Warren Buffett Reveals Bailout's Dirty Little Secret

[sabra]

http://www.clusterstock.com/2008/9/warren-buffett-reveals-bailout-s-dirty-little-secret

The critical part of the bailout is the price the government pays for the trash assets it buys from banks. In short, if the government pays too much, the taxpayers will get hosed.

So it is interesting to note the difference between the price the government is proposing to pay and the price one of the world's smartest investors--Warren Buffett--would be willing to pay. To wit:

Bernanke and Paulson want to pay a phantom "hold-to-maturity" price that is above the prices at which the banks are currently valuing their trash assets. The logic is that the banks' carrying value is somehow artificially depressed by a lack of liquidity. (This logic is weak: If anything, the banks are trying to conceal how badly off they are by overstating the value of the assets).

Warren Buffett, meanwhile, thinks the appropriate price would be the "market value," which he believes is below the price at which the banks are currently carrying their trash:

{If} they do {the bailout} right, I think they'll make a lot of money.... They shouldn't buy these debt instruments at what the institutions paid. They shouldn't buy them at what they're carrying, what the carrying value is, necessarily. They should buy them at the kind of prices that are available in the market. People who are buying these instruments in the market are expecting to make 15 to 20 percent on those instruments. If the government makes anything over its cost of borrowing, this deal will come out with a profit. And I would bet it will come out with a profit, actually.

Read that again. Warren Buffett is not talking about any theoretical "hold-to-maturity" price. He's not even talking about the "don't-give-your-shareholders-all-the-bad-news-yet" carrying price. He's talking about the market price. And, unlike Bernanke, he's not suggesting that market price is somehow artificially depressed by a lack of liquidity. On the contrary, he's saying the market price is the market price because that's the price intelligent investors need to pay to offset their risk. The goverment should not pay one cent more than the market price.

[OneGrassRoot]

1. Hence their inclusion of "section 8." Criminals. n/t

[Schema Thing]

2. And you would expect no less from Warren Buffett

Some people may "play" the market. For some investors it really is "speculation". Warren Buffett doesn't "play" and he doesn't "speculate".


Warren Buffett has never bought a stock or a company that wasn't worth more than the price he paid for it on the day he bought it.

[PA Democrat]

3. I asked this question in another thread, and no one responded:

Is the reason Paulson is pushing for paying a premium price for these
mortgage backed securities related to the even greater value of credit default swaps tied to them? Wasn't the reason for the AIG bailout related to their holdings of CDSs?

Anyone know the answer or care to speculate?

[sabra]

4. clusterstock blog thinks it's because the banks want the premium price and won't settle

http://www.clusterstock.com/2008/9/even-bailout-fans-agree-bernanke-s-pricing-plan-is-a-joke

<snip>

Why don't Bernanke and Paulson want to pay market? Because they don't think the banks will sell their assets at that level. To which we say, "tough."

This can be dealt with two ways: 1) with a time limit (sell your stuff now or forever rot in bankruptcy court), and/or 2) with the government taking an equity stake in exchange for its largesse.

[JDPriestly]

5. Buffet is right.

That is why my idea of bailing out homeowners first and by bailing them out bailing out institutions is wise. It will foil the speculators because my plan also provides that most of the profit made on the government bailout loans when a house is sold would go back to the government. In a sense, that would mean that the government would get its money back for whatever it paid for the loan.

I should explain: My plan is for the government to buy the loans of distressed homeowners and issue to those homeowners 99-year mortgages. The banks would be made whole for not all but most of the loans or at least have the opportunity to be made whole. Homeowners could stay in their homes. The government would recoup its money plus a small but steady stream of interest on the loans. This would secure the markets without enriching speculators.

My plan would also save neighborhoods from the blight of numerous abandoned houses and also save the families and the children in the families of those who have overextended themselves with these foolish mortgages from the stress and disruption of having to move.

Over time, most of these homeowners will sell their homes -- whether for a small loss or for a gain, most of which will revert to the government.

In my opinion, under my plan, housing prices would continue to fall, but less precipitously. The market would find the appropriate level for pricing on its own. This would stabilize things and return trust to people participating in the market. This is especially important as many babyboomers are going to want to exchange their large, family houses near their jobs for smaller houses in locations good for retirement. The homes of many babyboomers are their biggest investments.

This crisis is a huge theft of babyboomers' wealth.