Charles Munger: A Parody About The Great RecessionThe Acquirer's Multiple
One of the best articles ever written about the ‘Great Recession’ is Charles Munger’s – Parody Describing The Contributions of Wantmore, Tweakmore, Totalscum, Countwrong, and Obvilious To The Tragic ‘Great Recession’ in Boneheadia and The Thoughts of Some People Relating To The Disaster.
While the entire article is six pages long it’s a must read for all investors. Here’s an excerpt from the article:
In the country of Boneheadia there was a man, Wantmore, who earned his Income as a home mortgage loan originator. Wantmore operated conservatively. All his home loans bore interest rates of 6% or less, and he demanded of all borrowers large down payments, documented proof of adequate income and an immaculate credit-using history. Wantmore sold all his loans to life insurance companies that, before closing purchases, checked loan quality with rigor—then held all loans to maturity.
As Wantmore prospered, he eventually attracted the attention of Tweakmore, a very bold and ingenious investment banker. There was no other investment banker quite like Tweakmore, even in the United States.
Tweakmore had become the richest person in Boneheadia, driven by an insight that had come to him when, as a college student, he had visited a collection of hotels that contained gambling casinos located in a desert.
As Tweakmore saw immense amounts of cash pouring into cashiers’ cages surrounded by endless sand, in business operations that did not tie up any capital in inventories, receivables, or manufacturing equipment, he realized immediately that he was looking at the best business model in the world, provided one could also eliminate commitment of any capital or expense to hotel rooms, restaurants, or facilities providing parking or entertainment.
Tweakmore also saw exactly how he could create for himself an operation that possessed all the characteristics of his ideal business. All he had to do was add to Investment banking a lot of activities that were the functional equivalent of casino gambling, with the bank having the traditional “house advantage.” Such casino-type activities, masked by respectable sounding labels, Tweakmore foresaw, could easily grow to dwarf all the action in ordinary/casinos.
Determined to create and own his ideal business as fast as possible, Tweakmore quit college and entered investment banking. Within twelve years, Tweakmore was the most important investment banker in Boneheadia. Tweakmore rose so rapidly because he was very successful in convincing regulators and legislators to enlarge what was permissible.
Indeed, by the time Tweakmore called on Wantmore, any investment bank in Boneheadia could invent and trade in any bets it wished, provided they were called “derivatives,” designed to make counterparties feel better about total financial risks in their lives, outcomes that automatically happened. Moreover, an investment bank faced no limit on the amount of financial leverage it employed In trading or investing in derivatives or anything else.
Also, Tweakmore had obtained permission to use “Mark-To-Model” accounting that enabled each bank to report in its derivative book whatever profit It desired to report. As a result, almost every investment bank claimed ever-growing profits and had ownership of assets totaling at least thirty times an ever-swelling reported net worth. And despite a vast expansion of transaction-clearance risk, no big mess had so far occurred.
Tweakmore was pleased, but not satisfied, by what he had accomplished. And he now planned to revolutionize Boneheadia’s home mortgage loan business in a manner that would make Tvweakmore a national hero.
In his first proposal to Wantmore, Tweakmore held much of his Ingenuity in reserve. All he proposed was that Wantmore hereafter sell all his home loans to Tweakmore at a higher price than life insurers would pay. Tweakmore said that he planned to put all loans into trusts with no other assets.
Each trust would be divided into five “tranches” with different priorities in use of loan payments. Four tranches would use their shares of loan payments to pay off complex new fixed-interest-bearing, freely-tradable debt instruments, called CDOs . The fifth tranch got a tiny residue in case all home loan payments were received as due. The CDOs would be sold by Tweakmore, using a highly-paid sales force, to anyone who could be induced to buy, even highly-leveraged speculators and small Scandinavian cities In the Arctic.
To Wantmore, Tweakmore’s proposal at first appeared unfeasible. The planned operation seemed to resemble the operation of a meat vendor who routinely bought 1000 pounds of chuck roast, sliced It up, and then sold 950 pounds as filet mignon and the balance as dog food.
But Wantmore’s doubts melted away when Tweakmore revealed how much he would pay. Under the offered terms, Wantmore would double his income, something Tweakmore could easily afford because his own Income was going to be three times that of Wantmore.
After Wantmore accepted Tweakmore’s proposal, everything worked out exactly as Tweakmore had planned, because buyers of CDOs in aggregate paid much more than the life insurers had formerly paid.
You can read the entire article here – Charles Munger’s – Parody Describing The Contributions of Wantmore, Tweakmore, Totalscum, Countwrong, and Obvilious To The Tragic ‘Great Recession’ in Boneheadia and The Thoughts of Some People Relating To The Disaster.
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