Summary
Issue Is Payback, Not Bailout (NewYorkTimes, 2008/09/24)
Buffett Calls Crisis an `Economic Pearl Harbor,' Backs Paulson (Bloomberg, 2008/09/24)
Contents
Issue Is Payback, Not Bailout (NewYorkTimes, 2008/09/24)
- So are you for the bailout or against it? Many people, I'm guessing, don't have an immediate answer to the question. They understand that the financial crisis is serious enough to require a big response from the government. But they also hate the idea of rewarding Wall Street for its failures and are wary of yet another assurance from the Bush administration that this step will be the one that contains the crisis.
- The first thing to understand is that a bailout plan doesn't have to cost anywhere close to $700 billion, so long as it's designed well. The $700 billion number that you see everywhere is an estimate of how much the government would spend to buy deteriorating assets now held by banks. Eventually, the government will turn around and sell these assets, for a price almost certain to be greater than zero. So this $700 billion is very different from $700 billion spent on a war or on Medicare.
- Based on the underlying fundamentals (like the current foreclosure rate and the one forecast for the future), many of the securities appear to be worth something on the order of 75 percent of their original value. But thanks to the fear now gripping the market - not necessarily an irrational fear, given that most forecasts have proven far too sunny over the last year - very, very few of those securities are trading hands. Among those that have, the sales price has been roughly 25 percent of the value.
- Which price is the government going to pay? As Mr. Colander puts it, that's where the action is.
- It clearly shouldn't pay 75 cents on the dollar, or anything close to it. That would mean the Treasury Department - which, in the end, is really you and me - was assuming nearly all the risk. But it probably can't pay 25 cents. That might fail to fix the credit markets, because it would do relatively little to improve financial firms' balance sheets. Firms might then remain unwilling to lend money to businesses and households, which is the whole problem the bailout is meant to solve.
- The most obvious solution is to pay more than 25 cents on the dollar and then demand something in return for the premium - namely, a stake in any firm that participates in the bailout. Congressional Democrats have been pushing for such a provision this week, and it's one of the most important things they have done.
Buffett Calls Crisis an `Economic Pearl Harbor,' Backs Paulson (Bloomberg, 2008/09/24)
- Billionaire investor Warren Buffett, calling the market turmoil ``an economic Pearl Harbor,'' said Treasury Secretary Henry Paulson's $700 billion proposal to prop up the U.S. financial system is ``absolutely necessary.''
- ``The market could not have taken another week'' like last week, Buffett told CNBC today, a day after saying his Berkshire Hathaway Inc. will buy a $5 billion stake in Goldman Sachs Group Inc. ``I think it was the last thing Hank Paulson wanted to do, but there's no Plan B for this.''
- ``I am betting on the Congress doing the right thing for the American public and passing this bill,'' Buffett said. The economy is ``everybody's problem,'' he said, likening it to `a bathtub -- you can't have cold water in the front and hot water in the back.'
- ``It's nice to have a lot of money, but you know, you don't want to keep it around forever,'' Buffett said. ``I prefer buying things. Otherwise, it's a little like saving sex for your old age.''
