But to make money they didn't have and didn't need, they risked what they did have and what they did need. That is just plain foolish; it doesn't matter what your IQ is. If you risk something that is important to you for something that is unimportant to you it just doesn't make sense. I don't care if the odds you succeed are 99 to 1 or 1000 to 1 that you succeed.
If you hand me a gun with a million chambers with one bullet in a chamber and put it up to my temple and I am paid to pull the trigger, it doesn't matter how much I would be paid. I would not pull the trigger. You can name any sum you want, but it doesn't do anything for me on the upside and I think the downside is fairly clear. Yet people do it financially very much without thinking.
Charlie Rose: You have talked about derivatives. Derivatives are, in part, at the core of this problem, yes?
Warren Buffett: AIG would be doing fine today. It was one of the ten largest companies in the United States in terms of market value, over 200 billion, the most respected insurer and everything in the world. If they never heard of the word derivatives, they'd be doing fine. They'd be going to work in the morning and they would have no troubles. But they -- they -- it was very easy to do, because it's very tempting to write numbers on little pieces of paper and you can kinda report the profit you want to, and there is no limit on it. I mean there is no capital requirements to it or anything of the sort. And basically, I said there were possibly financial weapons of mass destruction, and they had them. They destroyed AIG. They certainly contributed to the destruction of Bear Sterns and Lehman. Although Lehman had other problems, too.
Charlie Rose: I'm interested in this because people are asking, did people get away with murder here? Were there people who simply gained the system and took advantage and made huge amounts of profit, and we had excesses that inevitably led to where we are today?
Warren Buffett: Well, we had all of that. But I would say the biggest single cause was we had an incredible residential real estate bubble. I mean you can go back to tulip bulbs in Holland 400 years ago. The human beings going through combinations of fear and greed and all of that sort of thing, their behavior can lead to bubbles. And it may have had an Internet bubble at one time, you've had a farm bubble, farmland bubble in the Midwest which resulted in all kinds of tragedy in the early '80s. But 300 million Americans, their lending institutions, their government, their media, all believed that house prices were going to go up consistently. And that got billed into a $20 trillion residential home market. Lending was done based on it, and everybody did a lot of foolish things. And people really behaved in a fraudulent way or something, we'll go back and find the culprits later on. But that really isn't the problem we have. I mean that's where it came from, though. We leveraged up and if you have a 20 percent fall in value of a $20 trillion asset, that's $4 trillion. And when $4 trillion lands -- losses land in the wrong part of this economy, it can gum up the whole place.
Charlie Rose: And it continues with respect to the housing market.
Warren Buffett: It continues.
...
Charlie Rose: And should wise people have known better?
Warren Buffett: People should always know better.
Charlie Rose: Yeah.
Warren Buffett: I mean people -- people don't get -- they don't get smarter about things that get as basic as greed and you can't stand to see your neighbor getting rich. You know you're smarter than he is, and he's doing these things, you know, and he's getting rich, and your spouse is getting unhappy with you because you aren't doing -- pretty soon you start doing it. And so you get what I call the natural progression, the three Is. The innovators, the imitators, and the idiots. And that's what happens. Everybody just kind of goes along. And you look kind of silly if you disagree. I mean, you know, you could have these crazy Internet valuations in the late 1990s, but they prove themselves out in the market. The next day they were selling for more than they were the day before, and people said, you know, you're crazy if you don't get in on this. So it's very human. Now, with housing it's something even more dramatic than that, because most people aspire to own their own home. And if you really think that houses prices are going to go up next year and the year after, you feel if I don't buy it this year, I'm going to have to buy it next year. That's not true of an Internet stock. But it's true of a home. And when somebody makes it very easy for you to do it by saying you don't really have to put up my money, you can lie about your income a little, or we'll give you 100 percent mortgage, you're going to do it, because everybody that's done it has been proven right. You have what they call social proof, and, you know, you're going to feel like an idiot if you didn't do it, and next year the house costs more.
- Charlie Rose: An exclusive conversation with Warren Buffett [Transcript]
