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Tuesday, March 03, 2009

Warren Buffett Explains How The Bailout Is Crushing Healthy Companies

Now, admittedly, these bailouts were started by the Bush Administration. And, admittedly, to some extent, many of the world's leading countries are taking the same appproach to the problem, so it would seem there's safety in numbers. If everyone's making the same mistake, the enormity of one's own mistake is but a drop in the pond.

HoweverI think it is possible Obama will not even be able to complete one term, before he is given the American version of a No Confidence vote, where Congress will draft a resolution stating their opposition to his policies en masse. An 80-85% vote will do him in. He'll either have to stay in office against a tidal wave of insurrection, or he will have to do the honorable thing and leave.

This is not impeachment I'm talking about. And, it will be hypocritical on the part of Congress, because clearly they are on board with his agenda (even initiating it in many ways), but voter anger will trump all, and I have a very hard time we are going to stand for a 4000 Dow, and 3000 is going to make us that much more angry.

If Obama is given such an American No Confidence vote, look for it to happen sometime late-2009 to early-2010. That way, our pork-fed Congress people will feel assured they will not be thrown out of office.

Read what Warren Buffett has to say, and tell me if my quasi-prediction is really so crazy.


warrenbuffett-concerned_tbi.jpg

There's a lot of talk about how the bailouts are creating moral hazard and rewarding bad behavior. But those are pretty abstract ideas, the kind of things people wonder whether or not we can afford to worry about while the economy is tanking. Sure we'll pay a long run price  for screwing up the market's discipline but in the long run we're all dead.

So forget "moral hazard" and just look at Warren Buffett's description of what is happening to his home construction business, Clayton Homes. Clayton, which makes pre-fab homes, also has a lending business. Surprisingly, Clayton hasn't been crushed by the markets because it maintained high lending standards and doesn't have a balance sheet overflowing with defaulting loans.

But it is getting crushed anyway. But the crushing agent is the government not the markets. You see, the government has extended loan guarantees of various sorts to troubled financial companies. This means that a bank or a financial company able to borrow under a government backed facility will be able to raise capital at low prices. Clayton gets crowded out of the market as would-be lenders flock to the safety of the government backed facilities. What's more, Clayton must then attempt to compete with these borrowers despite it's higher borrowing costs.

Here's the news from Buffett's letter:

Clayton's lending operations, though not damaged by the performance of its borrowers is nevertheless threatened by an element of the credit crisis. Funders that have access to any sort of government guarantee -- banks with FDIC-insured deposits, large entities with commercial paper backed by the Federal Reserve, and others who are using imaginitive methods (or lobbying skills) to come under the government's umbrella -- have money costs that are minimal. Conversely, highly-rated companies, such as Berkshire, are experiencing borrowing costs that, in relation to treasury rates, are at record levels. Moreover, funds are abundant for the government-guaranteed borrower, but often scarce for others no matter how creditworthy they are.

This unprecedented "spread" in the cost of money makes it unprofitable for any lender who doesn't enjoy government-guaranteed funds to go up against those with favored status. Government is determining the "haves" and the "have nots." That is why companies are rushing to convert to bank holding companies, not a course feasible for Berkshire.

Though Berkshire's credit rating is pristine -- we are one of only seven AAA corporations in the country -- our cost of borrowing is now far higher than competitors with shaky balance sheets but government backing. At the moment it is far better to be a financial cripple with a government guarantee than a Gibraltar without one.


When even the best performers are being destroyed by the bad policy of the government, then Capitalism is dead. And, we're not talking about some abstract "Capitalism" they speak of in University textbooks. We're talking about the simple ability of people to buy and sell goods and services that they want and need.

When we can no longer get the things we want and need, there will be absolute chaos. Chaos foments revolutions. The last thing our pork-fed Congress wants is a revolution.

I'm not a bear on America. But, I do believe our nation will have to find a sacrificial lamb to pay for this crisis. And, since Obama is the one selling the bailout, and the never-ending pork-barrel policy, and since Obama is the one stacking his Cabinent with retread politicians who refuse to pay their taxes, I think Obama will be the one to go.

We live in interesting times.
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posted by Pastorius at permanent link#

15 Comments:

Blogger midnight rider said...

I fell your pain, Warren. The wife and I struggle to pay our mortgage every month though she's been out of work for nine. We're still getting it paid. Barely, some months, but still.

But my bank, my mortgage company, those curs at CITIGROUP see fit to help the people who took loans they had no business taking and now can't pay. Going to lower their payments for a while. Because they can't pay.

But they can't help me because I pay on time every month. Slides into that grace period a bit but it's there on time.

What they do do for me is call me 3 or 4 days into that grace period to see when I will be mailing the check. It's not past due, mind you, but they want their money from the people who can pay every month.

So I usually politely tell them it was sent, give them an earful about how dare they come at me like that when they're the ones looking for a hand out and have no interest in helping their good customers then I politely tell them to fuck off.

They don't like that so much. Too bad. I have no confidence in them, either. Ask to speak to their loss mitigation department and they say you have to be 60 days past due to even get in that door.

So Mr. Filthy Rich Warren Buffet I feel your pain.

I'll get the torches and pitchfork, you get the tar and feathers.

Pasto can bring the beer.

We'll show 'em what a no confidence vote looks like.

Tuesday, March 03, 2009 9:08:00 pm  
Anonymous Anonymous said...

What kind of beer? Oh, wait - give it up for Lent. . .

I'll take a pitchfork, though!

Ro

Tuesday, March 03, 2009 9:13:00 pm  
Blogger midnight rider said...

Can I interest you in some feathers as well?

Tuesday, March 03, 2009 9:23:00 pm  
Blogger WC said...

Hmmmm... I always pay well inside the grace period. I did get a call once from some bank about some payment that was in the grace period - I forget which - and told them I pay when my cash flow allows it and told them to f**k off - nicely. OK maybe not so nicely. never heard form them again.

Tuesday, March 03, 2009 9:31:00 pm  
Blogger midnight rider said...

Right -- some torches for WC please!

Tuesday, March 03, 2009 9:41:00 pm  
Blogger Pastorius said...

And, of course, all of us who own homes, and/or are gainfully employed, are expected to foot the bill for our medical expenses as well.

However, if you do not have a job and are a renter, then someone else foots the medical bill for you as well.

Tuesday, March 03, 2009 9:46:00 pm  
Blogger midnight rider said...

YES YES YES! ANOTHER round of brew for Mr Pastorius if you would please.

Tuesday, March 03, 2009 9:49:00 pm  
Blogger Epaminondas said...

This stuff IS the first step on the path to...'we pretend to work and they pretend to pay us'

Why not just do whatever we have to at 40-60% of cruise speed, depending on how good the coffee was that day..take our 6 weeks or 8 weeks off paid, since there are not enough jobs to go around and more workers can be hired that way, and have a few pops, get laid, and forget it all.

If professional excellence and hard work has greatly diminished rewards compared to being 60 days behind...how long until ethics change?

How long can you be a schmuck for an ideal?

How long until the smart cynically play the system instead of writing patentable drivers for artificial limbs?

How long until the inventors ratchet it back and the producers slink into the back ground?

10 years?

Less than a generation, certainly.

We had better organize to save this stinking place

Tuesday, March 03, 2009 9:56:00 pm  
Blogger midnight rider said...

Epa let's stay focused on that "Why not just do whatever we have to at 40-60% of cruise speed, depending on how good the coffee was that day..take our 6 weeks or 8 weeks off paid, and have a few pops, get laid, and forget it all" idea.

That has some merit. The best, um, stimulus I've heard in awhile.


You're right of course. Maybe the Tea Parties are the start of that organizing.

If apathy and sloth doesn't set in first. . .

Tuesday, March 03, 2009 10:10:00 pm  
Blogger Pastorius said...

Let me be clear, I do not think Buffett was being obnoxious in his complaint here. He's telling us the system is broken, and it is not rewarding those who are doing what's right.

When even Buffett is severely negatively effected, then we know that those of us who might tend to believe we're just going through a bad time are not in it alone.

Tuesday, March 03, 2009 10:37:00 pm  
Anonymous Anonymous said...

Yes, feathers would be great, too.

Buffett is getting what he wanted. Tough.

If he couldn't read the "signals" -1. Obama told the incredulous Charlie Gibson (that foaming conservative- ha!) that he wanted to raise cap gains taxes because of "fairness" notwithstanding the negative revenue and investment effects; and 2. The widely broadcast sound bite with O telling the interviewer that he rejected the "idea" (!!!) that the Constitution put limits on government and was more interested in "positive, economic" rights.

Then too freakin' bad for him.

This is just as annoying as when Rove told O'Reilly (when O'R was whining that "no one knew" about the Freddie/Fannie/CRA treasonous caba;) that the Wall Street Journal had been reporting on it for three years, and O'Reilly dismisses Rove with "that's just a financial paper." Um, where better to get financial news, Bill?

So, too, the cap gains comment should have given anyone with a smidgen of financial or economic savvy some pretty damn serious pause. That would be Warren B.

Now, I would LOVE to see Soros' portfolio performance over the same period, btw.

Ro

Tuesday, March 03, 2009 11:17:00 pm  
Blogger Pastorius said...

Ro,
Good point. I had forgotten that Buffett endorsed Obama.

Oh brother.

Tuesday, March 03, 2009 11:41:00 pm  
Blogger midnight rider said...

Pasto -- I agree with what he said and not taking it as obnoxious. Just bringing it down to my/our level.

"At the moment it is far better to be a financial cripple with a government guarantee than a Gibraltar without one."

Still, I doubt his wife has to ask hijm how much she can afford at the grocery store this week, name brand or generic? Jst because he's doing the right thing and trying to keep up with the bills while some dude downtown was just told he'll only have to make half mortgage payments for the next few months (fucking CITIGROUP).

Yeah, the fucking financial cripple down the street is eating better than I can afford to feed my family.

Tuesday, March 03, 2009 11:42:00 pm  
Blogger Always On Watch said...

Pastorius,
I do believe our nation will have to find a sacrificial lamb to pay for this crisis. And, since Obama is the one selling the bailout, and the never-ending pork-barrel policy, and since Obama is the one stacking his Cabinent with retread politicians who refuse to pay their taxes, I think Obama will be the one to go.

I hope you're right.

Wednesday, March 04, 2009 12:13:00 am  
Blogger SamenoKami said...

Buffet is an uber douche bag. He funded and campaigned for Obama and now he's upset? Why Mr. 'Oracle' are you whining? You got what you wanted. You should be happy. If there were a way for rich Obamatrons to lose it all w/o affecting everyone else, it would be such sweet irony.
A$$-Whole!!!

Wednesday, March 04, 2009 3:54:00 pm  

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