Buffett lets public down…again

Jan 21, 2010 18:29 UTC

The public has always seen in Warren Buffett a different kind of capitalist, an honest observer providing sound financial advice regardless of his personal interests. But is he?

When it comes to his own holdings Buffett seems to use a carefully cultivated reputation for financial rectitude to feather his own nest.

On Wednesday he came out against Obama’s proposed bank tax, but his comments were inconsistent. On one hand he’s always maintained banks needed to be bailed out, yet he opposes ways to make them pay for it. At this point, financial giants in which Buffett has large stakes — Wells Fargo, Goldman Sachs and General Electric — all benefit from an implicit too-big-to-fail government insurance policy. How can Mr. Buffett, an insurance executive, argue that it’s inappropriate to charge them for it?

This is just the latest example of Buffett talking his book.

Buffett also lobbied for and profited greatly from the bailouts. He invested in Goldman, he said, with the expectation that Congress would “do the right thing” by passing the Troubled Asset Relief Program. In other words, it was a bet on a bailout.

Later he mocked the stress test, which forced over-leveraged banks to raise needed capital. This was bad for Buffett because it diluted his stakes in banks.

Less well-known is that Buffett was the first to propose a private-public partnership structure in order to rescue troubled banks. In a letter to Hank Paulson in the fall of ’08, cited in Andrew Ross Sorkin’s recent book, Buffett pitched his idea for a “public-private partnership fund” that would use public debt to finance private bets on toxic assets. When Tim Geithner rolled out a similar plan a few months later, it was widely panned as a giveaway to banks.

Buffett later complained about bailouts in his annual letter to Berkshire investors, saying that government subsidized funding put firms like Berkshire at a disadvantage. He failed to note that public subsidies — in particular FDIC’s Temporary Liquidity Guarantee Program — helped to keep afloat the eight banks in which Berkshire had a stake.  From the end of ’08 through July of ’09, 75 percent of the debt sold by these eight banks came with the explicit government guarantee offered by TLGP. Without it, many might have failed, wiping out Berkshire’s equity stake.

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

Those who follow him closely are well aware that he talks his own book, but the wider public still believes him to be a trustworthy broker of unbiased financial advice and commentary. They shouldn’t.

Buffett didn’t respond to requests for comment.

COMMENT

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Let’s say RIP to PPIP

Sep 24, 2009 19:21 UTC

Remember PPIP? The Public-Private Investment Program was to provide cheap government financing to encourage investors to overbid for banks’ toxic assets.

Investors would overbid, it was thought, because they were being offered a free put option. If the toxic assets they bought fell further in value, taxpayers would be left holding the bag.

The program has been largely left for dead, but the FDIC still sees some life in its part of the plan. Last week, the agency had a pilot sale, offering loans out of the estate of failed Franklin Bank, whose assets are in FDIC receivership.

Sure enough, the winning bidder elected nearly the maximum available amount of non-recourse leverage, resulting in a 22 percent premium for the assets over bids that didn’t take advantage of leverage.

On the surface, this seems like a good thing for taxpayers, since the higher purchase price accrues to the FDIC’s Deposit Insurance Fund.

But in a new paper, Linus Wilson of the University of Louisiana at Lafayette argues that while the auction prices are increased by leverage, the increase is offset by the loan guarantee the FDIC makes as part of the deal.

So at best it’s a wash and at worst the “subsidized leverage discourages the winning bidder from maximizing the value of loan portfolios.”

If true, this last part is problematic. The point of getting assets back into private hands is that private investors are supposed to be better than the FDIC at managing them. But if the structure of the sale discourages investors from maximizing value, then FDIC may be short-changing itself in the long run.

At least in this case, the 22 percent purchase premium was captured by the Deposit Insurance Fund, since the pilot sale was for assets already in FDIC receivership.

But FDIC conducted the test with an eye toward using it on living banks. If it does so, shareholders and creditors of those banks will capture any increased value that results from government leverage, while taxpayers will be left holding most of the risk.

Another potential problem according to Wilson: Inflated prices from PPIP auctions may give other banks an excuse to mark up their own assets, reducing their incentive to raise necessary capital.

A better idea is to let asset prices fall to levels that don’t require government support. Shareholders and bank creditors should eat those losses. Such a recapitalization will put the financial system on firm footing again, providing a strong foundation for sustainable growth.

COMMENT

An sin el espaol David Silva en su centro del campo debido a una lesin, los “citizens” tenan el baln aunque no lograban definir ante el guardameta estadounidense Brad Guzan.

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