Warren Buffet Speaks The Truth

Finally I heard someone explain to the American people how the $700 billion plan will really work.  All we’ve been hearing the last few days is that “we’re not going to bail out Wall Street”.  It’s been really frustrating watching this unfold.  There’s a lot of blame for this.  It’s not just Wall Street.  It’s greedy lenders AND greedy borrowers.  It’s not enough oversight from Dems & Republicans.  Paulson & Bernanke haven’t done a good job of explaining to the average Joe what this plan really means.  Secondly, politicians & television commentators certainly haven’t explained it.  Finally, Warren Buffet came out this morning and discussed this plan in terms that make sense. 

I hear politicians saying “we’re not going to write a blank check”.  Here are the facts.  The Treasury is proposing a plan to buy assets from various institutions.  $700 billion isn’t going down the toilet.  The Treasury is making an investment in some assets for pennies on the dollar.  I’d love to do this.  Buffet said he would love to do it but he doesn’t have that much money and can’t get the financing that the Treasury does.  They will buy bad assets from institutions for pennies on the dollar from distressed sellers.  Then, they will manage them and wait.  And, if they have to, they’ll wait longer.  Unlike a lot of firms, they have staying power.  Once the housing market stabilizes (which it will), these same securities are going to be worth a lot more than they are now.  It’s an investment.  These institutions that hold these securities right now would prefer to hang on to them because they know they’ll be worth much more in a couple of years.  But, they can’t.  They are being forced to mark them down which is hurting their borrowing capacity and it’s forcing them to either be bought out or go bankrupt.  By selling these to the government, they get a cleaner balance sheet which will enable them to operate as they normally would.  Keep in mind, they aren’t being bailed out.  They are selling these assets for pennies on the dollar when they bought them for a dollar on the dollar.  Seems like a stiff price to pay.  You & I are buying them through the government for pennies on the dollar.

The next stage will be for them to control the supply of homes through various processes of slowing down foreclosures, and hopefully offering incentives to us investors to buy some of these emtpy homes as investments.  The demand for homes is there and accelerating but the supply is going up faster.  So, they will tackle the supply issue and if they can get demand to go up even more with incentives, that will help home prices.  Once they do that, these assets the government is buying will start to go back up.  Taxpayers could make a lot of money from this deal in conjunction with the deal of lending AIG money at 11.5%.  When they do start to see a return on that $700 billion, my vote is not to send it to me, but to pay down the national debt.

Everyone agrees we need to get something done now, both Democrats & Republicans.  But, both sides have their incentives for arguing for it and against it.  But, Warren Buffet coming out and saying it’s the right plan for the right time and it’s being run by the right guy speaks volumes.  In fact, he is betting on the plan getting done soon.  He made a $5 billion investment into Goldman Sachs today with the option for $5 billion more.  This is a guy who’s not on the right but realizes this is a good plan that needs to be done quickly.  He did a good job of explaining it on television this morning. 

Both Paulson & Bernanke should be out doing town hall meetings explaining this but they won’t.  First, they don’t have time and second, I don’t think they are capable.  If it was me, I’d take $1 billion of the $700 billion and give it to Buffet and hire him to not only go around the country and explain to people what this means to them as taxpayers, but to also be on a board watching over this.  Americans trust him and would listen to him.

I like the plan and wish I had $700 billion to do it.


6 Responses to “Warren Buffet Speaks The Truth”

  1. 1 Joel Mackey September 24, 2008 at 7:45 am

    Why doesnt the government take steps to unfreeze the market in these assets and allow the companies holding them, to sell them at market rates instead of the government buying them at pennies on the dollar?

    Could not the government suspend the “mark to market rule” on these specific assets and oversee the creation of an open market exchange with transparency and regulation necessary to create a market for these assets, thus allowing the companies holding them to find the true current worth? You say that this is a good deal, why not allow individuals and private entities participate in this good deal and keep the government in its’ constitutionally assigned role?

    The government is attempting to socialize the whole of the credit markets, this “bailout” is no such thing, it is a power grab, pure and simple, it is the nationalization of the U.S. credit markets. They are moving from a regulatory and oversight role to being both reg. and oversight as well as being an active player in these markets. If you think that is going to end well, you are sadly mistaken.

  2. 2 James September 24, 2008 at 9:09 am

    I have my doubts that the Treasury will be able to get the bad assets for pennies on the dollar. If the banks know these assets have value, they will not want to sell it at market. (I know they may be forced to sell it, more on that later) They will bargain for better prices. Since the plan is to re-capitalize the banks, the Treasury will probably go along with it and pay up. If the banks decided they have to sell it at whatever price, Buffett and other investors who thinks it is a good deal, will be in there biding for the assets as well against the Treasury. Buffett or any other single entity doesn’t need to have 700 billion. If they think it is a good deal, they will be in there buying 5 billion here and 10 billion there. Next thing you know, there is a market for the assets and they will reach fair market value. I do not see Paulson getting tough with his friends at Goldman Sachs and the banks and buying those assets at deep discounts that would allow the tax payers to make money or come out flat on the deal. If he is willing to promise no favors and deep discounts on the assets purchased, I am for it!

  3. 3 andrew September 24, 2008 at 11:41 am

    Excellent post. Always admire Warren Buffet for his insights. I wonder if George Soros will ever come out and say such things.

  4. 4 bmbull September 24, 2008 at 1:31 pm

    Warren Buffett speaks in favor of the bailout because he is now a part of it, and stands to benefit from it. He’s picked sides, and he’s sided with the Wall Street cabal that created this mess in the first place.

    Reminds me a lot of Bill Gross begging for the Fannie/Freddie deal to go through…

  5. 5 jwojdylo September 24, 2008 at 1:40 pm

    Buffett has been a great investor his whole life; I am sure he will find a way to make this work out…hopefully!


  6. 6 lee September 24, 2008 at 2:30 pm

    Without any doubt, allowing events to run their natural course will have severe consequences, as human folly always does. But trying to prolong the high by spending the U.S. government into bankruptcy and saddling U.S. taxpayers with the bill is worse still — morally reprehensible in the short run, and economically disastrous in the long. One way or the other, the piper will have to be paid. It is better by far, both on economic and constitutional grounds, that it be sooner rather than later, and that, after the crisis has run its course (as it will), Americans decide to return to the wiser financial system — money based on a precious metal standard — that both the Founders and the Constitution countenance.

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