Warren Buffett Watch

The Economist recalls a Warren Buffett classic quote that feels very timely right now: "It's only when the tide goes out that you learn who's been swimming naked."  When everyone is enjoying good times, you don't know who has taken on excessive risks.  Now that many mortgages are going bad, it's harder to borrow money, and a few hedge funds have failed, it's becoming apparent a few "swimmers" will have a tough time staying afloat.

The magazine's columnist isn't too concerned, talking about "clearing the froth of the market" and quoting a Moody's report predicting some small banks may suffer but larger banks will only feel a short pinch in earnings.  Still:

"As Friday's sharp fall in response to remarks from Bear Stearns indicated, we may not yet know all the bad news.  So, to go back to Mr. Buffett, the image we can all agree we don't want to see is a large, naked banker."

Jeff Matthews, in his blog NotMakingThisUp, argues that Buffett should have remembered his own aphorism.  Matthews recounts Buffett saying last May that the enthusiasm surrounding private equity didn't constitute a "bubble."  (In an interview with CNBC in May, Mr. Buffett described private equity as a "big train" with investors locked in for years, "so I don't see it coming to a quick end at all."  You can see a video clip of that interview at the bottom of the Warren Buffett Watch post 'Warren Buffett's Window of Opportunity?')

Matthews concludes:

"He was wrong... The private equity bubble has burst, and nobody know how it will end.  But one thing we can take to the bank: trust Warren Buffett to pick through the debris and find the values."

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