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What is ' AAA toxic creations'? Buffett pointed out that it was Congress that presided over the two largest mortgage entities in the world, Fannie Mac and Freddie Mac, and both are in receivership. As for the rating agencies, especially Moody’s, in which Berkshire owns a 20% stake, Munger noted that they are good at fancy math and, as with the man with the hammer, treated each problem like a nail. Going forward, Buffett believed the rating agencies are good businesses: there are few competitors, they affect a large segment of the economy and they don’t require much capital (though they are still very much attackable). Buffett noted that the biggest surprise may have been that so many of these AAA toxic creations ended up in the hands of the creators themselves. They drank their own Kool-Aid. Stupidity ran wild, and “everyone else was doing it” became the primary rationale. It’s hard to stop once there is such widespread industry acceptance.
Nov 15, 2018 3:22 AM
Answers · 7
"Buffett noted that the biggest surprise may have been that so many of these AAA toxic creations ended up in the hands of the creators themselves." Financial instruments or entities have a grading given to them by the market. AAA implies a very good grading. Something is toxic if it is bad for your health. Not necessarily straight away, but it will eventually kill you. Buffett using the term "AAA toxic creation" is describing a financial creation (financuial entity, or financial instrument) that looks good but in fact is something very unhealthy for the financial market in general. It acts almost like a poison to it. I'm not sure if Buffett here is specifically referring to Fannie Mac and Freddie as the toxic AAA creation or not. I'd need a little more of the text to work that out :)
November 15, 2018
Greg's answer was great. You might also be interested in the origin of "drank their own Kool Aid" (if you don't already know it.) It refers to the Jonestown massacre, where a cult leader convinced his followers to commit suicide by drinking poisoned Kool-Aid. Now, "drinking the Kool Aid" means "being convinced to follow a bad idea that is likely to hurt you".
November 15, 2018
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