Obama is Bush part 3

Recapitalization and the Implicit Treasury Guarantee

Mr Salmon -- normally you have some really good market commentary, but maybe you haven't had enough sleep this week (no one has)

A blanket guarantee of all assets is a foolish idea. Hopefully, I don't need to explain to you that all assets are not equal.

If everything becomes (effectively) a Treasury bond, one of two outcomes must happen:
(1) As happened with Iceland, all assets lose value... this seems unlikely in the U.S., but lets remember that we have no domestic savings so it isn't completely impossible
(2) All assets are as credit worthy as Treasuries, but clearly some Treasury assets are much better than others -- and get a higher price. And the reverse, some "Treasury" assets are clearly not as good and their price should go to zero (or to what they might fetch in bankruptcy).

There is almost no difference between scenario two above and the current situation except: cash rich persons like Warren Buffet can snatch up assets that pay 10% and pay for them as though they were Treasuries paying only 4% -- so cash rich people get a windfall.. and two, future taxpayers (better known as OUR CHILDREN) get hit with the cost of making garbage assets pay off as though they were Treasuries.

Please Mr Salmon -- don't screw over our children with a bunch of voodoo accounting. All assets are not the same and we all know it.

Buffett Enters the Fray

Buffet is a hypocrite.

Its fine for the taxpayer to buy $700 billion of crap mortgage securities -- but its not OK for Berkshire Hathaway to buy even $5 billion. BRK instead bought $5 billion of cumulative convertible preferred shares from Goldman Sachs... you know the sort of preferred shares that Henry Paulson adamantly rejects having the taxpayer buy.

This may be a cruel statement, but its 100% true. Given his age, Buffett will be dead long before the debt for this bailout comes due.

BRK will collect 10% dividend yield from Goldman, even if the mortgage securities continue to decline. The only risk is if Goldman itself fails, which now that it is a Fed protected bank is a very small risk.

If Buffet really believed the mortgage securities were such a great deal, he should have bought them directly. Given his (prior) reputation, such a vote of confidence would likely have brought in lots of other players and eliminated the need for a taxpayer bailout.

Buffett bought cumulative convertible preferred shares for himself while recommending the taxpayer buy all the crap.

Buffet: "Do what I say, not what I do"

The Credit Bubble: Deregulation Gone Wild

Deregulation is the big lie here. Government is MUCH bigger now than when Reagan took office. The Fed knew perfectly well what was happening, and on several occasions issued warnings. They had, and still have, the authority to regulate lending practices at the money center banks (and the little banks tend to follow). The other lending is done by FNMA and FHLMC, which are completely government controlled.

Before you start expanding regulatory power, you need to ask why the regulators made almost no use of their existing powers. You need to establish that existing powers are insufficient -- as opposed to just unused.

Even if you make the Fed into an absolute dictator, what good would it do if they don't use their powers (for good)?

The problem isn't deregulation (which never happened except on paper). The problem is the regulations we already have were not enforced.

The government had to choose between collecting higher taxes on bubble homes, or enforcing the existing rules. The government repeatedly chose higher taxes by turning a blind eye to a problem they knew about all to well.