How Buffett Saved Paulson's Bacon (And Made a Killing, Too)by Justice Litle, Editorial Director, Taipan Publishing Group
“You know, it's not like Pearl Harbor where you could look at what happened with your own eyes and decide you had to do something that day. But this is sort of an economic Pearl Harbor we're going through. And I think most of [congress] will get it. And I do believe they will do what's right for the country. They may vent their spleen a little bit by getting mad about the people that brought us into that, and I don't blame them for that. I might do that privately, too. But in the end, you know, Republican, Democrat, I think they've got the interest of the country at heart and I think they will do the right thing. But I hope they do it soon.”
- Warren Buffett, CNBC interview transcript, in defense of the Paulson bailout plan
And the wild swings continue... The Dow is up 250 points as I write, on sweetened odds that a bailout deal will come through. Round and round and she goes; where she stops, nobody knows.
It would be more accurate to say we're all damned furious. As is colleague, Adam Lass.
On Thursday Adam wrote, “I do not think that we should be handing the keys to the vault to the same group who robbed it in the first place. And we certainly should not give away our right to ask them what the hell they are doing with our money. Or to put them in jail if they lie about it.”
If my inbox is a fair judge, most of you would not quibble with Adam’s view.
I have to admit, from a personal standpoint, I’m not nearly as angry about all this as many of you. It’s not that I’m OK with it. Far from it. More that this kind of thing has been going on for so long, my internal rage-o-matic has run out of gas. (That’s why I gave up cable news a long time ago.)
We are in this predicament because of human nature... and human nature is old as the hills. The greed-hubris-crisis cycle has been rising and falling with the tides for thousands of years. (It probably kicked in when the Lydians invented money, back in the sixth or seventh century B.C.) As long as empires have been around to rise, they have been around to fall. And this is simply how it happens.
I like to talk about the von Mises prophecy -- the “Austrian Endgame” that foresaw this decades ago -- but the predictability of human nature stretches back even further than that.
In fact, one could argue that Scottish historian Alexander Frasier Tytler saw all this coming centuries ago. These are the words of a man born in 1747 -- 29 years before America was born:
A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury, with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship.The average age of the world's greatest civilizations has been two hundred years. These nations have progressed through this sequence. From bondage to spiritual faith; from spiritual faith to great courage; from courage to liberty; from liberty to abundance, from abundance to complacency; from complacency to apathy, from apathy to dependence, from dependence back into bondage.
Doesn’t make for fun reading. But it does help explain a few things, no?
The Real Reason Congress Is Upset
As you have no doubt seen if you’ve turned on the news, Congress is hopping mad about the sweeping nature of the Paulson plan. Some of them are livid over the unchecked power grab (as my colleague Adam is).
But you know what the politicians on Capitol Hill were really upset about ? The fact that they weren’t getting their fair share.
In other words, with all this loot being handed out for Wall Street, where is the loot for Main Street? If we’re going to ransack the Treasury, shouldn’t everyone get a cut?
Shouldn’t the voters of this great nation have their misery eased and their pain soothed? And should those voters not be eternally grateful for the wise and caring stewardship of their elected officials, gently but firmly steering the cash spigot their way?
Bailouts for fat cats? Boooo! Bailouts for all the voters of the land? Hooray! That’s why this thing is going to get bigger, not smaller. (And bigger, and bigger, and bigger...)
Maybe the government will wind up making money on the Paulson deal, as some (like Warren Buffett) now argue. But in the long run, does it really make a difference? In terms of the grand sweeping cycles, we know how these movies all end.
Tytler saw it coming. So did Walt Kelly, the creator of Pogo, who wrote, “We have met the enemy and he is us.”
Buffett to the Rescue?
But anyway, back to the topic at hand... When this whole thing gets written up in the history books, Warren Buffett will have a noted role in the drama.
The “Oracle of Omaha” has built an image of folksy credibility over the years. It’s a neat trick, really. The richest man in the world (give or take a few billion, according to official tallies) has managed to portray himself as a sort of “everyman.”
And so when Buffett told Congress to “WAKE UP!” in a telephone interview with CNBC on Thursday, Wall Street breathed a sigh of relief.
The details are a little complex, so here is my quick and dirty take on what happened:
Buffett puts together a fantastically, amazingly great deal for a piece of Goldman Sachs... a deal that is set to earn Berkshire billions in profit at near zero risk. (Barry Ritholtz has a great take on this.)
The risk on the Goldman deal was zero, or close to zero, because Buffett likely got a federal guarantee that Goldman would not be allowed to fail. That was Buffett’s reward for stepping up, knowing he could lend stability with his mere presence.
Treasury Secretary Hank Paulson (who used to run Goldman Sachs and put this whole thing together) then pulled Buffett aside and said something like “OK, Warren. You’re going to make out like a bandit here... How about you help out Ben (Bernanke) and me a little, too? If you could get Congress to put up or shut up, that would be swell.”
Buffett says “OK, Hank. I’m your man,” and agrees to be interviewed on CNBC... where he states loudly and clearly that the bailout deal must get done, that Paulson is a good man doing a necessary thing, and that we will face “economic Pearl Harbor” if Congress doesn’t approve the whole shebang pronto. (You can read the transcript for yourself.)
So the Oracle of Omaha locks in another killer deal (the kind that only he could pull off)... burnishes his image as the wise man who keeps his head while others lose theirs all around him... maintains his folksy “aw shucks” style by voicing his belief that Republicans and Democrats will “do the right thing”... and gets credit for helping save the system to boot.
Neat trick, huh? No wonder the markets rallied...
And by the way, for those of you who might be wondering (or assuming): I’m no Buffett hater. I think the guy is brilliant. For anyone who wants to learn more about him, I highly recommend The Making of an American Capitalist by Roger Lowenstein. It’s a great story.
But the fact that Buffett is a brilliant investor and a first-rate mind doesn’t change the fact that he’s deep in the game... and that he’s happy to exploit every edge he can get. It’s that old Chicago motto: Ubi Est Mea (Where’s Mine?)
A Lot of Levers Left to Pull
It wasn’t just Buffett who got a great deal in the Goldman quid pro quo. Paulson did, too. Having the smartest investor in the world in your corner is always a nice thing. On the subject of “who will be the next Treasury Secretary,” Buffett had this to say:
… if I were running things, Republican or Democrat, I would ask Hank to stay on. I mean, you don't get talent like that very often in any administrative job. And the guy pays an enormous price to do it. He's probably sleeping three or four hours a night. He knows the market. He's got the interests of the country at heart. So I think if I were either Barack Obama or John McCain and found myself in the White House in January, I would go down there and say, 'Hank, do me a favor, stick around another year.'
“Hammerin’ Hank” will never again get an endorsement quite like that one.
So what does this mean to you and me? I think it’s a good reminder of how powerful the system still is, even now, after all that’s happened.
They’ve got “a lot of levers left to pull,” as a friend of mine likes to say.
Central banks all around the world have trillions in cash reserves... Uncle Sam has a printing press that chugs out the world’s reserve currency at the touch of a button... and there are plenty of influential “super investors” like Buffett out there, not to mention deep-pocketed sovereign wealth funds, which are willing to step up to the plate when asked.
This is why I think we’re headed up -- maybe way, way up -- in the short to intermediate term. I don’t take a Pollyanna view of how all this will play out long term. I just think we’ve gotten a taste of how good these guys are, and how well they play the game.
For what it’s worth, Marc Faber (aka “Dr. Doom”) agrees... sort of.
In a Q&A session with reporters in Hong Kong, Faber said the $700 billion rescue plan won’t be enough. He thinks homeowners should be bailed out, too... that this whole mess will take longer than six months to a year to solve... and that the S&P could rally as much as 14% on news of a bailout plan being finalized. That’s a pretty big pop.
Faber then thinks things will get ugly again sometime in 2009. (He could well be right on that. We’ll see...)
“You know, it's not like Pearl Harbor where you could look at what happened with your own eyes and decide you had to do something that day. But this is sort of an economic Pearl Harbor we're going through. And I think most of [congress] will get it. And I do believe they will do what's right for the country. They may vent their spleen a little bit by getting mad about the people that brought us into that, and I don't blame them for that. I might do that privately, too. But in the end, you know, Republican, Democrat, I think they've got the interest of the country at heart and I think they will do the right thing. But I hope they do it soon.”
- Warren Buffett, CNBC interview transcript, in defense of the Paulson bailout plan
And the wild swings continue... The Dow is up 250 points as I write, on sweetened odds that a bailout deal will come through. Round and round and she goes; where she stops, nobody knows.
It would be more accurate to say we're all damned furious. As is colleague, Adam Lass.
On Thursday Adam wrote, “I do not think that we should be handing the keys to the vault to the same group who robbed it in the first place. And we certainly should not give away our right to ask them what the hell they are doing with our money. Or to put them in jail if they lie about it.”
If my inbox is a fair judge, most of you would not quibble with Adam’s view.
I have to admit, from a personal standpoint, I’m not nearly as angry about all this as many of you. It’s not that I’m OK with it. Far from it. More that this kind of thing has been going on for so long, my internal rage-o-matic has run out of gas. (That’s why I gave up cable news a long time ago.)
We are in this predicament because of human nature... and human nature is old as the hills. The greed-hubris-crisis cycle has been rising and falling with the tides for thousands of years. (It probably kicked in when the Lydians invented money, back in the sixth or seventh century B.C.) As long as empires have been around to rise, they have been around to fall. And this is simply how it happens.
I like to talk about the von Mises prophecy -- the “Austrian Endgame” that foresaw this decades ago -- but the predictability of human nature stretches back even further than that.
In fact, one could argue that Scottish historian Alexander Frasier Tytler saw all this coming centuries ago. These are the words of a man born in 1747 -- 29 years before America was born:
A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury, with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship.The average age of the world's greatest civilizations has been two hundred years. These nations have progressed through this sequence. From bondage to spiritual faith; from spiritual faith to great courage; from courage to liberty; from liberty to abundance, from abundance to complacency; from complacency to apathy, from apathy to dependence, from dependence back into bondage.
Doesn’t make for fun reading. But it does help explain a few things, no?
The Real Reason Congress Is Upset
As you have no doubt seen if you’ve turned on the news, Congress is hopping mad about the sweeping nature of the Paulson plan. Some of them are livid over the unchecked power grab (as my colleague Adam is).
But you know what the politicians on Capitol Hill were really upset about ? The fact that they weren’t getting their fair share.
In other words, with all this loot being handed out for Wall Street, where is the loot for Main Street? If we’re going to ransack the Treasury, shouldn’t everyone get a cut?
Shouldn’t the voters of this great nation have their misery eased and their pain soothed? And should those voters not be eternally grateful for the wise and caring stewardship of their elected officials, gently but firmly steering the cash spigot their way?
Bailouts for fat cats? Boooo! Bailouts for all the voters of the land? Hooray! That’s why this thing is going to get bigger, not smaller. (And bigger, and bigger, and bigger...)
Maybe the government will wind up making money on the Paulson deal, as some (like Warren Buffett) now argue. But in the long run, does it really make a difference? In terms of the grand sweeping cycles, we know how these movies all end.
Tytler saw it coming. So did Walt Kelly, the creator of Pogo, who wrote, “We have met the enemy and he is us.”
Buffett to the Rescue?
But anyway, back to the topic at hand... When this whole thing gets written up in the history books, Warren Buffett will have a noted role in the drama.
The “Oracle of Omaha” has built an image of folksy credibility over the years. It’s a neat trick, really. The richest man in the world (give or take a few billion, according to official tallies) has managed to portray himself as a sort of “everyman.”
And so when Buffett told Congress to “WAKE UP!” in a telephone interview with CNBC on Thursday, Wall Street breathed a sigh of relief.
The details are a little complex, so here is my quick and dirty take on what happened:
Buffett puts together a fantastically, amazingly great deal for a piece of Goldman Sachs... a deal that is set to earn Berkshire billions in profit at near zero risk. (Barry Ritholtz has a great take on this.)
The risk on the Goldman deal was zero, or close to zero, because Buffett likely got a federal guarantee that Goldman would not be allowed to fail. That was Buffett’s reward for stepping up, knowing he could lend stability with his mere presence.
Treasury Secretary Hank Paulson (who used to run Goldman Sachs and put this whole thing together) then pulled Buffett aside and said something like “OK, Warren. You’re going to make out like a bandit here... How about you help out Ben (Bernanke) and me a little, too? If you could get Congress to put up or shut up, that would be swell.”
Buffett says “OK, Hank. I’m your man,” and agrees to be interviewed on CNBC... where he states loudly and clearly that the bailout deal must get done, that Paulson is a good man doing a necessary thing, and that we will face “economic Pearl Harbor” if Congress doesn’t approve the whole shebang pronto. (You can read the transcript for yourself.)
So the Oracle of Omaha locks in another killer deal (the kind that only he could pull off)... burnishes his image as the wise man who keeps his head while others lose theirs all around him... maintains his folksy “aw shucks” style by voicing his belief that Republicans and Democrats will “do the right thing”... and gets credit for helping save the system to boot.
Neat trick, huh? No wonder the markets rallied...
And by the way, for those of you who might be wondering (or assuming): I’m no Buffett hater. I think the guy is brilliant. For anyone who wants to learn more about him, I highly recommend The Making of an American Capitalist by Roger Lowenstein. It’s a great story.
But the fact that Buffett is a brilliant investor and a first-rate mind doesn’t change the fact that he’s deep in the game... and that he’s happy to exploit every edge he can get. It’s that old Chicago motto: Ubi Est Mea (Where’s Mine?)
A Lot of Levers Left to Pull
It wasn’t just Buffett who got a great deal in the Goldman quid pro quo. Paulson did, too. Having the smartest investor in the world in your corner is always a nice thing. On the subject of “who will be the next Treasury Secretary,” Buffett had this to say:
… if I were running things, Republican or Democrat, I would ask Hank to stay on. I mean, you don't get talent like that very often in any administrative job. And the guy pays an enormous price to do it. He's probably sleeping three or four hours a night. He knows the market. He's got the interests of the country at heart. So I think if I were either Barack Obama or John McCain and found myself in the White House in January, I would go down there and say, 'Hank, do me a favor, stick around another year.'
“Hammerin’ Hank” will never again get an endorsement quite like that one.
So what does this mean to you and me? I think it’s a good reminder of how powerful the system still is, even now, after all that’s happened.
They’ve got “a lot of levers left to pull,” as a friend of mine likes to say.
Central banks all around the world have trillions in cash reserves... Uncle Sam has a printing press that chugs out the world’s reserve currency at the touch of a button... and there are plenty of influential “super investors” like Buffett out there, not to mention deep-pocketed sovereign wealth funds, which are willing to step up to the plate when asked.
This is why I think we’re headed up -- maybe way, way up -- in the short to intermediate term. I don’t take a Pollyanna view of how all this will play out long term. I just think we’ve gotten a taste of how good these guys are, and how well they play the game.
For what it’s worth, Marc Faber (aka “Dr. Doom”) agrees... sort of.
In a Q&A session with reporters in Hong Kong, Faber said the $700 billion rescue plan won’t be enough. He thinks homeowners should be bailed out, too... that this whole mess will take longer than six months to a year to solve... and that the S&P could rally as much as 14% on news of a bailout plan being finalized. That’s a pretty big pop.
Faber then thinks things will get ugly again sometime in 2009. (He could well be right on that. We’ll see...)
No comments:
Post a Comment