MONDAY, SEPTEMBER 29, 2008
ACT IN HASTE, REPENT AT LEISURE.
That sententious warning has been around since at least 50 B.C. or thereabouts, when its Latin equivalent was coined by a scribbler named Publilius Syrus. Somehow, though, the sensible injunction to consider before you commit appears to have eluded that fidgety trio, George Bush, Henry Paulson and Ben Bernanke. Rather a shame, too, because the financial fate of the world rests uneasy in their shaky grasp.
While their record of economic fumble and fiscal failure is not of a sort to inspire confidence that they're just the guys you'd want to do battle with a monster financial crisis, we must admit that at least they've grudgingly come to recognize there is one. A major accomplishment!
After all, it seems only yesterday that the president insisted that the economy was fundamentally strong, that the Treasury secretary declared that there were no plans -- and implicitly no need -- for a big bailout, and the Fed chairman opined that the economy was not so good or not so bad, depending on what hour of which day he happened to be delivering the assessment.
So forgive us if we harbor a sliver of doubt that they have the necessary insight, foresight and clear sight to lead us out of this miserable morass. Or that a project that entails shelling out $700 billion can be rustled up in a few frantic days, that the way it's supposed to work can be sketched out in three not very elucidating pages, and that it can be launched under their inept auspices and prove the answer to our prayers (more likely, it'll prove the answer to the prayers of the likes of that nasty little bugger from Iran and the blowhard from Venezuela).
As an inordinately perceptive friend of ours remarked, what Paulson was proposing was the creation of a blind pool to end all blind pools, funded with your money and ours. (For the edification of the lucky innocents out there who've never heard of, much less invested in, the blamed thing, a blind pool was conceived by Wall Street bucket shops to sell stock in a nascent company bereft of prospects, profits or products, with nothing, that is, but the promoters' assurance to gullible investors not to worry, once they got the dough, they'd think of something.)
Congress, which you can usually count on to be dependably sluggish in tackling the most innocuous item on the legislative agenda, has been roused from its customary stupor and shooed into hurry-up mode to approve the $700 billion bailout with a scant few tucks and additions. Of course, our blessed representatives not having the foggiest notion of what they're voting on is strictly business as usual on Capitol Hill.
What made the lawmakers giddyap into the express lane were two things. First, with the election looming ever larger and ever nearer, they were scared stiff of being accused in Harry Truman's famous formulation of being "a-good-for-nothing, do-nothing Congress." Especially since that's pretty much what they've been.
The other, more compelling impetus was that the solons were hot to beat it out of town before spending more of their precious recess days on a little thing like a massive credit crunch. And who can blame them -- their jobs may be on the line. (We can only hope.)
On Thursday, at a make-or-break confab on his great plan at the White House, Paulson literally got down on one knee begging Nancy Pelosi to get her House Dems behind his proposal. Pelosi was understandably taken aback and pleasantly flustered. Her first impulse was to remind him she was already married, but pulled herself together and suggested the secretary go with his bended knee to his fellow Republicans, who were balking at the bailout. For some inexplicable reason, he didn't think that would play well; besides, his knees were hurting.
In his original proposal, Paulson wanted the final say on just about every aspect of the operation -- with no appeal, no recourse and no real oversight. Congress added one "no" to that list -- "no go." Except that it will be ugly and the usual Washington triumph of principal over principle, as we labor over our keyboard on a fittingly stormy Friday afternoon, the shape and substance of the final package agreed upon once the GOP mutiny has been quelled remain murky.
The heart of the undertaking -- the purchase of those aforementioned deadbeat assets, that is, mortgages and mortgage-backed securities -- is what price Uncle Sam will pay for them in the effort to bolster the banks with a massive dose of capital, coax them into lending again and thaw an increasingly frozen credit market. That, in a nutshell, is the $700 billion question.
Contrary to the rosy-colored projections of the incorrigible optimists, whose ranks include Dubya himself, the price will not be rock-bottom or what those assets are truly worth (in many cases, there may not be a difference). In other words, the price won't be what the bloodless verdict of the market says they're worth -- but, to get the banks up and lending again, a heck of a lot higher than anyone other than the government would pay for them.
If Uncle Sam were to follow Warren Buffett's lead in his $5 billion investment in Goldman and get a piece of the action from the beneficiaries of Uncle's largess, if and when things get better (we're a closet bull and expect they will, but don't ask us when or even what decade), it might sell that stake and recoup a slice of the $700 billion. But, under any circumstances, if you believe it's not going to be a hugely expensive rescue with the costs borne by Phil Gramm's wimpy whiners -- the beset taxpayers -- we say, dream on.
In any recognizable form, the bailout is not the magic potion that'll overnight make housing whole, revive the moribund credit system, spark sagging capital expenditure, retrieve disappearing consumer confidence, reverse the upward spiral in joblessness and cure all the myriad other grave ills that afflict the markets and the economy. It won't, in short, roll back the recession, which in the months ahead is destined to grow increasingly and inexorably meaner.
Pure and simple, the great unwind of feckless policy, debt addiction and insatiable greed that is visiting such grief on this proud nation still has a long and painful way to go before it calls it quits.
Investors have gotten a heartening lift from all the hoopla surrounding the bailout, the impression, mistaken or not, that someone out there is at long last doing something constructive, and perhaps a few embers of euphoria. Although last week's bailout bash was cut short by concerns that the wrangling in Congress would derail the plan, we expect the mood on the Street to turn buoyant again when something is finally hammered out.
And that would be an ideal time to sell, to steal a beat on the inevitable disappointment that's sure to come either quickly or gradually, as the evidence mounts that the recession is remorselessly deepening and recovery remains a tantalizing but stubbornly distant prospect.
WE'D BE REMISS IN FAILING to take note that, besides the prospect of all those billions pouring into the banks and the coffers of miscellaneous outfits pleading extreme duress, the stock market got conceivably an even more potent shot in the arm from the disclosure that Warren Buffett had invested $5 billion in Goldman Sachs , which cleverly piggybacked the news by raising $5 billion more via a sale of common to anyone with the scratch to buy the shares.
Goldman, along with Morgan Stanley, was the last of the big investment banks still standing before opportunistically switching status and becoming a commercial bank. Its stock, which had sold at $250 a share just about this time last year, has been steadily eroding in value in the wake of Bear Stearns' and Lehman's demise, until it had been cut by more than half.
When Buffett announced he was buying into Goldman, the move was widely hailed in the concrete canyons of Wall Street (and out in the greater world, as well) as proof positive that the end of the world is not nigh. We hesitate to go that far, but we do think it's fair to view the purchase as a show of confidence by one of the canniest investors extant.
More specifically, Buffett's Berkshire Hathaway for its five big bills got an issue of perpetual preferred Goldman shares with a neat 10% annual dividend, which according to our abacus translates into $5 million a year. (Goldman can buy back that stock at a 10% premium.) As a further sweetener, Berkshire received warrants to buy $5 billion worth of common stock at a strike price of $115 a share. Last we looked, Goldman's common was fetching $137 and change.
We feel safe in saying that whatever non-pecuniary motives were involved -- and we don't know that any were -- the deal does nothing to diminish Buffett's reputation as one smart cookie.
Indeed, as our old friend Doug Kass of Seabreeze Partners reckons, it was even better than the bare numbers suggest. Doug, we should note, is one of an endangered species, a short seller. Indeed, as we reported with some skepticism earlier this year, he shorted Berkshire a sizable bunch higher than it trades for today.
Doug figures that the value of the warrants reduces Berkshire's purchase price of the Goldman preferred by $2 billion, raising the effective yield on its preferred to 17%. If only Uncle Sam manages to get something besides thanks from the needy banks and does half as well. Who said, "Wanna bet?"
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