McCain says he will suspend his campaign so he can study the $700 billion bailout plan. Let's save him the trouble - we'll take the same deal Warren Buffett struck with Goldman Sachs.
I trust Buffett to strike a fair deal. His famous quote is so apt today:
You only learn who has been swimming naked when the tide goes out – and what we are witnessing at some of our largest financial institutions is an ugly sight.
The details, as reported in the WSJ this morning, compared to the Paulson plan:
Cash for Trash? That's not the Buffett Way! As Krugman puts it, the Paulson plan takes taxpayer money and buys the worst assets on Wall Street, at a significant premium to the market. Cash for Trash. Buffett gets senior perpetual preferred stock carrying a 10% cumulative dividend (not a bad return) and a 10% bonus if redeemed. Buffett also secured significant upside potential with no additional risk - $5 billion in equity warrants with a strike price of $115. These warrants are already in the money; Goldman closed at $133 today, up $7.95. Very clever on the warrants - Buffett can delay any additional investment for up to 5 years and put in the extra money only if things are looking good. In any event, he locks in yesterday's rock-bottom price without additional risk. Paulson doesn't come close.
Can We Beat the Street? Any economist will tell you that information asymmetry can lead to bad deals. The party with better information can make out like a bandit. If the taxpayers purchase complex credit default swaps from the folks who created them, who do you think has better information? Warren Buffett knows this. As clever as he is, Buffett isn't trying to outsmart the Street on these derivatives. That's why he's buying preferred stock and equity warrants - assets with relatively transparent downsides and significant upside potential.
Managing the Street? I understand why some in Congress are calling for limits on executive pay, and various regulations on any firm that sells trash to the Treasury, but I have to say that the government probably doesn't have a great track record in managing entrepreneurial financial firms. It could happen, but not likely. Buffett's maximum stake in Goldman is less than 10% and its not even clear that he gets a seat on the Board. He's willing to invest his money and let the management team do their job. All he wants is the 10% preferred dividend and the equity warrants. If the firm does well, so does Buffett, but he won't micromanage them. Congress should listen to this advice.
What About Main Street?. My story breaks down here - the taxpayers have another goal beyond just making money (in fact, we'll be happy just to get our money back). We want to stop the needless foreclosures of millions of homes. In order to do that, Congress needs to act, but we don't have to make that a condition of the bailout plan. A 60 day automatic stay of all home foreclosures would hit the pause button while Congress fine-tuned our investment in the financial sector. We might even hire Buffett to negotiate it for us.