Buffet's Perspective

#1
BigPapaVol

BigPapaVol

Wave yo hands in the aiya
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#1
I know Buffet's politics are odd because he's wealthy enough to no longer care about the tax man, but his perspective on this bailout will help.

He very clearly says that nothing is being nationalized and that this will be a very good deal for the treasury in the long run.

Bloomberg.com: Worldwide
 
#3
#3
MontereyVol said:
Good for the treasury, bad for you and me.
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no, no. When the treasury benefits, we should.

This move avoids a complete housing meltdown, which is afoot now. The treasury is simply nationalizing the bad debt for a fee and will recoup a tremendous amount of the face value of the bad debt. Not to mention they will be paid nicely for releasing their warrants.

The level of risk to US Capital is nowhere close to $700 billion.
 
#4
#4
BigPapaVol said:
no, no. When the treasury benefits, we should.

This move avoids a complete housing meltdown, which is afoot now. The treasury is simply nationalizing the bad debt for a fee and will recoup a tremendous amount of the face value of the bad debt. Not to mention they will be paid nicely for releasing their warrants.

The level of risk to US Capital is nowhere close to $700 billion.
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From the 4 or so hours of hearings I watched, I tend to agree with this assessment.
 
#5
#5
Neither party is showing a propensity to give back to the tax payer. Unless of course they can make it political.

Something tells me IF the government can actually make good on this deal that we will still foot the bill while the profits (and principle) will go to something or someone else.
 
#6
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MontereyVol said:
Neither party is showing a propensity to give back to the tax payer. Unless of course they can make it political.

Something tells me IF the government can actually make good on this deal that we will still foot the bill while the profits (and principle) will go to something or someone else.
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If the Fed has anything to do with it, the outcome will probably benefit us all. Let the elected folks into the deal and problems arise in a hurry.
 
#7
#7
volinbham said:
From the 4 or so hours of hearings I watched, I tend to agree with this assessment.
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I tend to see it as not addressing the true problem and only seeking to put us back in the same place we were before.

From what I can tell they want to buy the distressed mortgages and hold them until such a time that they can get the value back. That means they take over the mortgage on a house in Salinas, CA that was sold for 800K for say 400K. Now they hold the mortgage until the market brings it back to around 800K. Thats all good and maybe they take a profit right? The problem is that house was never worth more than 300K how long would you hold that mortgage before that property actually equalled 800K assuming normal growth of around 5-6% per annum. Before this housing bubble it would take around 20-30 years for property to triple. By that time the house would become derelict, thus now you are waiting on the property alone to move the marketability.

In my view this bailout is going to put houses back at the bloated prices we saw during this bubble and that isn't going to solve the problem, its going to make it worse.
 
#8
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BigPapaVol said:
If the Fed has anything to do with it, the outcome will probably benefit us all. Let the elected folks into the deal and problems arise in a hurry.
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Don't get me wrong I believe Paulson is one of our best in dealing with money management, his foresight isn't great though.
 
#9
#9
MontereyVol said:
I tend to see it as not addressing the true problem and only seeking to put us back in the same place we were before.

From what I can tell they want to buy the distressed mortgages and hold them until such a time that they can get the value back. That means they take over the mortgage on a house in Salinas, CA that was sold for 800K for say 400K. Now they hold the mortgage until the market brings it back to around 800K. Thats all good and maybe they take a profit right? The problem is that house was never worth more than 300K how long would you hold that mortgage before that property actually equalled 800K assuming normal growth of around 5-6% per annum. Before this housing bubble it would take around 20-30 years for property to triple. By that time the house would become derelict, thus now you are waiting on the property alone to move the marketability.

In my view this bailout is going to put houses back at the bloated prices we saw during this bubble and that isn't going to solve the problem, its going to make it worse.
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the issue is not really those values. The issue is the amount of spread we're willing to lose is deciding the disposition of the asset. They won't have the Fed forcing continued writedowns like a typical lender does, so they won't have to liquidate quickly and dump on the market in a forced sale. That helps the market as a whole and helps recoup reasonable market values for the properties.


The fix you are looking for is going to happen in how Fannie and Freddie force underwriting. As long as they will no longer prop up awful debt as reasonable, nobody will buy the CDOs full of awful borrowers.

It's not simple, but many of the folks who could borrow for a home or commercial property over the past couple decades will never again be able to buy property.

That's the systemic change that had to happen, but that change wasn't going to eliminate all of the potential overhang from the bad loans made to date. Both are going to happen in this process.
 
#11
#11
But that still means they are trying to prop the house prices close to around were they were last year, which was extremely overvalued.

And I have no problem with (call me heartless) people not being able to buy houses, afterall, this mess proves poor people shouldn't be buying mcmansions. But, they are running the risk of displacing people who should afford a house out of the market.
 
#13
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MontereyVol said:
But that still means they are trying to prop the house prices close to around were they were last year, which was extremely overvalued.
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I don't think there is any focus on a particular market value.

There will be some losses is this deal and that spread will likely be the difference between recent values and what people could truly afford.

The bottom line is that housing values have to correlate with per capita income at some point. We moved away from that relationship with a bunch of financial engineering, but it just can't be done over the long haul.

I don't remember where I read it, but recently I saw a very good article that said real estate prices have just now moved down to the point, relative to incomes, where we have typically begun exiting a real estate downturn. So I think the prices have found their home and will begin creeping up at a more normalized GDP deflator type of number.
 
#14
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MontereyVol said:
From what I can tell they want to buy the distressed mortgages and hold them until such a time that they can get the value back. That means they take over the mortgage on a house in Salinas, CA that was sold for 800K for say 400K. Now they hold the mortgage until the market brings it back to around 800K. Thats all good and maybe they take a profit right? The problem is that house was never worth more than 300K how long would you hold that mortgage before that property actually equalled 800K assuming normal growth of around 5-6% per annum.
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I don't think anyone said these properties have to go back to the original ($800K value). If they bought for $400k then selling it anything over $400k or better results in a gain. I don't see any reason they would try to hold it for long enough for it to reach some previously inflated value.

Even if they bought for $400K but had to eventually sell for $300K. We'd see a total cost of about $200 billion for the program - compare that to no action which could result in a long-term recession that could easily create more than a $200 billion tax revenue short-fall.
 
#16
#16
I would also say that Paulson saw the makings of the problem but couldn't convince Congress to take action on reforms.
 
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#17
In response to you both.

But wouldn't that mean these companies and banks are going to eat huge loses anyway? That doesn't sound like they are going to survive.
 
#18
#18
BigPapaVol said:
but what could he do until it became an emergency?
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volinbham said:
I would also say that Paulson saw the makings of the problem but couldn't convince Congress to take action on reforms.
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I watched interviews with this guy back in Jan/Feb where he was stating the economy was fundamentally strong and we are running like a well oiled machine.
 
#19
#19
MontereyVol said:
In response to you both.

But wouldn't that mean these companies and banks are going to eat huge loses anyway? That doesn't sound like they are going to survive.
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The distinction is that the assets are worthless now because no single buyer can stomach the risk and have the patience to wait for values or liquidity to return for these assets.

The government represents a buyer that can support the risk because of it's longer view and deeper pockets.

The companies get these bad assets off their books at a rate higher than they could otherwise (but still at a loss) so they are better able to operate close to normal.

The government gets a good deal on the assets (presumably) because of a pseudo-market mechanism such as a reverse auction. Further, the government doesn't have to sell the assets in the short term so they can wait for credit markets to stabilize and thus more correctly price these assets.
 
#20
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MontereyVol said:
In response to you both.

But wouldn't that mean these companies and banks are going to eat huge loses anyway? That doesn't sound like they are going to survive.
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no. This fund will absorb losses, but is going to be paid for it.

It removes the overhang from their balance sheets and frees up capital immediately. The crunch on their capital was on paper. This vehicle allows saner decision making relative to these assets because there isn't a regulator forcing an immediate disposition decision vs. capital hit. That immediate nature is what forces values to the floor. Now those losses will happen over time and not at floor level liquidation values that happen in distressed sales.

Losses will still happen across that portfolio, but to a much smaller degree. The losses are also essentially being borne by our government, where they originated in the first place.

Everyone wants to point fingers at the greedy investment banks, but nobody wants to talk through the fact that fannie and freddie essentially set up a welfare system through unwarranted home ownership. That's what is coming home to roost.
 
#21
#21
Overall the goal is to free up financial companies ability to loan money. The liquidity problem with these assets has ground this ability to a halt - cleaning up their balance sheets frees them up to both attract capital and distribute capital.
 
#22
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MontereyVol said:
I watched interviews with this guy back in Jan/Feb where he was stating the economy was fundamentally strong and we are running like a well oiled machine.
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he was right, aside from the real estate market. This isn't significantly different than the tech bubble bursting. Somebody's holding the bag. Just so happens that the gov't helped fill the bag in this case and we're talking about a systemic whack across the largest market in the world.
 
#23
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BigPapaVol said:
If the Fed has anything to do with it, the outcome will probably benefit us all. Let the elected folks into the deal and problems arise in a hurry.
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Seeing as where we are, this is absolutely what is going to happen. Listening to the people that seem to know what is going on, this all arose from too much involvement from the elected officals. I can't see good long terms solutions coming out of this.
 
#24
#24
allvol123 said:
Seeing as where we are, this is absolutely what is going to happen. Listening to the people that seem to know what is going on, this all arose from too much involvement from the elected officals. I can't see good long terms solutions coming out of this.
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Still, I don't believe we should just rush this through either.
 
#25
#25
I like Buffet a lot, I love reading his comments. A couple of these standout:

``I am betting on the Congress doing the right thing for the American public and passing this bill,'' Buffett said on cable channel CNBC today. ``I certainly have a vote of confidence in Goldman and vote of confidence in Congress.''

``I think the Treasury will pay back the $700 billion and make a considerable amount of money,'' Buffett said, adding that if he had $700 billion on the government's terms to buy distressed assets, he would. ``Unfortunately, I'm tapped out.''
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