Warren Buffet: The Treasury could make a lot of money on the bailout

[HamdenRice]

Right now, on the Greatest Page is a thread that says that Warren Buffet has revealed a "dirty secret" about the bailout -- that the Treasury plans to over pay for the securities.

But when you click on the link, Buffet is saying it's important to get the pricing right and if the Treasury does, it is likely to make a lot of money.

Is it me or are many people just seeing what they want to see in this whole thing?



Buffet thread excerpt:

I agree with upthread. How on earth can you read this as anything other than Buffet saying that if done right, this is going to make a lot of money for the Treasury; he said:

If> they do <the bailout> right, I think they'll make a lot of money.... 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..

You can be pretty fanciful in marking positions in Wall Street, particularly when things aren't trading. The one thing you want to make sure, when the Treasury is buying things, is the marks they have don't make any difference. Like I said, it wouldn't be a bad idea, if you're buying ten billion of a security and you're the Treasury, to have them sell five-hundred million, or something like that into the market, so you find out what the real market price is and then buy the other 9-1/2 billion at that price. I really think, I really think the Treasury will make -- I think they'll pay back the 700 billion and make a considerable amount of money, if they approach it in that manner.

<end quote>

On edit -- typing error didn't make clear what was the actual Buffet quote.

[Romulox]

1. Logic problem: "They should buy them at the kind of prices that are available in the market."

Nobodies buying, or else there would be no need for a bailout in the first place. :hi:

PS: Warren Buffet just bought a $5 billion dollar position in bailout poster-child Goldman Sachs in anticipation of government goodies. So he's not exactly a disinterested party here...

http://www.pbs.org/newshour/updates/business/july-dec08/buffett_09-24.html

[Zynx]

3. He means the prices they have cleared at in the cases they have sold.

Those are very low prices. The reason for the bailout is that the banks have been using these securities as assets and if they had to mark them as low as they have been selling, the banks would be entirely insolvent.

[Romulox]

7. Uhh, "as low as they have been selling" = "the kind of prices that are available in the market."

The historical price of these securities aren't really material to their current value which is (presumably) based on better information as to the underlying risk...

[Zynx]

9. The real issue is not that the securities are actually worth only 20% of what they used to be.

The issue is that there is almost no liquidity or appetite for these. For one thing, they are sold in very large chunks and only institutions can afford to buy them. After the drubbing these institutions have received, particularly the publicly traded ones, they are not about to put more money into the MBSs anytime soon. The traditional pool of buyers of these securities has dried up in what has been an ongoing panic in the debt markets for almost a year and three months now. Market prices do not necessarily reflect the true value of a product. Case in point on the other end was the NASDAQ bubble. There wasn't any special knowledge that was not available that confirmed those prices were reasonable. The issue with these securities is the lack of liquidity and the lack of credible information one way or the other. On balance, these securities are worth more than what they are going for.

[Romulox]

15. The problem is that when you acknowledge that "the Market" is unable to accurately price an asset

You essentially abandon the core principle which underlies the argument that we must bailout the self-same financial institutions whom you readily admit are entirely incapable assessing the so-called "true value" of these securities to prop up the self-same market which you claim cannot function without an infusion of taxpayer cash.

In short, you're calling for gasoline to put out a fire--more booze for the alcoholic--cake at weight-watchers.

All in the service of a "free market" that you take, as a central premise of thesis, as maladaptive and dysfunctional. And it's crucial we do all of this quickly, without time for debate you say? Hmmm.... :wtf:

[sendero]

23. The "true value"..

... when nobody wants to buy, is ZERO.

These are NOT piles of mortgages, they are derivatives of derivatives of derivative that are leverages 10, 20 50, 100 to one. They are essentially valueless, and they will probably always be.

[Romulox]

25. = "the kind of prices that are available in the market." Hence the circular logic problem. nt

[sendero]

26. There is nothing circular about it..

... market pricing of an asset is what someone is willing to pay.

Paulson is claiming that these assets actually have value, but that somehow the markets just don't reflect that. He's claiming that in the future these assets will have value.

Maybe, but I notice that if you pit big business economic judgement against the government's, big business will win EVERY TIME because it's THEIR MONEY whereas with the govt's they are using someone else's money namely the taxpayers.

Nobody is buying this crap because it is essentially valueless at the present time, and the likelihood if it ever having value is so low as to not make it a worthwhile investment.

[Romulox]

29. Completely illogical to believe that Paulson has better forecast of these assets' potential value

than the collective market.

[MadHound]

2. LOL, OMG, you're serious

:rofl::rofl::rofl::rofl::rofl::rofl::rofl::rofl::rofl::rofl::rofl::rofl::rofl::rofl::rofl::rofl:

Oh my, you have been drinking the Kool Aid. Do you care to place a small bet on your position? Of course if you're wrong, that money will be worthless, so really, it's a win-win for you.

Sorry, but I really think that you need to go back and study your basic economics. You and unfortunately our governments reasoning behind this bailout is fatally flawed.

[Zynx]

5. There really is not too much of a flaw in the argument. I am an Economics major by the way.

The mortgage backed securities on balance are very undervalued. They have often been moving for as little as 20-27 cents on the dollar. Some of them are that worthless such as second lien mortgage portfolios and HELOC securities. However, the balance of these securities are intrinsically worth more than they are going for. It's just that in the current environment they are not moving.

[MadHound]

11. It isn't MBS' I'm talking about

I'm talking about the fact that we're taking on another trillion dollars in debt, on top of an already vastly overextended debt structure. That means that our Treasury bonds(the instrument whereby we finance our debt, and by extension our government) are going to be downgraded within three to six months. Already we're seeing commercial houses doing this privately, soon it will become official. We will not be able to sell our debt instruments anymore. There will be no money for government spending. Tax revenues will be consumed paying for our debt, and there will be no other spending. This will make a depression look like the Roaring Twenties.

Has nothing to do with MBS', and in the end, they won't matter. Get it now?

[HamdenRice]

19. You get this wrong every single time. Here are real numbers for you to explain

I don't know why I'm even asking this, because when you get real models and numbers, you just don't answer.

Here's my post from yesterday about the effect of mbs illiquidity on the thrift sector:

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x4105489

To summarize the numbers: pre-crisis, total liquid assets in the thrift sector was $450 billion, consisting of $264 billion in mbs and $186 billion cash and other securities. Now $264 billion is illiquid, so total liquidity is $186 billion. If the government buys the mbs at $.33 on the dollar $150 of the $450 billion), issuing treasuries, total liquidity would be $336 billion ($150 billion plus $186 billion).

Can you explain why $336 billion liquidity is more inflationary than $450 billion? Can you explain why that is not a net contraction of liquidity of $114 billion?

And no, the treasuries will not be downgraded. You have read, haven't you, that yield on treasuries is effectively zero because demand for them has skyrocketed even as the plan is being unveiled?


If you can't or won't answer that, maybe you could call on your famous economist wife or famous economist friends?

[MadHound]

27. I'm fully congnizant of the ramifications of the liquidity crisis

What you're refusing to deal with is the near certainty that US Treasury Bonds(you do realize that it is the mechanism of these bonds that is currently funding our government don't you) will be downgraded. As I've shown you on a different thread, commercial houses started downgrading bonds last Monday, the next business day after the bailout was announced <http://financialtrader.com/Bond_Investor.html> Hell, Moody's was warning about downgrading bonds at the beginning of the year, when our debt load was lighter.<http://www.atimes.com/atimes/Global_Economy/JA17Dj02.html> What the fuck do you think this additional debt load is going to do? Break the camel's back, and take us all down with it.

But hey, don't worry. When the shit hits the fan here in a few months, one of my small pleasures in life will be looking at the sheeple who cheered on our latest excursion off the cliff and telling them exactly what sort of stupid fools they've been.

[HamdenRice]

12. You've never answered serious empirical questions put to you

Where are your economist wife and economist friends to answer these questions?

[MadHound]

18. Oh please, I've laid it out chapter and verse for you and everybody else

You just want to continue running off that cliff, bleating all the while that we need a bailout, with no real clue as to the fact that you're now falling.

In fact if I recall, I laid it out for you in a number of different ways for you, yet you still refuse to see. That's your problem, not mine.

Oh, by the by, do you realize that the rush towards downgrading has started? Commercial houses are already starting to downgrade, wait until it becomes official. <http://financialtrader.com/Bond_Investor.html>

But hey, keep on bleating out that the bailout is good. We're all still going to hit the bottom anyway.

[gopbuster]

4. Do we have any indication or specifics on exactly what typs of debt

instruments they are buying? Pools of mortgage securities, individual mortgages, foreclosed asset, CDOs, CDSs, all of the above? other?

How would they make money on CDSs for instance? Those are bets on the price of housing going down unless they believe housing is going down.

Paulson has made money with this stuff before...no reason to believe he can't do it again, but will the market cooperate?

If there is crap in the pools I guess some will even have to be retired , but it sounds like the value of what they are buying is so distressed that there is enough to mitigate the losses even if it ends up being a little longer term they have to hold on for a profit

Also seems that if the Gov pops up as the big buyer it will drive prices up

Just trying to get a little insight

[Tierra_y_Libertad]

6. So, will Buffet. That's why he's "investing" in the bailout.

[Kaleko]

8. Hamden, do you have a link to the thread you cited?

Not to put you on the spot, just trying my best to see through this ever-shifting mess.

Also, I do think that Buffett is one of the best deal-makers ever, which means making win-win deals that benefit everyone and do not backfire. In that sense, I count him among the "good guys".

Thanks.

[HamdenRice]

13. Here it is

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=114x44237

I agree with your assessment of Buffet. He's also very public spirited.

[dkofos]

10. The key to his statement is they have to do it right.

When was the last time govt. did something right??

[HamdenRice]

14. In terms of economic policy, when Clinton was president

So we have only a few more months until the government starts getting economic policy right again, hopefully.

[SmokingJacket]

16. Has the Paulson crew come out to say what they're going to pay?

Because doesn't that make a HUGE difference?

Is that what they're discussing right now???

[HamdenRice]

20. Reverse auction, which I think is wrong. He needs a tight leash...

as others have pointed out. At any rate, this is an interim measure and the real program hopefully starts with the incoming Obama administration.

[whatchamacallit]

17. Put down the pompoms for awhile, and let us work through the disgust n/t

[HamdenRice]

21. Rofl! nt

[Kip Humphrey]

22. And what does Buffet stand to make on his $5B once the Treasury buys up all of Goldman Sachs' junk?

[sendero]

24. Buffett,,.

... is talking his book (cheerleading for what will make HIM money), which he does pretty often.

[Subdivisions]

28. You've been promoting this bailout all over the place. And, I must say,

some of your posts have been very interesting and you try very hard to make your case. Tell me, in what way are you qualified to bring such a case in favor of this "bailout", which you say is not a "bailout" at all, adding that every single person the world over that refers to it as such is mistaken.

Don't read this wrong. Don't read this as beligerance. I genuinely want to know whether you are just some guy on the Internet stating your opinion or if your opinion comes from experience.

[HamdenRice]

31. I used to draft and sometimes design new mortgage backed securities

I got out of that 10 years ago (often it was mind numbingly boring, and I stayed mainly long enough to pay off student loans) and was in non-profit ever after. But I do understand the business and the securities.

I was sent to London in 1996 to design one of the first commercial paper backed mortage backed securities for a Dutch bank (incredibly bad idea in retrospect, but I was "just following orders").

The main thing is, I can see how out of wack the value of the underlying mortgages is from the securities. The NY Times published a chart dissecting the worst of the worst mbs -- a Bear Stearns Alt-A Frankenstein -- and I went to the prospectus, registration statement and exhibits, plus the spread sheets, and as a former drafter of this stuff, my back of the envelope calculation is that it is worth $.75 on the dollar. Most of this stuff is much, much better than that, but the market is illiquid.

If the feds by it for $.25-$30 on the dollar and unbundle it (or as is increasingly likely hold it for later sale), basically we get back to the public treasury an amount comparable to the surpluses of the Clinton era, which could well be a downpayment on universal health care. Plus we avert the China Syndrome, rollover meltdown that well and truly could be hours away.

Of course almost no one believes me, but this is, as Buffet says, a potential goldmine for the feds, while also averting financial catastrophe. It's also market socialism, which is something I have looked forward to for a very long time.

[Junkdrawer]

30. Translation: "The Treasury could make ME lot of money on the bailout" n/t