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.

However, I 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.

From the Business Insider:

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.