 2008. 28 March 2008.

38 Alan Schwartz and David Faber, "Bear Stearns CEO," Alan Schwartz and David Faber, "Bear Stearns CEO," Squawk on the Street, Squawk on the Street, CNBC, 12 March 2008. CNBC, 12 March 2008.

39 Ibid. Ibid.

40 Ibid. Ibid.

41 Serena Ng and Randall Smith, "Another Source of Quick Cash Dries Up," Serena Ng and Randall Smith, "Another Source of Quick Cash Dries Up," Wall Street Journal, Wall Street Journal, 17 March 2008. 17 March 2008.

42 Lester Pimentel, "Fed's Action May Have Hastened Bear Stearns' Decline, UBS Says," Lester Pimentel, "Fed's Action May Have Hastened Bear Stearns' Decline, UBS Says," Bloomberg News], Bloomberg News], 17 March 2008. 17 March 2008.

43 Kevin O'Leary's comments were made on Canada's Business News Network, BNN's "Squeeze Play," March 14, 2008. Kevin O'Leary's comments were made on Canada's Business News Network, BNN's "Squeeze Play," March 14, 2008.

44 Roddy Boyd,"The Last Days of Bear Stearns," Roddy Boyd,"The Last Days of Bear Stearns," Fortune, Fortune, 28 March 2008. 28 March 2008.

45 My comments were made on Bloomberg TV and Canada's Business News Network, BNN's "Squeeze Play," March 14, 2008. Bruce Foerster's comments were made on Bloomberg TV. My comments were made on Bloomberg TV and Canada's Business News Network, BNN's "Squeeze Play," March 14, 2008. Bruce Foerster's comments were made on Bloomberg TV.

46 Bruce Foerster's comments were made during the segment referred to in endnote 45 in which we appeared together on Bloomberg TV, March 14, 2008. Bruce Foerster's comments were made during the segment referred to in endnote 45 in which we appeared together on Bloomberg TV, March 14, 2008.

47 Jim Rogers has made these comments on Bloomberg TV and CNBC several times in the past several months. Rogers made these particular comments from Singapore during a segment that aired June 5, 2008. Jim Rogers has made these comments on Bloomberg TV and CNBC several times in the past several months. Rogers made these particular comments from Singapore during a segment that aired June 5, 2008.

48 Josh P. Hamilton and Erik Holm, "Buffett Castigates Wall Street, Bankers on Blunders," Josh P. Hamilton and Erik Holm, "Buffett Castigates Wall Street, Bankers on Blunders," Bloomberg News, Bloomberg News, 5 May 2008. 5 May 2008.

49 Kate Kelly, "Bear Stearns Neared Collapse Twice in Frenzied Last Days," Kate Kelly, "Bear Stearns Neared Collapse Twice in Frenzied Last Days," Wall Street Journal, Wall Street Journal, 29 May 2008. 29 May 2008.

50 Kate Kelly,"Lost Opportunities Haunt Final Days of Bear Stearns," Kate Kelly,"Lost Opportunities Haunt Final Days of Bear Stearns," Wall Street Journal, Wall Street Journal, 27 May 2008. 27 May 2008.

51 U.S. Senate Committee on Banking, Housing, and Urban Affairs, "Testimony of Jamie Dimon Before the Senate Committee on Banking, Housing, and Urban Affairs," April 3, 2008. U.S. Senate Committee on Banking, Housing, and Urban Affairs, "Testimony of Jamie Dimon Before the Senate Committee on Banking, Housing, and Urban Affairs," April 3, 2008.

52 Ibid. Ibid.

53 Stephen Labaton, "Testimony Offers Details of Bear Stearns Deal," Stephen Labaton, "Testimony Offers Details of Bear Stearns Deal," New York Times, New York Times, 4 April 2008. Jamie Dimon repeated the comment in an interview with Charlie Rose on July 8, 2008. 4 April 2008. Jamie Dimon repeated the comment in an interview with Charlie Rose on July 8, 2008.

54 Alistair Barr, "Bear Portfolio Worth $28.9 Billion, Fed Says," Alistair Barr, "Bear Portfolio Worth $28.9 Billion, Fed Says," Market Watch, Market Watch, 3 July 2008. The revaluation mentioned in the t.i.tle already represents a loss of $100 million for the Fed and it is not even based on market prices (which would have resulted in a greater stated loss); the Fed admitted it priced the securities based on its notion of an "orderly market." 3 July 2008. The revaluation mentioned in the t.i.tle already represents a loss of $100 million for the Fed and it is not even based on market prices (which would have resulted in a greater stated loss); the Fed admitted it priced the securities based on its notion of an "orderly market."

55 Ben White, "Bear Stearns Pa.s.ses into Wall Street History," Ben White, "Bear Stearns Pa.s.ses into Wall Street History," Financial Times, Financial Times, 29 May 2008. 29 May 2008.

56 Kate Kelly,"Bear Stearns Neared Collapse Twice in Frenzied Last Days." Kate Kelly,"Bear Stearns Neared Collapse Twice in Frenzied Last Days."

57 Ibid. Ibid.

58 Herbert Lash, "JPMorgan's Bear Takeover Not Looking Good: a.n.a.lyst," Herbert Lash, "JPMorgan's Bear Takeover Not Looking Good: a.n.a.lyst," Reuters.com, 9 June 2008. 9 June 2008.

59 "JPMorgan Chase: We Got Bear Stearns on the Cheap," CNBC, 17 June 2008. "JPMorgan Chase: We Got Bear Stearns on the Cheap," CNBC, 17 June 2008.

60 Landon Thomas Jr., "Buffett Said to Consider Bear Stake," Landon Thomas Jr., "Buffett Said to Consider Bear Stake," New York Times, New York Times, 27 September 2007. 27 September 2007.

61 CNBC aired several segments on September 27, 2007, including: "Bear Hunting," "Buffett Bearish?," "Buffett Buzz Buoys Bear," "Buffett Bear Hunting?," and "Buffett Buying Bear?" CNBC aired several segments on September 27, 2007, including: "Bear Hunting," "Buffett Bearish?," "Buffett Buzz Buoys Bear," "Buffett Bear Hunting?," and "Buffett Buying Bear?"

Chapter 10: Mark to Myth and the Black Box.

1 "Risky Business," "Risky Business," Squawk Box, Squawk Box, CNBC, 8 August 2007. CNBC, 8 August 2007.

2 AIG, "Residential Mortgage Presentation (Financial Figures are as of June 30, 2007)," 9 August 2007. The CDO consisted of BBB tranches with an average of 29 percent subprime in the original residential mortgage-backed securities portfolios. AIG claimed most of this was 2005 vintage and therefore not as suspect as loans originated in 2006 and 2007. Even though the super senior originally had a 36 percent cushion, a significant portion of the cushion could be eaten through (in some of my probable scenarios and in other scenarios, all of it) and that should have been reflected in an accounting loss. Even if AIG did not believe that there would be any ultimate princ.i.p.al loss, the price what it protected had declined which should have shown up in a mark-to-market loss. By August 2007, the prices of BBB rated tranches of residential mortgage backed securities deals tanked. Since AIG was writing protection on the super senior (ultimately backed by that collateral), it would have shown a loss. AIG, "Residential Mortgage Presentation (Financial Figures are as of June 30, 2007)," 9 August 2007. The CDO consisted of BBB tranches with an average of 29 percent subprime in the original residential mortgage-backed securities portfolios. AIG claimed most of this was 2005 vintage and therefore not as suspect as loans originated in 2006 and 2007. Even though the super senior originally had a 36 percent cushion, a significant portion of the cushion could be eaten through (in some of my probable scenarios and in other scenarios, all of it) and that should have been reflected in an accounting loss. Even if AIG did not believe that there would be any ultimate princ.i.p.al loss, the price what it protected had declined which should have shown up in a mark-to-market loss. By August 2007, the prices of BBB rated tranches of residential mortgage backed securities deals tanked. Since AIG was writing protection on the super senior (ultimately backed by that collateral), it would have shown a loss.

3 U.S. Department of Justice, "Former Gen Re and AIG Executives Found Guilty on All counts of Fraudulent Manipulation Scheme," Press Release #80-141:02-25-08. U.S. Department of Justice, "Former Gen Re and AIG Executives Found Guilty on All counts of Fraudulent Manipulation Scheme," Press Release #80-141:02-25-08.

4 David Reilly, "In Subprime, AIG Sees Small Risk; Others See More," David Reilly, "In Subprime, AIG Sees Small Risk; Others See More," Wall Street Journal, Wall Street Journal, 13 August 2007. AIG is a multinational conglomerate doing business in aroudn 130 countries. AIG has insurance operations (life, property, casualty, retirement products, commercial), and manages investments related to its insurance obligations.The insurance business is supposed to be separate and regulated (by state regulators), but at one point, AIG (at the holding company) was given permission to have its insurance operations provide a bridge loan to AIG's financial products operations-another unprecedented move by regulators. AIG's finacial operations act as a credit derivatives counterparty (primarily selling protection) on mortgage products, corporate risk and other a.s.sets. AIG also has a.s.sests such as International Lease Finance Corporation (ILFC, which leases aircraft), among other valuable a.s.sets. 13 August 2007. AIG is a multinational conglomerate doing business in aroudn 130 countries. AIG has insurance operations (life, property, casualty, retirement products, commercial), and manages investments related to its insurance obligations.The insurance business is supposed to be separate and regulated (by state regulators), but at one point, AIG (at the holding company) was given permission to have its insurance operations provide a bridge loan to AIG's financial products operations-another unprecedented move by regulators. AIG's finacial operations act as a credit derivatives counterparty (primarily selling protection) on mortgage products, corporate risk and other a.s.sets. AIG also has a.s.sests such as International Lease Finance Corporation (ILFC, which leases aircraft), among other valuable a.s.sets.

5 Ibid Ibid 6 Amir Efrati and Liam Plevin, "SEC, Justice Scrutinize AIG on Swaps Accounting," Amir Efrati and Liam Plevin, "SEC, Justice Scrutinize AIG on Swaps Accounting," Wall Street Journal, Wall Street Journal, 6 June 2008. 6 June 2008.

7 Liam Plevin, "AIG's Board Now Comes Under Fire of Dissidents (online t.i.tle: "AIG Holders Add Change in the Board to Demands")" Liam Plevin, "AIG's Board Now Comes Under Fire of Dissidents (online t.i.tle: "AIG Holders Add Change in the Board to Demands")" Wall Street Journal, Wall Street Journal, 12 June 2008. 12 June 2008.

8 Amir Efrati and Liam Plevin, "SEC, Justice Scrutinize AIG on Swaps Accounting." Amir Efrati and Liam Plevin, "SEC, Justice Scrutinize AIG on Swaps Accounting."

9 Charles Duhigg, "At Freddie Mac, Chief Discarded Warning Signs," Charles Duhigg, "At Freddie Mac, Chief Discarded Warning Signs," New York Times, New York Times, 5 August 2008. 5 August 2008.

10 Gretchen Morgenson and Charles Duhigg, "Loan Giant Overstated the Size of Its Capital Base," Gretchen Morgenson and Charles Duhigg, "Loan Giant Overstated the Size of Its Capital Base," NewYork Times, NewYork Times, 7 September 2008. 7 September 2008.

11 Mark Gilbert, "I Spy More Road Kill on the Credit-Crunch Highway: Mark Gilbert," Mark Gilbert, "I Spy More Road Kill on the Credit-Crunch Highway: Mark Gilbert," Bloomberg News, Bloomberg News, 21 August 2008. 21 August 2008.

12 Jay Yarrow, "Bill Gross Cashes in on Fannie Freddie Bailout," Jay Yarrow, "Bill Gross Cashes in on Fannie Freddie Bailout," The Business Sheet, The Business Sheet, 9 September 2008. The Pimco Total Return Fund had over $130 billion in a.s.sets at the end of June 2008. 9 September 2008. The Pimco Total Return Fund had over $130 billion in a.s.sets at the end of June 2008.

13 "Fannie Mae and Freddie Mac removed from S&P 500," "Fannie Mae and Freddie Mac removed from S&P 500," a.s.sociated Press, a.s.sociated Press, 9 September 2008. 9 September 2008.

14 James R. Hagerty, Ruth Simon, and Damian Paletta, "U.S. Seizes Mortgage Giants," James R. Hagerty, Ruth Simon, and Damian Paletta, "U.S. Seizes Mortgage Giants," Wall Street Journal, Wall Street Journal, 8 September 2008. (Mr. Moffett's affiliation with the Carlyle Group was not reported in this article but was available on the Carlyle Group's Web site 8 September 2008. (Mr. Moffett's affiliation with the Carlyle Group was not reported in this article but was available on the Carlyle Group's Web site www.carlyle.com with his biography as one of the Carlyle team.) Richard Syron's Freddie Mac exit package was estimated at up to $15 million; Daniel Mudd's Fannie Mae exit package was estimated at up to $14 million. with his biography as one of the Carlyle team.) Richard Syron's Freddie Mac exit package was estimated at up to $15 million; Daniel Mudd's Fannie Mae exit package was estimated at up to $14 million.

15 Gregory Mott, "Dodd Plans Senate Hearing on Fannie, Freddie Takeover," Gregory Mott, "Dodd Plans Senate Hearing on Fannie, Freddie Takeover," Bloomberg News, Bloomberg News, 8 September 2008. 8 September 2008.

16 Hugh Son and Shannon D. Harrington, "AIG May Disclose Its Strategic Review Before Sept. 25 Deadline," 13 September 2008. Hugh Son and Shannon D. Harrington, "AIG May Disclose Its Strategic Review Before Sept. 25 Deadline," 13 September 2008.

17 Hugh Son, "AIG Seeks Loan from Goldman, JPMorgan as Fed Resists," Hugh Son, "AIG Seeks Loan from Goldman, JPMorgan as Fed Resists," Bloomberg News, Bloomberg News, 15 September 2008. 15 September 2008.

18 Christine Harper, "Goldman Net Drops 70% as Merger Advice, Trading Slow," Christine Harper, "Goldman Net Drops 70% as Merger Advice, Trading Slow," Bloomberg News, Bloomberg News, 16 September 2008. 16 September 2008.

19 Erik Holm and Christine Richard, "AIG's Collapse Would Have Impact Around the Globe," Erik Holm and Christine Richard, "AIG's Collapse Would Have Impact Around the Globe," Bloomberg News, Bloomberg News, 16 September 2008. 16 September 2008.

20 Matthew Karnitschnig, Deborah Solomon, and Liam Pleven, "U.S. Plans Rescue of AIG to Halt Crisis; Central Banks Inject Cash as Credit Dries Up," Matthew Karnitschnig, Deborah Solomon, and Liam Pleven, "U.S. Plans Rescue of AIG to Halt Crisis; Central Banks Inject Cash as Credit Dries Up," Wall Street Journal, Wall Street Journal, 16 September 2008. 16 September 2008.

21 Federal Reserve (press release), 16 September 2008 (9:00 p.m. EDT).The (up to) $85 billion AIG facility has a 24-month term and will accrue interest at three month Libor plus 850 basis points. Federal Reserve (press release), 16 September 2008 (9:00 p.m. EDT).The (up to) $85 billion AIG facility has a 24-month term and will accrue interest at three month Libor plus 850 basis points.

22 Miles Weiss, "Gross's Fund Guaranteed $760 Million of AIG Debt Through Swaps," Miles Weiss, "Gross's Fund Guaranteed $760 Million of AIG Debt Through Swaps," Bloomberg News, Bloomberg News, 16 September 2008. 16 September 2008.

23 Caroline Baum, "No Limit to Greenspan's Once-in-a-Century Events: Caroline Baum," Caroline Baum, "No Limit to Greenspan's Once-in-a-Century Events: Caroline Baum," Bloomberg News, Bloomberg News, 18 August 2008. 18 August 2008.

24 Hugh Son and Eric Holm, "Fed Said to Reverse Stance, Consider AIG Loan Package," Hugh Son and Eric Holm, "Fed Said to Reverse Stance, Consider AIG Loan Package," Bloomberg News, Bloomberg News, 16 September 2008. 16 September 2008.

25 Nicholas Varchaver, "What Warren Thinks . . .," Nicholas Varchaver, "What Warren Thinks . . .," Fortune Fortune, 28 April 2008, p. 62.

26 Benjamin Graham, Benjamin Graham, The Intelligent Investor The Intelligent Investor (New York: Harper & Row, 1973), 315, 316. (New York: Harper & Row, 1973), 315, 316.

27 McSheehy and Hugh Son, "AIG Chief Sullivan Seeks to Ease Rules on Writedowns" McSheehy and Hugh Son, "AIG Chief Sullivan Seeks to Ease Rules on Writedowns" Bloomberg News, Bloomberg News, 18 March 2008. 18 March 2008.

28 Ibid. Ibid.

29 Warren Buffett,"Shareholders Letter," Warren Buffett,"Shareholders Letter," Berkshire Hathaway 2002 Annual Report, Berkshire Hathaway 2002 Annual Report, 14. 14.

30 Telos Demos, Nina Easton, Adam Lashinsky, Eugenia Levenson, Carol Loomis, Brian O'Keefe, Patricia Sellers, and David Stires, "Crisis Council," Telos Demos, Nina Easton, Adam Lashinsky, Eugenia Levenson, Carol Loomis, Brian O'Keefe, Patricia Sellers, and David Stires, "Crisis Council," Fortune, Fortune, 3 September 2007. 60. 3 September 2007. 60.

31 Division of Corporate Finance, "Sample Letter Sent to Public Companies on MD&A Disclosure Regarding the Application of SFAS 157 (Fair Value Measurements)," U.S. Securities and Exchange Commission, March 31, 2008, Division of Corporate Finance, "Sample Letter Sent to Public Companies on MD&A Disclosure Regarding the Application of SFAS 157 (Fair Value Measurements)," U.S. Securities and Exchange Commission, March 31, 2008, http://www.sec.gov/divisions/corpfin/guidance/fairvalueltr0308.htm. The letter concerned Management's Discussion and a.n.a.lysis for their upcoming quarterly reports on Form 10-Q. Excerpt: "Current market conditions may require you to use valuation models that require significant un.o.bservable inputs for some of your a.s.sets and liabilities. As a consequence, as of January 1, 2008, you will cla.s.sify these a.s.sets and liabilities as Level 3."

32 Ibid. Ibid.

33 Joyce Moullakis, "Merrill Says Level 3 a.s.sets Jump 70% in First Quarter," Joyce Moullakis, "Merrill Says Level 3 a.s.sets Jump 70% in First Quarter," Bloomberg News, Bloomberg News, 6 May 2008. 6 May 2008.

34 Bradley Keoun, "Merrill to Pay Ex-Goldman Trader Montag $40 Million," Bradley Keoun, "Merrill to Pay Ex-Goldman Trader Montag $40 Million," Bloomberg News, Bloomberg News, 2 May 2008. Thain compensated Montag for $50 million in equity awards he would leave behind. He also agreed to pay him a $39.4 year bonus for 2008, even though the announcement was made in 2 May 2008. Thain compensated Montag for $50 million in equity awards he would leave behind. He also agreed to pay him a $39.4 year bonus for 2008, even though the announcement was made in May May 2008. In addition, Montag would get a $600,000 salary for a total of $40 million. 2008. In addition, Montag would get a $600,000 salary for a total of $40 million.

35 Susanne Craig and Tom Lauricella, "Big Loss at Lehman Intensifies Crisis Jitters," Susanne Craig and Tom Lauricella, "Big Loss at Lehman Intensifies Crisis Jitters," Wall Street Journal, Wall Street Journal, 10 June 2008. 10 June 2008.

36 Ken Auletta, Ken Auletta, Greed and Glory on Wall Street: The Fall of the House of Lehman Greed and Glory on Wall Street: The Fall of the House of Lehman (New York: Random House, 1986), 158. (New York: Random House, 1986), 158.

37 Ibid. Ibid.

38 Ibid. Ibid.

39 Jesse Westbrook, "SEC to Make Wall Street Banks Reveal Capital, Liquidity Levels," Jesse Westbrook, "SEC to Make Wall Street Banks Reveal Capital, Liquidity Levels," Bloomberg News, Bloomberg News, 7 May 2008. 7 May 2008.

40 David Reilly and Karen Richardson, "For Financial Stocks, Is It Another False Bottom?" 16 Janaury 2008. David Reilly and Karen Richardson, "For Financial Stocks, Is It Another False Bottom?" 16 Janaury 2008.

41 In a client note I observed that the difference between my numbers and Citi's numbers are due to a combination of a.s.sumptions, and there is a lot of leeway in how one can account for structured products:"What's a few billion anyway (except when one is trying to attract capital)? Since when do shareholders shrug off a 10% dilution in shareholder equity? It would be nice to have heard something along the lines of 'We know what went wrong (and here it is. . . .), and we know exactly what to do about it (other than pa.s.s the hat)." In a client note I observed that the difference between my numbers and Citi's numbers are due to a combination of a.s.sumptions, and there is a lot of leeway in how one can account for structured products:"What's a few billion anyway (except when one is trying to attract capital)? Since when do shareholders shrug off a 10% dilution in shareholder equity? It would be nice to have heard something along the lines of 'We know what went wrong (and here it is. . . .), and we know exactly what to do about it (other than pa.s.s the hat)."

42 Lewis, Michael, "The Rise and Rise of a.n.a.lyst Meredith Whitney," Lewis, Michael, "The Rise and Rise of a.n.a.lyst Meredith Whitney," Bloomberg News, Bloomberg News, 9 April 2008. 9 April 2008.

43 Yalman Onaran and Dave Pierson, "Banks' Subprime Market-Related Losses 91 Capital Raised," Yalman Onaran and Dave Pierson, "Banks' Subprime Market-Related Losses 91 Capital Raised," Bloomberg News, Bloomberg News, 16 October 2008. 16 October 2008.

44 David Enrich and Jenny Strasburg, "Citigroup to Close Hedge Fund; Blow to CEO," David Enrich and Jenny Strasburg, "Citigroup to Close Hedge Fund; Blow to CEO," Wall Street Journal, Wall Street Journal, 12 June 2008; and Joyce Moullakis and Josh Fineman, "Citigroup Shuts Down Old Lane, Co-Founded by Pandit," 12 June 2008; and Joyce Moullakis and Josh Fineman, "Citigroup Shuts Down Old Lane, Co-Founded by Pandit," Bloomberg News, Bloomberg News, 12 June 2008. 12 June 2008.

45 David Einhorn, "Accounting Ingenuity," remarks at the Ira W. Sohn Investment Research Conference, 21 May 2008. David Einhorn thought Lehman's 1Q 2008 writedowns on its commercial mortgages were insufficient given the AAA commercial mortgage backed securities (CMBS) index fell 10 percent. According to Einhorn, Lehman had $39 billion in exposure to lower rated a.s.sets, yet it took a write down of only 3 percent. He questioned Lehman's accounting for its share of KSK Energy Ventures. When he challenged Lehman's statements, the stories changed (this happened more than once). He noted Lehman's SunCal (California land developer) investment did not have a material charge unlike other home builders that took huge writedowns. David Einhorn, "Accounting Ingenuity," remarks at the Ira W. Sohn Investment Research Conference, 21 May 2008. David Einhorn thought Lehman's 1Q 2008 writedowns on its commercial mortgages were insufficient given the AAA commercial mortgage backed securities (CMBS) index fell 10 percent. According to Einhorn, Lehman had $39 billion in exposure to lower rated a.s.sets, yet it took a write down of only 3 percent. He questioned Lehman's accounting for its share of KSK Energy Ventures. When he challenged Lehman's statements, the stories changed (this happened more than once). He noted Lehman's SunCal (California land developer) investment did not have a material charge unlike other home builders that took huge writedowns.

46 Alan Sloan and Roddy Boyd, "The Lehman Lesson," Alan Sloan and Roddy Boyd, "The Lehman Lesson," Fortune, Fortune, 13 September 2008. 13 September 2008.

47 Jason Kelly and Jonathan Keehner, "Lehman's Survival Hinges on Fuld's Reluctant Sale of Fund Unit," Jason Kelly and Jonathan Keehner, "Lehman's Survival Hinges on Fuld's Reluctant Sale of Fund Unit," Bloomberg News, Bloomberg News, 11 September 2008. 11 September 2008.

48 Carrick Mollenkamp, Susanne Craig, Sernea Ng and Aaron Lucchetti, "Lehman Files for Bankruptcy, Merrill Sold, AIG Seeks Cash," Carrick Mollenkamp, Susanne Craig, Sernea Ng and Aaron Lucchetti, "Lehman Files for Bankruptcy, Merrill Sold, AIG Seeks Cash," Wall Street Journal, Wall Street Journal, 16 September 2008. Lehman filed for protection under Chapter 11 of the U.S. Bankruptcy Code. This is an attempt to ensure an orderly liquidation. Lehman said the filing did not include broker-dealer subsidiaries (or other LBHI subsidiaries or Neuberger Berman Holdings LLC). Neuberger Berman is operating as usual. Its a.s.sets are segregated from Lehman Brothers. 16 September 2008. Lehman filed for protection under Chapter 11 of the U.S. Bankruptcy Code. This is an attempt to ensure an orderly liquidation. Lehman said the filing did not include broker-dealer subsidiaries (or other LBHI subsidiaries or Neuberger Berman Holdings LLC). Neuberger Berman is operating as usual. Its a.s.sets are segregated from Lehman Brothers.

49 Bank of America press release, "Bank of America Buys Merrill Lynch Creating Unique Financial Services Firm," 15 September 2008. Bank of America will exchange .8595 shares of Bank of America common stock for one Merrill Lynch common share. Bank of America press release, "Bank of America Buys Merrill Lynch Creating Unique Financial Services Firm," 15 September 2008. Bank of America will exchange .8595 shares of Bank of America common stock for one Merrill Lynch common share.

50 Nicholas Varchaver, "What Warren Thinks..." Nicholas Varchaver, "What Warren Thinks..." Fortune, Fortune, 28 April 2008, p. 59. 28 April 2008, p. 59.

51 Bradley Keoun, "Accounting Rule Defying Common Sense," Bradley Keoun, "Accounting Rule Defying Common Sense," Bloomberg News, Bloomberg News, 8 June 2008. If accounting weren't bizarre enough, as of January 1, 2008, firms can record an increase in revenue when the price of their own bonds declines, and this "revenue" has been used to net off against losses, so the losses reported by investment banks and monoline insurance companies look less damaging than they would have otherwise appeared. 8 June 2008. If accounting weren't bizarre enough, as of January 1, 2008, firms can record an increase in revenue when the price of their own bonds declines, and this "revenue" has been used to net off against losses, so the losses reported by investment banks and monoline insurance companies look less damaging than they would have otherwise appeared.

52 Yalman Onaran,"Banks Keep $35 Billion Markdown Off Income Statements," Yalman Onaran,"Banks Keep $35 Billion Markdown Off Income Statements," Bloomberg News, Bloomberg News, 19 May 2008. By May 2008, 19 May 2008. By May 2008, Bloomberg Bloomberg estimated that tens of billions more in writedowns would have shown up on balance sheets if the losses had not been offset by the decline in the price of investment banks' debt. The theory is that if the bonds are redeemed at a lower price, it is a net benefit to the company. That is only true, however if a firm has the ability to buy the bonds due to an increase in revenues or other means without strain in some other area. If you want to report the maximum revenues due to a decline in the value or your debt, go into bankruptcy. Now your debt will only be worth your recovery value, if any. estimated that tens of billions more in writedowns would have shown up on balance sheets if the losses had not been offset by the decline in the price of investment banks' debt. The theory is that if the bonds are redeemed at a lower price, it is a net benefit to the company. That is only true, however if a firm has the ability to buy the bonds due to an increase in revenues or other means without strain in some other area. If you want to report the maximum revenues due to a decline in the value or your debt, go into bankruptcy. Now your debt will only be worth your recovery value, if any.

53 Warren Buffett has long been a critic of pension rate a.s.sumptions, and he made similar comments on CNBC March 3, 2008. Even pension fund accounting can be very misleading. Often rates used by pension funds are mandated, and Warren thinks they are too high. Berkshire Hathaway owns some public utilities, and although he would like to use a lower rate for pension fund a.s.sumptions, the lowest rate is 6.5 percent. At least that is lower than the 8 percent rate much of the rest of the financial world uses.The rate difference may not seem that much at first glance, but for long term funds like pension funds, it is an enormous difference. For example, $100,000 compounded at an annual rate of 6.5 percent for 30 years is $661,436, but compounded at 8 percent, it is $1,006,265. If Warren Buffett thinks 6.5 percent is too much to promise-meaning pension funds are not kicking in enough to make their future payments-do you think the rest of the world will do a better job using an a.s.sumed rate of 8 percent? Warren Buffett has long been a critic of pension rate a.s.sumptions, and he made similar comments on CNBC March 3, 2008. Even pension fund accounting can be very misleading. Often rates used by pension funds are mandated, and Warren thinks they are too high. Berkshire Hathaway owns some public utilities, and although he would like to use a lower rate for pension fund a.s.sumptions, the lowest rate is 6.5 percent. At least that is lower than the 8 percent rate much of the rest of the financial world uses.The rate difference may not seem that much at first glance, but for long term funds like pension funds, it is an enormous difference. For example, $100,000 compounded at an annual rate of 6.5 percent for 30 years is $661,436, but compounded at 8 percent, it is $1,006,265. If Warren Buffett thinks 6.5 percent is too much to promise-meaning pension funds are not kicking in enough to make their future payments-do you think the rest of the world will do a better job using an a.s.sumed rate of 8 percent?

54 Berkshire Hathaway 1990 Annual Report Berkshire Hathaway 1990 Annual Report 3. 3.

55 Josh Hamilton and Erik Holm, "Buffett's Berkshire Says Net Declines on Insurance, Derivatives," Josh Hamilton and Erik Holm, "Buffett's Berkshire Says Net Declines on Insurance, Derivatives," Bloomberg News, Bloomberg News, 3 May 2008. 3 May 2008.

56 Berkshire Hathaway 2007 Annual Report, Berkshire Hathaway 2007 Annual Report, 16. 16.

57 Ibid. Ibid.

Chapter 11: Bond Insurance Burns Main Street.

1 Jody Shenn, "FGIC Sees No Need to Honor Agreement with IKB, Calyon," Jody Shenn, "FGIC Sees No Need to Honor Agreement with IKB, Calyon," Bloomberg News, Bloomberg News, 26 March 2008. On March 12, FGIC, a bond insurer, filed a lawsuit in the New York Supreme Court against Calyon, a French investment bank, and IKB, the German-owned state bank. Calyon had arranged a deal for IKB, and FGIC was nullifying a $1.9 billion guarantee on a portfolio of mortgage-backed securities. At the start of 2008, FGIC was still rated AAA, but that day Fitch downgraded the bond insurer to BBB, the lowest investment grade rating. It now struggles for survival with a junk rating. 26 March 2008. On March 12, FGIC, a bond insurer, filed a lawsuit in the New York Supreme Court against Calyon, a French investment bank, and IKB, the German-owned state bank. Calyon had arranged a deal for IKB, and FGIC was nullifying a $1.9 billion guarantee on a portfolio of mortgage-backed securities. At the start of 2008, FGIC was still rated AAA, but that day Fitch downgraded the bond insurer to BBB, the lowest investment grade rating. It now struggles for survival with a junk rating.

2 Traditionally, the main line of business of monoline insurance companies, or Traditionally, the main line of business of monoline insurance companies, or monolines, monolines, was to provide bond insurance. Bond insurers (or monolines) provided was to provide bond insurance. Bond insurers (or monolines) provided credit wraps, credit wraps, which are which are financial guarantees, financial guarantees, and under New York law, home of the largest U.S. investment banks, monolines are the only ent.i.ties allowed to provide financial guarantees. Many of the bond insurers bought subprime-related CDOs including, in some cases, risky CDO-squared products. and under New York law, home of the largest U.S. investment banks, monolines are the only ent.i.ties allowed to provide financial guarantees. Many of the bond insurers bought subprime-related CDOs including, in some cases, risky CDO-squared products.

3 Michael McDonald,"Auction-Bond Failures Deplete New Hampshire Fund," Michael McDonald,"Auction-Bond Failures Deplete New Hampshire Fund," Bloomberg News, Bloomberg News, 17 March 2008. 17 March 2008.

4 Darrell Preston, "Banks Say Auction-Rate Investors Can't Have Money," Darrell Preston, "Banks Say Auction-Rate Investors Can't Have Money," Bloomberg News, Bloomberg News, 6 June, 2008. 6 June, 2008.

5 Michael McDonald, "UBS E-Mails Show Conflicts With Auction-Rate Customers in Suit," Michael McDonald, "UBS E-Mails Show Conflicts With Auction-Rate Customers in Suit," Bloomberg News, Bloomberg News, 27 June 2008. 27 June 2008.

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