2007: How can we solve the fail-to-deliver and naked shorting problem?

AUDIENCE MEMBER: Hello. My name is Brian Bowalk (PH), Fremont, Nebraska.

With the growing number of fail-to-deliver trades happening in our stock markets, including investors’ cash accounts, Roth IRAs, and other retirement accounts, it seems like the problem is getting worse.

With some companies being on the Regulation SHO list for hundreds of days, what can be done to make Wall Street deliver stock that they have sold but never delivered? Thank you.

WARREN BUFFETT: Yeah. The so-called fail to deliver and naked shorting, I think is the question. I don’t know exact — I’ve never been in a position where I’ve asked a broker from whom I bought stock to give me the certificate and have them decline it for any period of time.

I would think that you might have some action against them. But I’ve never — I do not see the problem at all with people shorting stocks.

I mean, I would welcome people shorting Berkshire Hathaway. I mean, it — if you own stock, and they need to borrow from you, you can get some extra income from your stock. And the one sure buyer of your stock eventually is somebody who shorted it. I mean, that guy is going to buy it someday.

And I have no problem with shorts. If there’s some kind of a game that’s played — and I’ve read about it — I’ve never seen it happen to anything that we’ve owned.

Like I say, if anybody wants to naked short Berkshire Hathaway, they can do it until the cows come home, and we’ll be happy to. We’ll have a special meeting for them.

But — and I would say this: the shorts generally have the tougher time of it in this world. I mean, there are more people bowling stocks for phony reasons than there are burying stocks for phony reasons.

So I do not see shorts as any great threat to the world. If enough people shorted Berkshire stock, they would have to borrow it and they would pay you to borrow your stock and that’s found money.

We did that on USG. When USG got hammered after they went into bankruptcy — or maybe just before — one large brokerage firm came to us and they wanted us to lend them millions of shares and they paid us a lot of money.

And we happily lent them the stock. We wished they borrowed more. In fact, we insisted that they borrow it for a given length of time just so that we could collect a large premium.

And I don’t know how many — I’d have to look it up but — I don’t know whether it’s in the hundred thousands or, maybe, low millions, but we were better off.

And they didn’t do too well shorting USG at $4 a share either, but it was immaterial to us.

So I do not regard — I do not regard shorts as — it’s a tough way to make a living.

It’s very easy to spot phony stocks and promoted stocks, but it’s very hard to tell when that will turn around.

And somebody that’s promoted a stock to five times what it’s worth, may very well promote it to ten times what it’s worth, and if you’re short, that can get very painful.

Charlie, do you have any thoughts on shorting?

CHARLIE MUNGER: Well, not on shorting. But those delays in delivering sometimes reflect a tremendous slop in the clearance process, and it is not good for a civilization to have huge slop in the clearance processes for its security trades.

That would be sort of like having a lot of slop in the management of your atomic power plants. It’s not a good idea to have slop that causes a lot of financial exposure that people are ignoring.

WARREN BUFFETT: Charlie, reach back into your law practice. If I buy a thousand shares of General Motors, and my broker doesn’t deliver it to me, and I ask him to deliver it and he doesn’t deliver it to me after a week or two weeks or three weeks, what’s the situation?

CHARLIE MUNGER: Well, if you’re a private customer, you may wait a while. And a lot of the other trades — the clearance systems do cause people to put up collateral and so on.

But a lot of — take derivative trading. There’s a lot of slop in derivative trading. And the clearance problem would be awful if a lot of people wanted to do something at once.

WARREN BUFFETT: But if I demand delivery after three weeks, can I walk into court and say I want my stock, I’ve given you the money?

CHARLIE MUNGER: I don’t think there’s any court that can issue you a stock certificate just because you want it.

No, the clearance system is failing you. Why, you can scream a lot, and you may have some ultimate remedy, but there’s —

WARREN BUFFETT: I’ll get somebody else to represent me. (Laughter)