Buffett Bailout - Hmmmmmm.....

iVillage Member
Registered: 03-25-2007
Buffett Bailout - Hmmmmmm.....
8
Sat, 09-27-2008 - 3:29pm

This is from the blogosphere, so I guess we can take it for what it is worth.  But, is Paulson proposing massive giveaways that he doesn't have to?   Is there another way to value those homes with the bad mortgages, thus greatly reducing the amount of the bailout?


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


 


Warren Buffett Reveals Bailout's Dirty Little Secret

Henry Blodget | Sep 24, 08
 
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:


they do 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...


You can be pretty fanciful in marking positions in Wall Street, particularly when things aren't trading.  The one thing you want to make sure, when the Treasury is buying things, is the marks they have don't make any difference.  Like I said, it wouldn't be a bad idea, if you're buying ten billion of a security and you're the Treasury,  to have them sell five-hundred million, or something like that into the market, so you find out what the real market price is and then buy the other 9-1/2 billion at that price.  I really think, I really think the Treasury will make -- I think they'll pay back the 700 billion and make a considerable amount of money, if they approach it in that manner.


Read that again. Warren Buffett is not talking about paying 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 (the "fanciful" ones he describes above). 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.


Why aren't Bernanke and Paulson suggesting that the government pay a "market price." Because they know the banks will continue to insist that this price is too low and won't play ball.  Fine.  The answer is NOT to pay them to help the country--especially since they are a primary reason the company has gotten into this mess.


The answer is either to let them crash and burn and come begging for a bailout--at which point you nuke their shareholders completely AND/OR put a time-limit on the bailout offer, so they have to weigh their own self-interest vs. possible self-destruction. And in any case, you take equity, too, so you don't get screwed while their shareholders zoom.


Remember: You don't need to save all the banks to save the country. You only need to save some.>>>


 

 

Sopal


Sopal

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iVillage Member
Registered: 07-15-2008
Sat, 09-27-2008 - 3:36pm

Within your post was embedded that interview with Buffett where the quote came from.

iVillage Member
Registered: 03-26-2003
Sat, 09-27-2008 - 5:48pm

Interesting, thanks. I can't remember if anyone posted this, but it bears repeating:

Stopping a Financial Crisis, the Swedish Way
By CARTER DOUGHERTY
Published: September 22, 2008
Correction Appended

A banking system in crisis after the collapse of a housing bubble. An economy hemorrhaging jobs. A market-oriented government struggling to stem the panic. Sound familiar?

It does to Sweden. The country was so far in the hole in 1992 — after years of imprudent regulation, short-sighted economic policy and the end of its property boom — that its banking system was, for all practical purposes, insolvent.

But Sweden took a different course than the one now being proposed by the United States Treasury. And Swedish officials say there are lessons from their own nightmare that Washington may be missing.

Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government.

That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well.

“If I go into a bank,” said Bo Lundgren, who was Sweden’s deputy minister of finance at the time, “I’d rather get equity so that there is some upside for the taxpayer.”

Sweden spent 4 percent of its gross domestic product, or 65 billion kronor, the equivalent of $11.7 billion at the time, or $18.3 billion in today’s dollars, to rescue ailing banks. That is slightly less, proportionate to the national economy, than the $700 billion, or roughly 5 percent of gross domestic product, that the Bush administration estimates its own move will cost in the United States.

But the final cost to Sweden ended up being less than 2 percent of its G.D.P. Some officials say they believe it was closer to zero, depending on how certain rates of return are calculated.

The tumultuous events of the last few weeks have produced a lot of tight-lipped nods in Stockholm. Mr. Lundgren even made the rounds in New York in early September, explaining what the country did in the early 1990s.

A few American commentators have proposed that the United States government extract equity from banks as a price for their rescue. But it does not seem to be under serious consideration yet in the Bush administration or Congress.

The reason is not quite clear. The government has already swapped its sovereign guarantee for equity in Fannie Mae and Freddie Mac, the mortgage finance institutions, and the American International Group, the global insurance giant.

Putting taxpayers on the hook without anything in return could be a mistake, said Urban Backstrom, a senior Swedish finance ministry official at the time. “The public will not support a plan if you leave the former shareholders with anything,” he said.

The Swedish crisis had strikingly similar origins to the American one, and its neighbors, Norway and Finland, were hobbled to the point of needing a government bailout to escape the morass as well.

Financial deregulation in the 1980s fed a frenzy of real estate lending by Sweden’s banks, which did not worry enough about whether the value of their collateral might evaporate in tougher times.

Property prices imploded. The bubble deflated fast in 1991 and 1992. A vain effort to defend Sweden’s currency, the krona, caused overnight interest rates to spike at one point to 500 percent. The Swedish economy contracted for two consecutive years after a long expansion, and unemployment, at 3 percent in 1990, quadrupled in three years.

After a series of bank failures and ad hoc solutions, the moment of truth arrived in September 1992, when the government of Prime Minister Carl Bildt decided it was time to clear the decks.

Standing shoulder-to-shoulder with the opposition center-left, Mr. Bildt’s conservative government announced that the Swedish state would guarantee all bank deposits and creditors of the nation’s 114 banks. Sweden formed a new agency to supervise institutions that needed recapitalization, and another that sold off the assets, mainly real estate, that the banks held as collateral.

Sweden told its banks to write down their losses promptly before coming to the state for recapitalization. Facing its own problem later in the decade, Japan made the mistake of dragging this process out, delaying a solution for years.

Then came the imperative to bleed shareholders first. Mr. Lundgren recalls a conversation with Peter Wallenberg, at the time chairman of SEB, Sweden’s largest bank. Mr. Wallenberg, the scion of the country’s most famous family and steward of large chunks of its economy, heard that there would be no sacred cows.

The Wallenbergs turned around and arranged a recapitalization on their own, obviating the need for a bailout. SEB turned a profit the following year, 1993.

“For every krona we put into the bank, we wanted the same influence,” Mr. Lundgren said. “That ensured that we did not have to go into certain banks at all.”

By the end of the crisis, the Swedish government had seized a vast portion of the banking sector, and the agency had mostly fulfilled its hard-nosed mandate to drain share capital before injecting cash. When markets stabilized, the Swedish state then reaped the benefits by taking the banks public again.

More money may yet come into official coffers. The government still owns 19.9 percent of Nordea, a Stockholm bank that was fully nationalized and is now a highly regarded giant in Scandinavia and the Baltic Sea region.

The politics of Sweden’s crisis management were similarly tough-minded, though much quieter.

Soon after the plan was announced, the Swedish government found that international confidence returned more quickly than expected, easing pressure on its currency and bringing money back into the country. The center-left opposition, while wary that the government might yet let the banks off the hook, made its points about penalizing shareholders privately.

“The only thing that held back an avalanche was the hope that the system was holding,” said Leif Pagrotzky, a senior member of the opposition at the time. “In public we stuck together 100 percent, but we fought behind the scenes.”

This article has been revised to reflect the following correction:

Correction: September 27, 2008
An article and a picture caption on Tuesday about Sweden’s response to its 1992 financial crisis misstated the position at the time of Bo Lundgren, who described Sweden’s strategy and commented on the United States’ proposals for resolving its own crisis. He was the deputy minister of finance — not the finance minister, a post held by Anne Wibble.

http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html?_r=1&scp=2&sq=sweden&st=cse&oref=slogin

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Registered: 03-25-2007
Sat, 09-27-2008 - 6:24pm
Thanks for posting that.

Sopal

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iVillage Member
Registered: 03-25-2007
Sat, 09-27-2008 - 8:57pm

If you can tolerate Jim Cramer, he went on a rant about the foot-dragging with the bailout and had a few good points to make:


http://www.cnbc.com/id/15840232?video=869062106&play=1

http://www.cnbc.com/id/15840232?video=868879113&play=1

Sopal


Sopal

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iVillage Member
Registered: 10-25-2006
Sat, 09-27-2008 - 11:15pm

Here's a bailout option link with some interesting comments following the article:

http://economix.blogs.nytimes.com/2008/09/23/what-are-the-other-bailout-options-an-explainer/

And a BBC "Have your Say":

http://newsforums.bbc.co.uk/nol/thread.jspa?forumID=5388&edition=2&ttl=20080928035206

There are a lot of good, out-of-the-box comments. I like the idea of giving every househould a million dollars so that we taxpayers can stimulate the economy.

I think the Swedes did it right. If the financial industry doesn't like it tough--they either work among themselves to clean up their messes or they accept the socialism they brought on.

Regardless of what happens with this legislation, we will have a long recession and there will be more business failures. If we bail out the financial sector, will we do the same for the automakers, or the heavy equipment manufacturers, or the restaurant chains that go under? Where will it end?

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http://www.pnhp.org/news/2009/october/meet_the_new_health_.php

http://www.youtube.com/watch?v=DQTBYQlQ7yM

iVillage Member
Registered: 03-25-2007
Sat, 09-27-2008 - 11:51pm
I think that the Swedes probably did it right, but with the nationalization of the banks, they effectively socialized their financial system.

Sopal

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iVillage Member
Registered: 03-26-2003
Sun, 09-28-2008 - 3:23am
I think the Swedish bail-out was simply pragmatic. It was also carried out by a conservative government.
iVillage Member
Registered: 03-26-2003
Sun, 09-28-2008 - 3:28am

I really do not understand that reaction. First of all, the threat of nationalization caused many banks to find other ways of surviving, so not the entire industry was nationalized. All but one remaining stake in one bank has since been re-privatized.

Secondly, what Paulson was intending to do was to provide a massive government subsidy to keep house prices from tanking completely and the government has already taken over a couple of companies. How is that less "socialistic"?