Lunchtime Links 2-11

Feb 11, 2010 18:29 UTC

EU seals deal to help Greece, details murky (Grajewski/Toyer, Reuters) We need to know more about what help is being offered and what strings will be attached to it.

A Greek crisis is coming to America (Niall Ferguson, FT)

Google plans experiment to offer superfast web (Sherr, Reuters)

Buffett takes on Chicago chokepoint with Burlington (Lippert, Bloomberg) This article is 500 words too long, but it’s still interesting!

Immelt disagrees with Paulson’s recollection of Sept ’08 (Layne, Bloomberg) Immelt is lucky that companies like AIG and Goldman have absorbed much of the public’s bad feelings about the bailout. It doesn’t sound like Immelt is really disagreeing with Paulson, he just doesn’t remember discussing GE’s funding problems in the commercial paper market. Uh, really? The Fed created the Commercial Paper Funding Facility in large measure for GE. And GE sold $60 billion of government guaranteed paper through FDIC’s Temporary Liquidity Guarantee Program.

Fed in talks with money market funds to help drain $1 trillion (Torres/Condon, Bloomberg) Interesting….

New black hole simulator uses real star data (Muir, New Scientist)

Driving behind a hearse… (imgur)

Sausage fingers (clusterflock) iPhone users in cold places will appreciate this…

A brief history…

Is Conan O’Brien a $40 million bailout recipient?

Jan 20, 2010 00:22 UTC

Conan O’Brien is expected to receive some $40 million for leaving NBC, the media unit of General Electric, itself among the largest recipients of taxpayer help. While it would be a stretch to compare the late-night talk show host to a Goldman Sachs or Citigroup banker, he’s arguably only a few steps removed.

Though the conglomerate wasn’t a recipient of direct equity aid from the Troubled Asset Relief Program, GE availed itself of perhaps an equally important bailout facility, the Temporary Liquidity Guarantee Program overseen by the Federal Deposit Insurance Corp.

Participants in this scheme were able to issue debt with a government guarantee, receiving explicit taxpayer backing in the event of default. Though GE was just one of 88 firms with outstanding Uncle Sam backed debt as of October 31, its $60 billion of issuance accounted for nearly a fifth of the total.

Unlike some of the banks that received direct equity injections from the government, GE can argue it does not deserve the same scrutiny over compensation that has bedeviled financial companies including Citigroup, Goldman and American International Group.

But without the FDIC’s largess, the group’s troubled financial arm, GE Capital, would have struggled to fund its $650 billion balance sheet. That, in turn, could have forced its parent to liquidate assets, starting with NBC. In a truly worst-case scenario, GE might have even had to seek protection from its creditors.

Had GE been forced to dump NBC in a fire-sale, new owners could have demanded changes to contracts like Mr. O’Brien’s. True, that’s not the same as, say, a Citi banker fighting for a bonus after the government clearly bailed out the bank. But it’s only a few steps removed. So a bit of thanks to taxpayers from Mr. O’Brien may be in order.

Buffett’s Betrayal

Aug 4, 2009 17:54 UTC

When I was 14, Warren Buffett wrote me a letter.

It was a response to one I’d sent him, pitching an investment idea.  For a kid interested in learning stocks, Buffett was a great role model.  His investing style — diligent security analysis, finding competent management, patience — was immediately appealing.

Buffett was kind enough to respond to my letter, thanking me for it and inviting me to his company’s annual meeting.  I was hooked.  Today, Buffett remains famous for investing The Right Way.  He even has a television cartoon in the works, which will groom the next generation of acolytes.

But it turns out much of the story is fiction.  A good chunk of his fortune is dependent on taxpayer largess. Were it not for government bailouts, for which Buffett lobbied hard, many of his company’s stock holdings would have been wiped out.

Berkshire Hathaway, in which Buffett owns 27 percent, according to a recent proxy filing, has more than $26 billion invested in eight financial companies that have received bailout money.  The TARP at one point had nearly $100 billion invested in these companies and, according to new data released by Thomson Reuters, FDIC backs more than $130 billion of their debt.

To put that in perspective, 75 percent of the debt these companies have issued since late November has come with a federal guarantee. (Click chart to enlarge in new window)

buffett-bailout2

Without FDIC’s debt guarantee program, even impregnable Goldman would have collapsed.

And this excludes the emergency, opaque lending facilities from the Federal Reserve that also helped rescue the big banks. Without all these bailouts, the financial system would have been forced to recapitalize itself.

Banks that couldn’t finance their balance sheets would have sold toxic assets at market prices, and the losses would have wiped out their shareholder’s equity.  With $7 billion at stake, Buffett is one of the biggest of these shareholders.

He even traded the bailout, seeking morally hazardous profits in preferred stock and warrants of Goldman and GE because he had “confidence in Congress to do the right thing” — to rescue shareholders in too-big-to-fail financials from the losses that were rightfully theirs to absorb.

Keeping this in mind, I was struck by Buffett’s letter to Berkshire shareholders this year:

“Funders that have access to any sort of government guarantee — banks with FDIC-insured deposits, large entities with commercial paper now backed by the Federal Reserve, and others who are using imaginative methods (or lobbying skills) to come under the government’s umbrella — have money costs that are minimal,” he wrote.

“Conversely, highly-rated companies, such as Berkshire, are experiencing borrowing costs that … are at record levels. Moreover, funds are abundant for the government-guaranteed borrower but often scarce for others, no matter how creditworthy they may be.”

It takes remarkable chutzpah to lobby for bailouts, make trades seeking to profit from them, and then complain that those doing so put you at a disadvantage.

Elsewhere in his letter he laments “atrocious sales practices” in the financial industry, holding up Berkshire subsidiary Clayton Homes as a model of lending rectitude.

Conveniently, he neglects to mention Wells Fargo’s toxic book of home equity loans, American Express’ exploding charge-offs, GE Capital’s awful balance sheet, Bank of America’s disastrous acquisitions of Countrywide and Merrill Lynch, and Goldman Sachs’ reckless trading practices.

And what of Moody’s, the credit-rating agency that enabled lending excesses Buffett criticizes, and in which he’s held a major stake for years?  Recently Berkshire cut its stake to 16 percent from 20 percent.  Publicly, however, the Oracle of Omaha has been silent.

This is remarkably incongruous for the world’s most famous financial straight-shooter. Few have called him on it, though one notable exception was a good article by Charles Piller in the Sacramento Bee earlier this year.

Buffett didn’t respond to my email seeking a comment.

What saddens me is that Buffett is uniquely positioned to lobby for better public policy, but he’s chosen to spend his considerable political capital protecting his own holdings.

If we learn one lesson from this episode, it’s that banks should carry substantially more capital than may be necessary.  You would think Buffett would agree. He has always emphasized investing with a “margin of safety” — so why shouldn’t banks lend with one?

Yet he mocked Tim Geithner’s stress tests, which forced banks to replenish their capital. Why? Is it because his banks are drastically undercapitalized?  The more capital they’re forced to raise, the more his stake is diluted.

He points to Wells Fargo’s deposit funding model being more robust than investment banks’, but that’s no excuse for letting tangible equity dwindle to three percent of assets.  At that low level, the capital structure would have collapsed were it not for bailouts.

And by the way, the strength of Wells’ funding model is a result of FDIC insurance, among the government subsidies Buffett complains about in this year’s letter.

To me this feels like a betrayal.  There’s a reason he’s Warren Buffett and not, say, Carl Icahn.

As Roger Lowenstein wrote in his 1995 biography of Buffett, “Wall Street’s modern financiers got rich by exploiting their control of the public’s money … Buffett shunned this game … In effect, he rediscovered the art of pure capitalism — a cold-blooded sport, but a fair one.”

But there’s nothing fair about Buffett getting a bailout, about exploiting the taxpaying public for his own gain.  The naïve 14-year-olds among us thought he was better than this.

What would Ben Graham say?

COMMENT

Sounds like “The Rich get Richer and the Poor get Poorer”

Posted by appayne1 | Report as abusive
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