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Paulson's Offer No Bank Could Refuse

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It was a scene that would have fit better in the classic gangster movie The Godfather than in the seat of financial control of the most powerful country in the world. Treasury Secretary Henry Paulson sat the leaders of several of the biggest and most powerful banks in America together in a room and literally made them an offer they couldn't refuse.

That's right, Paulson forced the banks to accept billions worth of bailout-funded government investment. At least one bank, Wells Fargo (NYSE: WFC  ) , protested on the grounds that it didn't need the money. Another two, Bank of America (NYSE: BAC  ) and Morgan Stanley (NYSE: MS  ) , were recently able to raise billions from the private sector and claimed they didn't need Treasury's help.

You've been had
Handing over taxpayer dollars to banks that don't need or even want the money? Forcing the banks to take the cash (and the strings attached to it)? Making the investment as shares of preferred stock and warrants to buy common stock, rather than the "toxic assets" pledge of the original proposal? What happened to the financial crisis that was so devastating that the entire economy would collapse unless Congress immediately approved a massive bailout bill?

This bailout is less than a month old, and already it has resulted in significant waste and abuse of power. That has to be close to a record, even in Washington D.C. No wonder the same politicians who rammed this debacle down our throats are now claiming that it'll take a while for the markets to return to normal.

It will only get worse
While Paulson and his counterpart in this chaos, Federal Reserve Chairman Ben Bernanke, have claimed they're only trying to help the market recover, their actions paint a different picture. Their so-called rescue attempts are running roughshod over two of the most important mechanisms the market has at its disposal to self-correct its excesses: price and punishment.

As a result, they're actively damaging, rather than repairing the market. The more they help, and the more force they use when ramming that help down the throats of American taxpayers and businesses, the longer and more painful it will be before the real recovery starts.

Oh, sure -- in the short run, the trillions of dollars that the government is pouring into its bailout attempts may seem like they're propping the market up. But even Warren Buffett -- an early supporter of these monstrous bailouts -- acknowledged in a recent New York Times op-ed piece that inflationary devastation will likely follow. (Welcome to the club, Warren -- glad you could join us.) That inflation is a crisis that certainly cannot be solved by running the Federal Reserve's printing presses at full speed.

What to do?
Aside from U.S. federal government debt -- which is booming thanks at least in part to the fact that no other asset seems safe from Paulson's interventions -- the debt market is still in shambles. Cash accounts aren't paying near enough interest to keep pace with current inflation. At this point, stocks -- which have also been devastated by this crisis -- may well be the best asset class in which to ride out this storm.

Don't just take my word for it. In that same op-ed piece, in fact, Buffett himself claimed he was moving his personal investment accounts away from bonds and into U.S. stocks. For obvious reasons, Buffett declined to name which stocks he happened to be buying. If Buffett's history at Berkshire Hathaway is any guide, however, those stocks are likely ones that:

  • Have strong balance sheets,
  • Are not overpriced,
  • Have solid economic moats, and
  • Reward their shareholders with dividends.

Even in the midst of our current market meltdown, the chances are pretty slim that these Berkshire Hathaway holdings are going to fall off the face of the Earth:


Shares Held by
Berkshire Hathaway

Dividend Yield

S&P Credit

Trailing P/E Ratio

Johnson & Johnson (NYSE: JNJ  )





Wal-Mart (NYSE: WMT  )





American Express (NYSE: AXP  )





Costco (Nasdaq: COST  )





In the short term, it may feel safer to hold cash through this incredibly volatile period. As Buffett's op-ed points out, though, "bad news is an investor's best friend. It lets you buy a slice of America's future at a marked-down price."

Our country's political class will likely continue to dig the rest of us deeper into this morass while claiming to be trying to help dig us out. While there's little we can do to stop them, we can protect our long-term financial futures by following Buffett's lead and buying great companies at reasonable (or even downright cheap) prices.

At the time of publication, Fool contributor Chuck Saletta owned shares of Bank of America, Johnson & Johnson, and American Express. Johnson & Johnson and Bank of America are Motley Fool Income Investor picks. Wal-Mart, Berkshire Hathaway, and American Express are Motley Fool Inside Value picks. Costco and Berkshire Hathaway are Motley Fool Stock Advisor selections. The Fool owns shares of Berkshire Hathaway and American Express. The Fool's disclosure policy is temporarily hiding out in Sicily under the protection of Don Tommasino until this whole mess blows over.

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