Even Warren Buffett Agrees: Bernanke Bailout Price Plan A Joke

Ben Bernanke and Hank Paulson beat the bushes last night and found some members of a great silent minority to voice support for their bailout plan.

The supporters included Warren Buffett, who said on CNBC this morning that implementing some form of the plan was a necessity (and the expectation that the government will soon follow through on it was part of his reason for deciding to invest in Goldman Sachs).

However!

Even Warren thinks the proposed pricing plan is ridiculous. As a reminder, Paulson and Bernanke want to buy trash assets from banks at a theoretical "hold-to-maturity" price that is well above the current market price. The trouble with this is that the "hold-to-maturity" price--if actually different than the market price (unlikely)--is not stamped on the assets like a price tag on a can of soup. The market is generally recognized to be the best estimator of "hold-to-maturity" value on the planet. So to suggest that a tiny team of public servants can glance at the assets, determine a fair price, and then not get taken to the cleaners is absurd.

Warren recommends that the government buy the trash assets at market value. Even this is a gift, since banks have no doubt done everything they can to avoid taking the full losses they should. But paying market value is a heck of a lot better than paying some theoretical "hold-to-maturity" value that rewards the banks for making dumb-ass bets.

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 I say, "tough."

If you want the banks to play ball, set a time limit (sell your stuff now or forever rot in bankruptcy court). And demand an equity stake in exchange for your money--because you deserve one.

On the latter, note that Warren Buffett didn't buy trash assets from Goldman at a huge premium to market value. On the contrary, he let Goldman keep its assets and invested in a senior preferred stock paying a 10% dividend, with a huge bonus warrant kicker on the back end. The government should drive a similarly hard bargain.

The economy is not going to recover immediately regardless. If this means waiting until banks realize that they're screwed to bail them out--and, in the process getting as good a deal for taxpayers as the government got on AIG, et al--then so be it. Whatever happens, the government cannot reward banks for their idiocy by buying $700 billion-worth of trash assets at a premium.

See Also: Unfortunately, Bailout History Suggests Stock Market Not At Bottom

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Comments

[luutzu]

Don't bail them out, take them over.

When executives do stupid greedy things, you don't reward them with golden anything, you either ignore them, or in this case, you have to buy them out to save the economy... Why on earth would you, the US, pay anything higher than market price? heck, since you are the only person who can buy on that scale, buy 'em at LOWER tahn market price.

I saw the Buffett phone interview and though don't know much details about the plans... he might be right that the US gov't can make a lot of profit from the bail out - if they don't pay a stupid price on the assets that, without their involvement, is worthless.

"Bail out" sounds like the gov't is doing these failed captains of industries a favour. Gov't ought not to, they ought to do what Buffett suggests and act as though they're investors, and investors always under pay for assets, especially one as powerful, as critical, as the US gov't is in this whole deal.

[oldfart1]

"The government should drive a similarly hard bargain." Not so fast. Warren already bought the good stuff. What's left is rubbish.

There are auctions that can handle this problem, and that is the fair way to do it.

The FT reported today that cash on hand at American corporations is nearly $700 billion (that number again!), an all-time record. Bush didn't see this coming, but everyone else did.

Will the Artful Dodger pick our pockets? Wait and see.

[stevets]

The proposed bailout is the wrong idea. Here's one that puts ordinary Americans first:: http://stevefalcon.com/thoughts.htm#9_24_08 .

[GeorgeWRumscroft]

You have to worry about a proposal which in its earliest draft would have permitted Henry Paulson to spend the entire 700 Billion on TV commercials promoting John McCain (or lying about Barack Obama) or to split the entire 700 Billion in equal shares between Donald Trump and Paris Hilton. No oversight, no judicial review -- just a blank check. Just trust me.

Right!

[ModerateDon]

Could you please address the column by William Gross in the Washington Post. I have always respected him, but don't quite get what he's saying. He doesn't seem to see any downside.

[politicky]

"Whatever happens, the government cannot reward banks for their idiocy by buying $700 billion-worth of trash assets at a premium."

Sure they can. The captains of industry have a captive audience; the taxpayers.

[wldnswmmr]

I don't think Ben Bernanke, at least, is talking about buying the distressed MBS stuff at a premium. The market price discussed here is typified by Merrill Lynch's sales at about 22 cents on the dollar. Other investment banks have done somewhat better. But there's no reason to believe that Bernanke is pushing the idea that the Fed should simply "glance" at the assets and pay whatever the banks demand. Bernanke's testimony was to the effect that partial damage to the bonds' face value tends to drive down their market price enormously, whereas within the MBS portfolio, really only about 5% of the mortgages are actually bad. If held to maturity, the bonds would be worth more than the Merrill type distress sales. So the actual loss to the govt. could be considerably less than the amount appropriated for the bailout. That isn't so unreasonable. Bernanke is not generally sloppy about his opinions. He's just in a tough spot.

[TRYKER]

"Hold to maturity" on the 30 mortgages per house they packaged and sold? How long will it take for 29 fake mortgages to "come to maturity?" Oh, like NEVER.
If those "minorities" they are trying to blame for this schlock had taken 30 mortgages on their house, they'd be locked up and made to pay back the money.
They leveraged 30 to 1 in their sneaky scheme, sold them around the world to every country that had a dollar. Now those countries are angry they were rooked and would like some satisfaction.
Paulson isn't talking about the real reasons he needs that money.

[GhiaccioPronto]

500 million, tax free, and control of the treasury for your buddies

The treasury and bailout plan are run by ex goldman execs.

Paulson cut his teeth under John Ehrlichman, in the Nixon whitehouse, then joined Goldman in 1974

Paulson sold 3.23 million shares in Goldman, worth about $500 million at the time, when he took the Treasury job, according to regulatory filings. He was exempted from paying capital gains tax on the sale of those stakes under a rule meant to avoid penalizing wealthy people who take government jobs and are forced to sell assets.

Rather than encouraging ringers like Paulson in government, it might be wiser to INCREASE taxes on asset sales for those going into government, it would give some assurance they are there for the right reasons.

[T Pol]

This article is outstanding, making it clear to anyone with an IQ above 70. Good work.

[EngineerBill]

I probably know less about the economy than almost anyone i know. Still my lack of knowledge has never stopped me from offering an opinion before and it won't now.So here is my idea. Let these banks set their own price for the loans they want us to buy but...
1. We set it up as collateral for a loan.
2. we agree not to "fire sale" the products we bought but sell them within one to two years.
3. If they sell for less than what we paid for them the bank is on the hook for the difference.
4. a payment plan is then set up to pay off the difference within three to five years.
That way I am generous not-for-profit lender and not a "sugar daddy".

[oldfart1]

A good idea, but if the war continues, and oil starts going back up, who knows if the banks will ever come back to the surface?

[kimk3]

Congress doesn't get the joke, though. Oh, they're making some noise but they need to start negotiating from a place of strength, such as Dennis Kucinich's plan:

1. Reinstatement of the provisions of Glass-Steagall, which forbade speculation
2. Re-regulation of the finance, insurance, and real estate industries
3. Accountability on the part of those who took the companies down:
a) resignations of management
b) givebacks of executive compensation packages
c) limitations on executive compensation
d) admission by CEO's of what went wrong and how, prior to any government bailout
4. Demands for transparencey
a) with respect to analyzing the transactions which took the companies down
b) with respect to Treasury's dealings with the companies pre and post-bailout
5. An equity position for the taxpayers
a) some form of ownership of assets
6. Some credible formula for evaluating the price of the assets that the government is buying.
7. A sunset clause on the legislation
8. Full public disclosure by members of Congress of assets held, with possible conflicts put in blind trust.
9. A ban on political campaign contributions from officers of corporations receiving bailouts
10. A requirement that 2008 cycle candidates return political contributions to officers and representatives of corporations receiving bailout

[oldfart1]

Dennis K's plan is punitive but ineffective. There is too big a gap between what we would like to have happen, and what probably will happen, with enforcement being a big issue.

For instance, "Some credible formula for evaluating the price of the assets that the government is buying": what would that be? The banks themselves don't know what their paper is worth.

[MourningDude]

So while Obama and the Dems complain that Wall Street should stop paying dividends until they have re-capitalized themselves, Obama's financial adviser Warren Buffet is buying into sweetheart deals offering 10% permanent dividends, in addition to an extra $5 billion in stock options for his trouble?

Can you say "Hypocrites"? Yeah, I thought you could.

[copernikus]

"So while Obama and the Dems complain that Wall Street should stop paying dividends until they have re-capitalized themselves"

Where did you get this from.

As Letterman said to O'Reilly, "I have the feeling about 60 percent of what you say is crap."

[schatsie]

Buffett has PR, including the wonderful book about his investing, but I am afraid that under the covers, there are more stories like those in Free Lunch... The man is smart and does not give anything away...He got a sweet deal on Goldman Sachs, and the government should get the same deal..

The government can contract to bail out these clowns/gam­blers/corr­upt at the same price as any investor who gets a better deal...So that if Buffett gets this type of deal, then the government gets exactly the same type of deal.....T­here is TOO MUCH Risk of the Bushs giving the farm away to their friends and relatives, think Silverado, Broward Bank and Jeb Bush, the Keatings..­..

I am totally opposed to this BAILOUT for the Titans of Wall Street who have had their party and are now billing us dummies for it.....

[oldfart1]

Remember, Bush wanted to give the banks everything for nothing. His guys have already stolen trillions, and have it safely tucked away where no one will ever find it. Just like looting a banana republic.

[Djyrn]

There's been a lot of push-about with regards to the Fed taking an equity position.

It seems to me that it wouldn't be unreasonable to take options with the bad loans. If there's a gain then they'll have an offset against the junk. If there isn't a gain then there's no need to be an owner.

[jhoughton1]

Yabbut...t­he real goal here isn't to bail out the banks, it's to get the credit markets unfrozen so businesses can continue to function. At least that's what it SHOULD be. There have been proposals that involve the government providing short-term lending to Business without making the banks well so they can do it. That's what I prefer -- let the banks choke to death on their own greed and stupidity, and let the government (which is, after all, supposed to be We The People) do the job they can no longer do. Make no mistake, that short-term credit needs desperately to be provided..­.by someone.