Insights from Warren Buffett on the Financial Crisis that has created an "economic Pearl Harbor".
Hospitality Lawyer with Why the Bailout Bill had to pass, the key to making the bailout work, and how the Treasury can make a profit.
After the Senate passed the Bailout Bill, he talked about what it takes to win the war of Financial Recovery. Buffett's common-sense insights on the $700 billion financial system rescue package are great. Let's hope our Government listens to the compelling logic of how to make this bailout work . . . and how we will all make out better.
I hope the U.S. Treasury and Congress are listening . . .
The "Emergency Economic Stabilization Act of 2008'' is now law. The Senate-revised version of the Bush Bailout Bill was passed by the Senate on October 1 (by a vote of 74 - 25) and finally passed by the House of Representatives at 1:21 pm October 3, 2008 (by a vote of 263 - 171). Speaker Nancy Pelosi signed the bill at exactly 2 pm, and it was rushed to President Bush for his signature within an hour.
Now we just have to figure out what the law means and how it will implemented. Speaker Pelosi has announced that hearings will start next week to find the causes of the crisis and to determine "where we go from here."Warren Buffett's Wisdom on Financial System Crisis . . . How we profit from the bailout bill . . .How to fix the credit crunch. . .
Here is what I took down from a recent interview Warren Buffet gave to CNN after the Senate passed the rescue package this week. I have rephrased many of the questions (or topics) posed by CNN, but Warren's quotes are unaltered, or as close as I could get.Why the financial rescue package had to be passed. There is a lot of concern about the bailout package enriching the "fat cats" on Wall Street. Why do we need this package?
"A lot of fat cats have come down. You look at Bear Stearns, Lehman, AIG and all of that . . . Wall Street has had plenty of pain.
The real problem is the economy. When credit seizes up, everything starts grinding to a halt. And we are seeing that in the economy now. The real question is how to keep it from getting way, way worse . . . which it will . . . unless money starts flowing. So if the assets are purchased at market prices or very close to market prices, the Treasury will make money.
I would love to buy these assets, be able to borrow money at the Treasury's cost and have their staying power. I can't do it. Nobody can do it. That's the reason . . . as the world tries to de-leverage, that you need somebody who can leverage up. The United States Treasury is the only one [that can do it.] And if it is done at market-based prices, I think the odds are very high that the Treasury makes money."What is the KEY to making the $700 billion bailout work?
"Market-based prices."How can the Treasury (or the taxpayers) make a profit on this bailout?
"Market- based prices for the assets purchased! One way to get market-based prices would be to have the Treasury finance various institutions that would invest 20% of their own money to buy these mortgage securities that are for sale. The Treasury would lend 80%. Whoever put up the 20% would not get a dime back until the Treasury got all of its money plus interest plus perhaps a share of the profits.
You would get real market prices that way. You would get people that knew the game. You would get people administering the program . . . buying these mortgages . . . that would care a lot, because the Treasury would have to get all of its money back -- the 80 cents -- before they got their 20 cents, and the Treasury could participate in the profits.
It's just a thought to get market-based pricing into the system and to get some other people with skin in the game who will lose all their money before the Treasury loses a dime."Didn't you say that you have never seen Americans as fearful as they are now? Why did you call the current financial crisis an "economic Pearl Harbor"?
"This is an "economic Pearl Harbor." Everywhere I go, people are worried about whether the institution they are dealing with will be around tomorrow or will honor their checks or whatever it may be. You cannot operate a complicated economic system without confidence. That is like trying to live without oxygen. When you have oxygen, you don't even think about it.
Americans have not thought about whether their money markets were safe or their bank was safe. And you have had big companies not worry that the commercial paper that was coming due tomorrow would be refinanced.
Now, everybody is worried. That worry is contagious. It affects the real economy. It sort of makes it own truth after a while. You have break that cycle, and the Federal government is the only one that can do it. They have the resources.
We had the resources to win the Pacific war after Pearl Harbor. We got off to a terrible start. But we had the resources. We didn't spend a lot of time arguing about who was at fault for having all those ships in the bay. We did not spend a lot of time saying that we had to have a complete battle plan before we even send out the fleet. We just got into action. And everybody sort of joined in. And we really need something similar now."You think we are already in a recession. How long does the recession last?
"I don't know the answer to that. But I know that It is going to be a while.
The [financial system rescue legislation] is not a panacea. It is necessary to prevent something way worse than would otherwise happen but it doesn't cure everything in a month. It doesn't cure everything in 6 months.
We have had an economy that is like a great, great athlete but it has a massive cardiac arrest. The big thing to do is apply resuscitation . . . get the athlete back on his feet. But the athlete is not going to leave the hospital tomorrow. I wish I could say that is going to happen, It is going to take a while, but it will be far, far worse if we don't get right on it."What does this say about Wall Street? In May 2008, you said: "As house prices fall, a huge amount of folly is exposed. You only find out who was swimming naked when the tide goes out." So who surprised you with their clothes off?
"Wall Street has turned out to be . . . a nudist beach basically. Everybody that had a lot of money coming due and didn't know where it was going to come from has been exposed during this period. You couldn't count on the kindness of strangers.
I heard they were going to call off the Wall Street Christmas pageant because they couldn't find three wise men . . . They couldn't find a virgin either, but that was another problem.
There was a lot of folly. But the system will work over time."This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $50 billion of hotel transactions and more than 100 hotel mixed-use deals in the last 5 years alone. Who's your hotel lawyer?