Berkshire’s Vice-Chair Charles Munger on Credit-Default Swaps

In a Bloomberg Television interview today, Charles Munger, Berkshire Hathaway’s (BRK-A) (BRK-B) second in command, expressed his support on an outright ban of credit- default swaps as a way to prevent speculators from profiting on the failure of companies.

From Bloomberg: “If I were the governor of the world, I would eliminate it entirely — 100 percent,” Munger…said. “That’s the best solution. It isn’t as though the economic world didn’t function quite well without it, and it isn’t as though what has happened has been so wonderfully desirable that we should logically want more of it.”

In February Munger wrote a column for the Washington Post suggesting that the U.S. government must expand regulation to prevent the excesses that caused the current fiscal crisis, and said credit-default swaps were partly to blame.

From WaPo: This system, in which completely unrelated entities bet trillions with virtually no regulation, created two things: a gambling facility that mimicked the 1920s “bucket shops” wherein bookie-customer types could bet on security prices, instead of horse races, with almost no one owning any securities, and, second, a large group of entities that had an intense desire that certain companies should fail. Croupier types pushed this system, assisted by academics who should have known better. Unfortunately, they convinced regulators that denizens of our financial system would use the new speculative opportunities without causing more harm than benefit.

[Bloomberg] “The national policy that allowed the derivative markets to develop as they did was a stupid policy and we think the derivative markets as they evolved have done more public damage than public benefit,” Munger said. “That said, if they exist and they are legal and some opportunity therein is presented to us that we think makes sense to the shareholders of Berkshire, we would seize that opportunity.”

Warren Buffett’s Berkshire is scheduled to hold its annual shareholder meeting tomorrow.

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