TMQ

[digitaldiscipline]

Greg Easterbrook, of ESPN (emphasis in original): As Congress continues to debate whether they are going to hand over $700 billion of your money to the wealthy who screwed up Wall Street and the banking industry, you will be relieved to learn that top executives of the bailed-out firms temporarily will be limited to a strict $500,000 a year in tax-subsidized income. Surely you receive $500,000 a year in tax-subsidized income, don't you? Anyway, supposing we assume the bailout is required, here is what bothers me about the plan so far: Taxpayers don't get stock, what they get is warrants that can be exchanged for stock, and nonvoting stock to boot. This means that once media attention switches to the next crisis that everyone will claim in retrospect to have seen coming, the Wall Street rich can quietly lobby to have the warrants never called, thus keeping the entire bag of gold for themselves. Even if the warrants are called, taxpayers get no voting positions -- meaning the boards of directors of the bailed-out firms can do anything they damn please with taxpayers' money.

A week ago, Warren Buffett rescued Goldman Sachs by injecting $5 billion in capital. Did Buffett bargain for warrants that can be exchanged at an unknown later date for nonvoting shares? No: He is not a fool. Buffett gave Goldman Sachs $5 billion in return for senior preferred stock, the kind that votes and also is more valuable than ordinary shares. That is to say, he used his money to buy something. Goldman can now employ the cash to fix its liquidity problems. The United States Congress and the White House should use the public's $700 billion to buy something, namely senior preferred shares. Why are Congress and George W. Bush not simply following the road map laid out on this problem by the smartest investor of our era? Either Congress and the president are a bunch of blithering fools -- or what they actually want is to insure the public's money is never seen by the public again.

Comments

[y2kdragon.livejournal.com]

My question is, why doesn't our government listen more to who is arguably the smartest man in business EVER! Warren Buffet casts an eye in the direction of something, and it instantly turns to gold. Ok, maybe not quite that. But the man is famous for smart business acumen, even in the worst of times. He doesn't print money, it pulls it out of thin air. He even know when to invest money into things that won't turn a profit for a long time because....IT'S HOW THINGS WORK. You don't invest in something because you think you're going to double your money tomorrow.

You do it because, in the long run, you'll end up with more than you started with.

[ruefullyamused.livejournal.com]

Greeeaaaaaat...one of the most salient points I've seen raised yet and it comes out of ESPN? *facepalm*

[the_axel]

Yeah... Actually the source is pretty indicative of the quality of the comment.

First, Buffett bought perpetual preferred shares - preferred shares are almost never voting shares, and I haven't seen anything that says that those were an exception.

Thing is, he doesn't need a vote because just threatening to dump the stock will get them to do what he wants.

Second, he did take $5 billion in warrants exercisable over the next 5 years.

Thirdly, the reason for calling it a warrant is not because the government would be spending money for options. Money changes hands at the point the warrant is exercised, not before.

What it means is that new stock is created at the point the government hands over the cash, at a pre-defined rate, not what the stock is trading for, which, because the government decides when to hand over the cash serves to stabilize the market up to the point at which the stock is issued, allowing the government to say "We can buy $10 million in shares at $20 a pop whenever we want to", which will cause the market to stabilize around $20 without the government actually having to spend a penny.


The more important point is that Paulson didn't want the option of using warrants. He just wanted cash to bail out banks by buying crappy securities.

The Democrats forced the option for him to spend some of the money on warrants in, which given that he didn't ask for that option he likely wouldn't use.

Hopefully the next attempt will require most of the money to go via warrant.

This is good.