Hacker News Reader

> This is interesting as it is apparently true, by the numbers, and also a slap at investment bankers.

Usually the "higher-income brethren" are not succumbing to the ethical and moralistic brainwashing regarding defaults, and bankruptcies. For them "bankruptcy" != "I am a lazy, bad, and irresponsible person" it is just a risk calculation in an excel spreadsheet.

> succumbing to the ethical and moralistic brainwashing

Ugh. "brainwashing"? A bankruptcy for a low- or middle income earner would be much more disruptive than it would be to a high-income earner. Your opinion (or how I am reading it) is elitist at the very least.

No, he's saying that high-income people appear to be worse credit risks because they're educated and know that they don't have to "go down with the ship" of untenable debt loads, while low-income people tend to do exactly that; in other words, he's saying it's not a good thing (for the homeowners) that Clayton's low-income home borrowers are better credit risks, but rather a "tell" that Clayton is exploiting those low-income people.

Another possibility is that a higher income means you don't really need credit if you start over, so this is just rational self interest on both sides.

But that's just another hypothesis. I don't think the truth can be found with armchair reasoning; it requires data.

Credit score is independent of income level. The score we use in our insurance risk modeling doesn't care about the amount of money you earn. There is a lot of actuarial papers just demonstrating this. Credit score is often though of something reflecting wealth. It is not the case. It is a score that reflects the likelyness of you defaulting on future obligations.

What parent is saying is that if you have a high income level, it's not the end of the world to pay cash for everything, so you can live with a bad credit score.

You might have to buy a beater while you save for a nice car, but if your income is low the equivalent option is taking the bus.

> A bankruptcy for a low- or middle income earner would be much more disruptive than it would be to a high-income earner

It would be. But I am saying even if even they wouldn't, the higher income earner will have less moral and ethical qualms about walking away.

In other words they would do the math and seeing that their million dollar home is under water, they would throw the keys at the bank and walk away.

While perhaps someone raised and believing in hard work, paying your debts, being fair and responsible, would actually feel like they are letting the bank down or they are violating some core ethical principles, and might lose sleep over it.

That makes sense. But "succumbing to the ethical and moralistic brainwashing" makes it sound like you think it's ethically and morally justified to walk away from a loan.

I imagine that he/she is looking at it from the perspective of the high-income person. In that case, defaulting is no more evil than losing money in the stock market or having one's business perform badly this quarter. Sure, the financial impact may be painful, but all parties involved should have been aware of the risks of making the loan.

I have anecdotal evidence of this from the recent housing bust. One friend who's worth several million walked away from a $700k mortgage when he realized how upside down it was. Another friend who's worth less than $100k stuck with a $300k loan and even doubled down, sunk in her entire life savings to refinance and reduce the ballooning payments. Despite my pleading her reasoning was a moralistic attitude of "I gave my word". The friend that walked away recently bought a new house and is doing better than ever financially while my other friend will be feeling the pain for years.

All of which, while certainly true, still makes them a worse credit risk than the numbers say.

> Also, does anyone have color on went wrong with Tesco?

One of Buffett's claimed keys to success is being able to evaluate management talent^. Since he can't manage all of these business himself, it's important for him to have talented managers running each show. He has specifically built Berkshire to be attractive to this kind of person. E.g., when he makes an acquisition, the old management is left in place and continues to run the business, making it a great way for someone who has built a business from scratch to cash out and yet be sure their baby won't be dismantled, unlike a normal M&A that tends to fire all of upper management and gut half the staff.

So when he says he's lost faith in management, that is quite a serious condemnation. My guess (with no data backing it up) is when Tesco ran into trouble, they tried to feed him a load of crap about it, and he knew it.

^If you have not heard the story of Mrs. Blumkin of Nebraska Furniture Mart, it is well worth it: http://www.focusinvestor.com/Blumkin.pdf

Sure. What's the last position BH exited with an observation about losing faith in the management team? I've been reading these letters for years and the Tesco thing sticks out to me.

Well, he's often said the only reasons he will sell is if a business's competitive advantage disappears, he's lost faith in management, or he needs the cash.

Johnson & Johnson would be one recent (2012) example where I think neither the first nor the third conditions applied (though he only said they'd "obviously messed up in a lot of ways in the last few years" in an interview, and didn't discuss it in the shareholder's letter at all).

Tesco has had accounting issues:

http://www.theguardian.com/business/2014/oct/29/serious-frau...

Tesco also has a hard time competing with Aldi and Lidl:

http://www.managementtoday.co.uk/news/1317297/why-tesco-cant...

Tesco had a major accounting scandal: http://www.theguardian.com/business/2014/oct/29/serious-frau...

Is that it? Gen Re did too, didn't they?

Yes, and a nasty derivatives position [0] if memory serves. Buffett also had to get involved after Solomon Brothers [1] had some regulatory improprieties.

[0] http://www.forbes.com/2003/05/09/cx_aw_0509derivatives.html

[1] http://dealbook.nytimes.com/2008/09/24/warren-buffett-and-th...

It's difficult to convey how big a deal Tesco's issues have been in the UK–it's had very extensive media coverage, a parliamentary inquiry looks likely, and there are investigations ongoing by the Serious Fraud Office and several regulatory bodies. This has created a distinct lack of goodwill in the general public.

Regardless of the accounting issues, they've had other issues too. There's the perception they're losing their customer base: they're ceding the low end of the market to certain supermarkets (Aldi, Lidl, Asda) and the higher end to others (Waitrose, Sainsbury's, M&S), leaving nothing in the middle. So that's a problem for them, and one they'd need effective management to handle.

All of this is potentially salvageable, but it is very uncertain, so I'm not surprised people might not want to invest.

The final thing to remember is that their stores look like shit. There's a tumbler about one near me being the worst Tescos on Earth, a truly frightening point. The way to play this investment is sell while they are about to spend loads of cash for a few years sorting out their stores and then just as this investment picks up you buy back in. Tescos still has lots of potential to be the default UK supermarket again.

There's a Tesco Express near me which is small but was okay until they redesigned it last year and did what I term a WHSmiths: put in shelves almost to the ceiling, thinned the aisles, packed in as much content as possible. It obviously allows more product but makes the shopping experience terrible when there are more than a few people in the store. I avoid it unless there's something on heavy discount that worth's picking up.

> went wrong with Tesco?

They blew £1.5 bn trying to expand into China, and £1.8 bn trying to expand into the usa.

also in the UK people are getting poorer and turning from fairly low-end Tesco to discount retailers like Aldi/Lidel.

well there's also slightly upmarket food stores like Waitrose, Marks & Spencer, Peckhams, Co-operative which seem to be spreading

Lidl/Aldi just seems like a new business model which we didn't really have before

All the world's economies artificially prop up the market and, surprise, General Re is now a gem and the king still has no clothes on.

Gen Re was purchased decades ago and so the 2008 interventions were not related to makin it a gem. (I am sure that they helped polish the bank balance since but even so ...)

>Many of our buyers how low incomes and mediocre FICO scores.. our blue-collar borrowers have often proved to be much better credit risks than their higher-income brethren.

During economic downturns, people with higher salaries are cut first.