Friday, October 03, 2008

Buffett suggests improvement to TARP

From Fortune Magazine:
Warren Buffett suggested Thursday that the U.S. Treasury team with private investors to buy the distressed mortgage assets at the center of the controversial $700 billion Wall Street bailout, and said the price tag of the rescue plan may have to rise.

Buffett, the chairman and CEO of Berkshire Hathaway, called the problems facing world markets "unprecedented" and warned of a "disaster" if Congress does not move faster to shore up the economy.

"We had an economic Pearl Harbor hit," he said ... "For a couple of weeks we've been arguing about who's at fault [and] fooling around while things have gotten a lot worse." ...

"It will cost more to solve this problem today than it did two weeks ago," said Buffett...

But he described a plan he thought of Thursday morning on the way to the Summit that would allow Treasury and private investors to buy assets together. He said his proposal would kickstart demand for mortgage-backed securities, help find a market price for these troubled assets and make it more likely that taxpayers would be made whole or even come out ahead in the bailout.

Under Buffett's plan, Treasury would lend hedge funds, Wall Street firms or any other investors 80% of the price for distressed assets. Investors would benefit from borrowing at lower rates available to the Treasury. But the government would get first claim on the sale of those assets, which means it would get its loan back plus interest and possibly turn a profit. Only then would investors see a penny.

"Now you have someone with 20% skin in the game," explained Buffett. "Believe me, I won't be overpaying if I'm buying with that kind of leverage. And you have someone [the investors] to manage the assets to the extent they need to be managed."

Buffett also noted that the presence of the government in the transactions would raise the price of assets above the absolute firesale levels for which they could now be sold. That would benefit the banks trying to unload them. ...

He said the [financial] problem boils down to widely-held assumption during the housing boom that prices could only go up.
Under this scenario, the private investors would benefit by being able to borrow at ultra-low interest rates that normally only the government can get. They could also get higher potential returns by having higher leverage. Meanwhile, taxpayers are protected because the private investors would take a 100% loss before the government lost a penny. This gives the private investors a very strong incentive to protect taxpayers from a loss.


  1. Great - if thats the solution then thats what we should do. Even under this plan, the money wont be spent for months. For the time being though, lets just pass this turd in a box. Pass it, and then poke it with a stick - put it on a napkin, allow a congressional committee to review it and determine "yes indeed it is turd". Then take that turd mold it into buffets plan, or Sorros' plan or Krugman's plan or whatever.

    No matter what though, just take the first step. Congress, dont send another message of unbridled incompetence and uncertainty like you did on monday! Take your turd in a box, and show the world, at least we can do something. Tell us all, "my fellow americans, we got you a turd, and maybe much more" In any event, just take the turd and move forward!!!

  2. so that means they need to re-write the bill, no?

    "Under Buffett's plan, Treasury would lend hedge funds, Wall Street firms or any other investors 80% of the price for distressed assets."

    Roubini referenced the IMF's September report on 42 systemic banking crises from 1970-2007 that showed only 7 of the 42 had the Govt directly purchasing assets... and these were the most painful, drawn-out recoveries of the 42. the less painful recoveries had Govt financing the asset purchases... like Buffett's idea.

    so to hear Buffett, whom the Treasury may deem worthy of acknowledging (maybe not), push for the Govt to loan money to the banks and investors as opposed to buying the garbage directly is a breath of fresh f*cking air. a form of this alternative was pushed from Day 1 but not even considered because there was "no time to think."

    fear-mongering is a winning motivational tool and a sign of true leadership.

  3. "Million said...

    so that means they need to re-write the bill, no?"

    Maybe so the thing was there really was "no time to think". We had a financial ticking time bomb on our hands. We heard it ticking, but we couldnt see the clock to tell how much time was left - maybe a day, maybe a month - who knows. Rather than sit around and discuss the best way to dispose of it we did the most prudent thing - we cut the wire (pass something to show we are doing what we can - even a hint of leadership should do a lot to placate the credit markets).

    Now that the wire is cut, we still need to figure out how to safely dispose of it (Paulson plan, buffet plan, whatever) but at least we have some time now. (not much but some). Mind you, its still going to blow up, we are going to have a recession, but at least now we can move it to a save distance before we detonate it - diminish the damage if you will.