In the LA Times today, Warren Buffett endorsed the bailout plan as "a rescue plan for America." He went on to say:
"If we could do the deal that is available to the United States government and have its staying power, and its borrowing costs, we would make significant money. I would love to have, if they buy the assets at market price, I would love to have 1% of the profit or loss that results from buying these assets from troubled financial institutions."
Okay, well, that suggests a second deal:
I hereby offer to sell, straight up, my family's share of the bailout, both payouts and subsequent profits, to Mr. Warren Buffett. If he'll write me a check for what it will cost me in taxes, I'll sign over to him my share of the profits, if any.
Seriously, if Buffett really "would love to have 1% of the profit or loss that results from buying these assets from troubled financial institutions," then I am all in favor of him ponying up $7 billion for 1% of the action.
Indeed, I would be feeling a lot better about this deal if Buffett, his buddy Bill Gates, and the rest of the Forbes 400 put together a syndicate to, say, buy 2/7th of the bailout for $200 billion dollars. I'd love for them to have a say in how it's spent as long as they had substantial skin in the game. Buffett has been investing billions in Goldman Sachs and GE in return for 10% interest and warrants to buy stock at certain prices. I'd trust Buffett to come up with a better bailout plan than Paulson or Congress ... but only if Buffett had billions riding on it himself.
By the way, Buffett offers a caveat on his prediction:
"If they buy them at market, they will realize a significant profit over time . . . but the key is buying at market prices."
Indeed. But if they buy them at market prices, how do insolvent banks get bailed out?
I'm guessing about $2 to $2.5 trillion in paper wealth has evaporated in California houses alone, with similarly scaled losses in the other 49 states' houses.
On top of that, there's a possibility that those losses in wealth would be much bigger if the entire financial system comes tottering down because of the mortgage meltdown and we go back to an economy based on trading salt for rifle cartridges.
But, preventing that general collapse isn't going to make those 4 to 5 trillion in paper losses go away. That wealth isn't coming back in the real world because that wealth never really existed.
Now, the big question that I haven't seen answered is: How much of the 4 to 5 trillion was wasted on consumer crap during the bubble as if it were real? I don't know. Personally, I didn't spend more during the Bubble because I never believed in the Bubble price for my home. But, I'm driving a 1998 Accord with 105,000 miles on it, while a lot of other people on the freeway are driving 2008 Lexuses with $4,000 rims, so it seems as if other people took the market price of their homes more on faith.
So, I'm left wondering whether $700 billion (or, I guess, $810 billion in the Senate's version) is going to be enough to prevent a collapse of the financial system?
UPDATE: So, how do you price financial assets if the market has locked up? I have no idea what to do with all the derivatives and other financial black magic, but the underlying mortgages aren't that complicated. The good news is that rents weren't much affected by the bubble. Rents tend to trend upward at a fairly stable rate over the years. In California, house purchase prices got wildly out of wack with house rents. We also have readily available on the Internet a vast amount of information on rental properties comparable to each mortgaged house -- Dr. Housing Bubble typically looks at a half dozen comparable rental units for each of his Real Homes of Genius awards.
So, it wouldn't be that hard to come up with a relatively simple spreadsheet to value homes based on rents in that area. From that, the government could value mortgages. One big technical problem might be reassembling sliced and diced mortgages. But the biggest problem is that 4 or 5 trillion in wealth just vanished and some unknown fraction of that has already been spent.
My published articles are archived at iSteve.com -- Steve Sailer
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10 comments:
"But if they buy them at market prices, how do insolvent banks get bailed out?"
This is the question I keep asking over and over when I hear talk of how the bailout will save us.
Either you overpay for the properties, in which case taxpayer dollars are flushed down the toilet, or you pay fair value, in which case you don't actually help anyone.
"If they buy them at market, they will realize a significant profit over time . . . but the key is buying at market prices."
And who's to say they will? How are you supposed to ensure the government buys $700 billion of real estate, all at market prices? There is a powerful incentive for banks to maximize the price. Will the Fed have that power - will the folks involved get a cut of the differential between what the govt pays and what the govt sells it for - or will it be salaried schleps making all the purchases? My guess is the latter. This is government, after all.
We should also get every last damn congresscritter on the record, telling us how much it'll actually cost us, so they have no excuses 2-4-6 years from now. We should be generous, and give them a $50 billion margin or error.
For so very may reasons, we do not want the government buying any more real estate. If they do, can't you just see that as one more argument they'll use for mass immigration/amnesty? "But...we've got all this real estate we need to sell. We can't kick them out now!"
Trust me on the latter point: you heard it here first.
You know America is past it's peak when the Sage of Omaha not only:
(a) bets against America (see his position re the dollar and US securities a few years ago), but also
(b) actively propagandizes for the oligarchs as a naked profiteer
I would suspect a relatively decent chunk was spent on illegal drugs, as well as Nikes, etc.
http://www.lewrockwell.com/blog/lewrw/archives/023260.html
I quote, from Dr. Rozeff:
Bernanke spoke recently of the Fed or the government or the tax payers creating liquidity in markets for assets that have closed down or locked up as prices have tumbled drastically. Another case is the interbank loan market that is drying up.
Bernanke is not talking about simply hyping the money supply. That is not the liquidity being referred to. He's talking about the volume and depth of trading in an asset market.
Unfortunately, the Chairman's knowledge of finance is abysmal. There is no way that the government or the Fed can create liquidity or jump start liquidity in a market by injecting liquidity. This is a false medical analogy. The Fed would have to enter the market and become an active participant in it, a dealer with a bid-asked spread. And once it did that, it could not make a price higher than the market price or else the rest of the traders would dump enormous amounts of securities in the Fed's hands. The market would no longer even resemble a free market.
The financial concept that the Chairman is missing is that liquidity is endogenous to a market. It is not exogenous. Markets develop liquidity from within their own trading. It's not something that is imported from outside of the actual trading.
Bernanke should search google for "endogenous liquidity" to find some research on this subject. Congressmen, pay heed. Do not attempt the impossible.
The rest of us should not accept the idea of an outside agent being able to "save" a market by injecting liquidity.
____________________________
This is why I think your spreadsheet based on rents wouldn't work, Steve. Simply by entering the market, the Fed/Treasury changes it--kind of like quantum physics. Also, the rents themselves are distorted to some extent by being cheek-by-jowl with overpriced homes. Or maybe not. And what sort of geographic line do we draw to consider as the local "market" for housing? IOW, it's too complicated to do by committee. The market just has to sort it all out.
--Senor Doug
Buffet also claims that people should pay more taxes yet I have yet to hear of him writing a check to pay extra to the treasury. Instead he says he will put much of his money into Gate’s charity which will protect his wealth from the very taxes he says should be increased.
DJ
"But if they buy them at market prices, how do insolvent banks get bailed out?
They won't be buying houses, they will be buying CDO's, and the really toxic mortgages will be folded in with a lot of loans which were perfectly sound. As you yourself pointed out, sub prime loans represent only 12% of the total. Even if all of these went into foreclosure and the lender were unable to recapture any of his losses by reselling the houses, a CDO with that mixture of assets would be worth 88% of its face value.
What is the market value of these assets now? Merrill Lynch sold itself to BofA for 22 cents on the dollar. In the present market panic, CDOs are worth zero cents on the dollar because they can't be sold at any price. If the government can't make money by buying these assets now at the prices which banks will be willing to offer them in a reverse auction, then the situation is indeed hopeless.
This will not "bail out" the banks in the sense of making them whole again, but it will keep them functioning, and they will ultimately have to take the losses not the taxpayer.
In other words, I think Buffet is right. The bail out can work without costing the taxpayer anything directly. We will have to pay for this speculative binge in other ways, of course. By having a shitty economy for a few years and by inflation a few years after that, but it is better than the alternative.
No, Steve's spreadsheet idea would work. Something very much like his idea was implemented during the Depression -- the Home Owners Loan Corporation. The government sent appraisers around the country to value homes at their Depression prices, paid those prices in exchange for the mortgages, then sold the stuff at a profit in the late 30s. Very straightforward way to get the bad mortgages off peoples' books.
"But, I'm driving a 1998 Accord with 105,000 miles on it, while a lot of other people on the freeway are driving 2008 Lexuses with $4,000 rims, so it seems as if other people took the market price of their homes more on faith."
Do white people in CA buy rims for their cars? Here on the East Coast, only lower class blacks and puerto Ricans do that. The typical cars they are seen on are Honda Civics or older Nissan Maximas. Maybe an old Integra or Trans-Am too. If you see a Lexus with expensive aftermarket rims, it would probably a ten year old used one with 120k miles and a young black guy behind the wheel.
I get the impression from TV that white CA residents are more trashy, stupid and superficial than white Americans in general. Is this accurate?
"No, Steve's spreadsheet idea would work. Something very much like his idea was implemented during the Depression -- the Home Owners Loan Corporation. The government sent appraisers around the country to value homes at their Depression prices, paid those prices in exchange for the mortgages, then sold the stuff at a profit in the late 30s. Very straightforward way to get the bad mortgages off peoples' books."
The HOLC actually lost money when you take into account interest costs and the time value of money, and it wasn't liquidated until the early 1950s. Also, the pre-HOLC mortgage tended to be short (less than ten years) balloon payment loans that the government exchanged for 30 year mortgages. What would the government exchange 30 year mortgages for in this case, 60 year ones?
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