Show Us the Money
By William Greider
Nation' -- - Taxpayers should wake up the
politicians and ask them to tell Wall Street: "We want the same
Warren Buffett got." The Omaha billionaire announced he is
playing White Knight to Goldman Sachs by investing $5 billion in
the endangered investment house. What a big-hearted guy. Buffett
is an old-fashioned capitalist who invests in companies for the
long term and I am a big admirer. But Warren Buffett did not get
to be a billionaire by committing public-spirited acts of
charity. He plays to win.
So his deal with Goldman Sachs is
carefully wired to produce gorgeous returns for Buffett's
Berkshire Hathaway. Upfront, he gets a 10 percent ownership
stake in preferential shares that will pay a 10 percent
dividend--even if Goldman's stock price keeps falling. But
Buffett also gets the right to buy $5 billion in common shares
at below the market price. So if Goldman flourishes in these
hard times, Buffett will win big as its stock price soars.
To sweeten his chances, the
Omaha sage quickly announced that he endorses the $700 billion
bailout plan proposed by Treasury Secretary Paulson. Let's
follow the bouncing ball. Buffett puts some of his capital at
risk on terms that are smartly protected from loss. Then Buffett
urges the taxpayers to put their money on the line too. Only the
taxpayers don't have any deal. They are the naked investors in
this drama, asked to put up many billions to rescue Wall Street
firms with nothing more than a vague promise it will save the
Republic. I am reminded of the oldest rule in the financial
business: "Get it in writing."
Warren Buffett's intervention
provides a clarifying moment because it demonstrates what's
wrong with the bipartisan bailout Congress is preparing to
authorize. There's nothing illegitimate in what Buffett
accomplished. The overlapping terms and contingencies he secured
for his capital are standard practice in Wall Street
deal-making. Investment bankers work out the fine print and put
it in enforceable contracts or the deal doesn't happen.
Hank Paulson was a star in that world. When he left as chief
executive to become Treasury Secretary in 2006, Goldman awarded
him $110 million in cash to cover remaining stock options and
restricted stock, in addition to $51 million to repurchase
family shares. These payments were on top of the approximately
$500 million in Goldman shares Paulson sold when he joined the
Doing hard-nosed deals in the
Buffett style is essentially what the federal government should
be doing now--bank by bank--as it intervenes to rescue the
financial system from ruin. In our situation, the public
treasury is the White Knight because private capital is afraid
to play. The federal government has all the leverage it needs to
demand very stern terms. That includes demanding an equivalent
equity stake in banks or brokerages it assists, but also the
power to impose explicit commandments and prohibitions on how
these rescued firms must behave. The threat that banks will
refuse to play is a meaningless whine from the banking industry.
If bankers find a better deal from private lenders, they should
take it. Otherwise, they are down the tubes.
The underlying power
relationship in this crisis has been artfully obscured by the
bailout sponsors because they decline to explain clearly what
the bailout really is intended to accomplish. First, they said
it was to restore calm in markets. Then they said it was the
rotten assets centered in mortgage securities. But the problem
is more accurately described as the great deflation of Wall
Street's illusions--inflated prices, profits, deals, commissions
and bonuses. You name it, they ran it up to stratospheric
levels. Now the dream is dying and values are falling, but have
not yet hit bottom.
To put it more concretely, the
banks and investment houses have lost massive amounts of
capital--a hole that is real, not psychological. Maybe $1
trillion, possibly twice that. We can't say exactly, because the
banks have still not come clean and because assets in bank
portfolios continue to lose value as housing prices continue to
The great capital losses mean
Wall Street is sure to get smaller--a lot smaller--with fewer
firms, less leveraged deals based on inadequate capital and a
general retreat from its domineering role in economic life.
Personally, I believe a smaller Wall Street will be good for the
country, part of restoring balance to the damaged economy.
In any case, it is folly for
Washington to imagine that it can--or should--simply replenish
Wall Street's great loss. That essentially is what Paulson's
blanket bailout attempts to do--restore conditions to "normal"
by buying up the bad assets from banks at inflated prices. In
other words, supply the missing capital that private lenders
won't provide. Good luck with that.
"Normal" is not in the cards.
Trying to accomplish this, given present realities is not in the
country's interest. It also resembles King Canute trying to
command the tides.
The real goal for government
intervention should be to manage Wall Street's inescapble
downward adjustments in ways as peaceable as possible. Stabilize
the shrinking financial system so it will keep the the real
economy going, that is, insure that credit and capital flows
continue, while Wall Street is gradually cut down to normal
size. There is real pain in that for everyone, but the objective
is concrete and manageable.
Washington would exercise an
activist supervisory role and offer deals in exchange for
cooperative, compliant behavior. Bank regulatory agencies,
including the Federal Reserve, already do this with troubled
banks; now they have to step up with a more forceful hand.
Banking watchdogs estimate at least 100 (maybe 200) banks are
already doomed to fail. But another 1,000 banks are still
solvent but on the edge. These can be managed to safe ground
with tougher regulatory controls and some aid. Subsidiary
financial markets need similar treatment and liquidity
injections if they seize up.
At center stage are the big, bad
players--the mega-banks and some others--who took the extreme
risks and are now conveniently described as"too big to fail." If
that's so, then one goal of government should be to make them
get smaller, either through market forces or by lawful edict.
The public likewise needs a new federal agency to manage the
deal-making--something like the Reconstruction Finance
Corporation during the New Deal--and determine which major banks
can be cleaned up and stabilized, which ones cannot. The
objective is not to save everyone--that is not what the nation
needs--but to wind up with a broadly balanced financial system,
chastened by new rules and ready to serve the rest of us, rather
than eat us alive.
Only the federal government can
do this. But I am suggesting government should mimic the
hard-headed assumptions and practices that are commonplace in
Wall Street. Don't take wishful promises in exchange for your
money. Insist on hedges to protect the broad public interest.
And get it in writing.
Maybe Warren Buffett and some
other trustworthy capitalists would come to Washington during
this emergency and show government officials how to make real
deals. These are savvy people. Many are genuinely interested in
helping the country get out of this mess. We could offer them a
dollar a year.
Update: After I filed the
above, the New York Times reported that Bill Gross,
managing partner of Pimco, the giant bond investment house, is
offering to serve as expert advisor to help Treasury sort
through the rotten bank assets. "If the Treasury wanted to use
our help, it would come, you know, free and clear," Gross said.
Like Warren Buffett, Gross is a brilliant capitalist who plays
to win. I happen to know him and I trust him. He has an
enlightened understanding of global capitalism, not just
financial markets and monetary economics but the deeper tides of
history. In fact, Gross should be the next president's pick for
chairman of the Federal Reserve. I don't know his politics,
though I assume he is Republican.
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