Paulson’s proposal gets an important vote: Warren Buffett
September 24th, 2008In a CNBC interview Warren Buffett provided strong support for Treasury Secretary Hank Paulson’s plan to buy distressed securities from Wall Street firms:
BUFFETT: … If I didn’t think the government was going to act, I would not be doing anything this week. I might be trying to undo things this week. I am, to some extent [by putting $5 billion into Goldman Sachs], betting on the fact that the government will do the rational thing here and act promptly. It would be a mistake to be buying anything now if the government was going to walk away from the Paulson proposal.
BECKY: Why would that be a mistake? Because the institutions would collapse, or because you could get a better price [on Buffett's investment in Goldman Sachs]?
BUFFETT: Well, there’s just no telling what would happen. Last week we were at the brink of something that would have made anything that’s happened in financial history look pale. We were very, very close to a system that was totally dysfunctional and would have not only gummed up the financial markets, but gummed up the economy in a way that would take us years and years to repair. We’ve got enough problems to deal with anyway. I’m not saying the Paulson plan eliminates those problems. But it was absolutely, and is absolutely necessary, in my view, to really avoid going over the precipice.
CARL QUINTANILLA: Warren, we can almost hear you measuring your words as you speak, because what we’re talking about has such gravity. There are people out there who either don’t, or are unwilling, to acknowledge what exactly, how serious the situation was last week. And I’m hearing you say is that, was it the most frightening experience you’ve had in your lifetime, in terms of evaluating where this economy stands?
BUFFETT: Yeah, well, both the economy and the financial markets, but there’re so intertwined that what happens, they’re joined at the hip. And it doesn’t pay to get into horror stories in terms of naming institutions or anything. But I will tell you that the market could not have, in my view, could not have taken another week like what was developing last week. And setting forth the Paulson plan, it was the last thing, I think, that Hank Paulson wanted to do. there’s no Plan B for this.
BECKY: Warren, you mentioned that Wall Street could not have taken another week like that. But what does that mean to the American taxpayer who’s sitting at home saying, ‘Why is this my problem?’
BUFFETT: Yeah, well, it’s everybody’s problem. Unfortunately, the economy is a little like a bathtub. You can’t have cold water in the front and hot water in the back. And what was happening on Wall Street was going to immerse that bathtub very, very quickly in terms of business. Look, right now business is having trouble throughout the economy. But a collapse of the kind of institutions that were threatened last week, and their inability to fund, would have caused industry and retail and everything else to grind to something close to a halt. It was, and still is, a very, very dangerous situation. No plan is going to be perfect, but thanks heavens that Paulson had the imagination to step up with something that is of the scope that can really do something about it. And what he did with the money market funds, that was not an idea that I had, but as soon as I heard about it, that was an important stroke. Because the money, pulling out of the money market funds and going to Treasuries, and driving Treasury yields down to zero. That — a few more days of that and people would have been reading about lots and lots of troubles.
JOE KERNEN: People listen, Warren, when you speak. And I don’t know if you watched the hearings yesterday …
BUFFETT: I got to watch some of them.
JOE: But when the more dire it looked, in terms of communicating, with some of these Senators, the three-month or one-month bill, again, started acting similar to what was happening on Thursday. Now we averted that disaster on Thursday, but it’s already been three or four days. It’s almost as if these guys already forgot about the position that we were in. Do you think that accounted — we’re still susceptible to that happening again if it looked like they’re not going to go through with this?
BUFFETT: No, it would get worse. Last week will look like Nirvana (laughs) if they don’t do something. I think they will. I understand where they’re very mad about what’s happened in the past, but this isn’t the time to vent your spleen about that. This is the time to do something that gets this country back on the right track. What you have, Joe, you have all the major institutions in the world trying to deleverage. And we want them to deleverage, but they’re trying to deleverage at the same time. Well, if huge institutions are trying to deleverage, you need someone in the world that’s willing to leverage up. And there’s no one that can leverage up except the United States government. And what they’re talking about is leveraging up to the tune of 700 billion, to in effect, offset the deleveraging that’s going on through all the financial institutions. And I might add, if they do it right, and I think they will do it reasonably right, they won’t do it perfectly right, I think they’ll make a lot of money. Because if they don’t — they shouldn’t buy these debt instruments at what the institutions paid. They shouldn’t buy them at what they’re carrying, what the carrying value is, necessarily. They should buy them at the kind of prices that are available in the market. People who are buying these instruments in the market are expecting to make 15 to 20 percent on those instruments. If the government makes anything over its cost of borrowing, this deal will come out with a profit. And I would bet it will come out with a profit, actually.
BECKY: Are you buying instruments like these in the market?
BUFFETT: Well, I don’t want to leverage up. No one wants to leverage up in this thing. So, if I could buy a hundred billion of these kinds of instruments at today’s prices, and borrow non-recourse 90 billion, which I can’t, but if I could do that, I would do that with the expectation of significant profit.
JOE: But the government can do that. You can’t. And that’s why the private sector can’t, even you, can’t save the system.
BUFFETT: I can’t come close to it. But they have the ability to borrow. They can borrow much cheaper than I can borrow. They can borrow unlimited. They don’t have covenants. They don’t have — I mean, they are in the ideal position. So, for example, if I were hiring advisers, as I talked about doing to buy these things, I would tell those advisers, ‘Look it! People are buying these instruments to make 15 percent. So if you’re going to charge me any fees, I’m going to defer those fees until I get rid of these instruments later on. If I don’t make at least ten percent on my assets, you know, your fee goes down the drain. Because it should be a lead-pipe cinch to make 10 percent at the kind of prices that exist now. I wouldn’t try to write that into the legislation. I don’t think you should — I think they should punish, in many cases, the people — I would think they might insist on the directors of the institutions that participate in this program waiving all director’s fees for a couple of years. They should, maybe, eliminate bonues. They may wish to do some of those things. I don’t think you should try to write it into the instrument, though. I think that gets so damn complicated and ties people’s hands. But if I were administering the program, I think I’d be fairly tough about some of those things, and I’d make sure that the advisers earned me a return that was well above my cost of borrowing before they got paid a dime.
BECKY: Would you administer the program?
JOE: Yeah, can you be on the oversight board? (Buffett laughs.) Can you be on the oversight board?
BUFFETT: I’d love to administer (laughs). I’d love to administer it for nothing, but I would really love to administer and get some kind of an override in terms of the profits, which is naturally the way Wall Street thinks. No, it’s not my game to do that, but I will tell you that the buyers of the instruments these days are going to do better than the sellers. And the big buyer, if they — they shouldn’t pay any attention to the cost of these instruments to the selling institutions. They shouldn’t pay any attention to the carrying value. In fact, one thing you might do, is if someone wants to sell a hundred billion of these instruments to the Treasury, let them sell two or three billion in the market and then have the Treasury match that, for what they pay. You don’t want the Treasury to be a patsy. But I’ll tell you, with Hank Paulson on top of it, you couldn’t have any better guy to do that. The important thing is that if this program extends into the next administration is to have somebody in the next administration that has similar market savvy.
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BUFFETT: Yeah, well, it goes beyond credit default swaps into all forms of derivatives. But the derivative genie got out of the bottle, and it’s a huge genie, and it will never get back into the bottle. It is a terribly tough problem because they are not homogeneous items. It’s one thing to have a clearing house for the futures in Chicago, or something, and every morning have everybody post to market and that’s a very efficient system. It’s very hard to do that with derivatives where you can derivatives based on the New Zealand money supply or the number of babies born in Japan, and all kinds of things as the variables. And they’re often very complicated. I applaud Dinallo. He is an outstanding insurance comimssioner. But getting regulation around the entire derivatives market is really tough. I’ve thought a lot about it. But it’s important. Derivatives have been an important part of the problem in financial markets. And they continue to be part of it. And in AIG’s case — AIG would be doing fine now, I think, if they’d never heard of the word derivative.
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CARL: When do you think, Warren — I don’t know if you even have an answer to this question — When is the absolute deadline by which you think this needs to happen? Is it this weekend? Can you be that specific? Or if this thing were to bleed into next week, or if they had to reconvene a special session, would that be disastrous?
BUFFETT: Well, I think anything that makes it look like it’s in doubt is what causes the problem. So if they said on Friday we’re absolutely having a vote on Monday, or something of the sort, I don’t think that would be a problem. But if they went home on Friday and there was doubt about whether they were going to do something on Monday, I think you’d see some things you don’t want to see in the markets and they would have some effects on the economy.
JOE: You were watching yesterday, and I don’t know, maybe I don’t know the ways of Washington. Maybe they say one thing and maybe they’re really planning — you know, they have to look good for their constituents. But I wasn’t convinced they really understood the seriousness of the situation, Warren, and that was after they said, look, Greenspan says we need this, Volcker says we need this, Bernanke, Paulson. Now we have you. I don’t know. Do you think they get it?
BUFFETT: Well, I think they will get it. I think enough of them will get it. You know, it’s not like Pearl Harbor where you could look at what happened with your own eyes and decide you had to do something that day. But this is sort of an economic Pearl Harbor we’re going through. And I think most of them will get it. And I do believe they will do what’s right for the country. They may vent their spleen a little bit by getting mad about the people that brought us into that, and I don’t blame them for that. I might do that privately, too. But in the end, you know, Republican, Democrat, I think they’ve got the interest of the country at heart and I think they will do the right thing. But I hope they do it soon. (Laughs.)
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BECKY: You know, you mentioned earlier, in the grand scheme of things, it’s going to matter who the next Treasury Secretary is going to be. Are there names of people you think would be sound in either administration.
BUFFETT: Becky, if I were running things, Republican or Democrat, I would ask Hank to stay on. I mean, you don’t get talent like that very often in any administrative job. And the guy pays an enormous price to do it. He’s probably sleeping three or four hours a night. He knows the market. He’s got the interests of the country at heart. So I think if I were either Barack Obama or John McCain and found myself in the White House in January, I would go down there and say, ‘Hank, do me a favor, stick around another year.’
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BUFFETT: They can make money on this deal. I can tell you this. I would love to have 700-billion at Treasury rates to be able to buy fixed-income securities now that they’re in distress. There’s a lot of money to be made.
JOE: It’s just that, you know, they want these details, Warren. They said — Paulson says there’s the hold-to-maturity price and there’s the firesale price. We’re going to go somewhere in between, get a much better price but still leave enough for the people that are buying it to make some money. That can be done in principle? There’s a way to do that, do you think?
BUFFETT: I think what I would be looking for — I heard that hold-to-maturity price. I’m not as excited about that. I basically like a market, or something very close to a market-related price. And there are ways to determine that and I don’t think that Uncle Sam should be in the business of paying somebody a whole lot more than it’s worth in the market today. And if the guy that bought it doesn’t like it, he doesn’t have to sell it, and it was his problem, he bought it in the first place. I think a market price will enable people to be leveraged. The problem they have now is that some of the institutions, they’re loaded with this stuff, they’re having trouble funding, and they’re worried about being able to sell a ton of it. But take the Merrill Lynch deal. Merrill Lynch had to take back 75 percent of the sales price. Well, they didn’t want to take back that 75 percent. I would let ‘em sell it for the same price, but I’d pay them the whole thing in cash. So they’d be a lot better off if they could have sold the whole thing at that same price but gotten paid a hundred percent in cash instead of having to take back 75 percent. And I see the government fulfilling that kind of a function.
JOE: All the outrage we’re seeing in these comments from viewers, and obviously the senators are hearing from constituents. If we take your word for it, that the government could even break-even, or only lose 50 billion, that 700 billion dollar number is out there in the public, and people think that we’re spending that.
BUFFETT: Yeah, they think that, yeah.
JOE: It seems crucially important to get the point across that, in your view, we could, the government could actually end up making money and saving the taxpayer from much worse, a much worse outcome if we didn’t do this.
BUFFETT: The government is getting 700 billion worth of assets, assuming they spend the 700 billion, they’re getting 700 billion of assets at what I regard as attractive prices. And they’ve got the staying power to hold those things. If I could get 700 billion, if I could borrow 700 billion on the government’s terms and buy these assets I’d be doing it myself. But unfortunately I’m tapped out. (Laughs.)
BECKY: And yet, Warren, Mayor Mike Bloomberg, I heard him making comments this morning, and he’s someone I know you’ve spoken very highly of ..
BUFFETT: I admire him.
BECKY: You admire him. he says this morning we should not be giving a blank check to have something passed in the dead of night. How dire is this situation?
BUFFETT: Well, I’m sure we didn’t want to go to war on December 7, 1941, maybe, in the dead of night, or whenever we did it, in the middle of the afternoon actually. But there are time when events force timetables on you, and force action, and you have to be — You know, it’s just like in my business. I might like to think over buying something for a month, I’m not that type anyway. But in the end, if somebody offers me something that makes sense, I better decide whether to act or not. And if it makes sense to me, I usually don’t attach unnecessary conditions, you know. It would be nice to have the luxury of thinking about this for three months. But I will tell you, if you think about this for three months, you’re going to have a situation where — If you think about it for three weeks, you’re going to be facing a situation that’s far different, and far more difficult, than if you do something now.
(Link to the transcripts: http://www.cnbc.com/id/26867866)
