Warren Buffett's thank-you letter to the government reminds me of watching an English Premier League soccer "match." Let's say EPL powerhouse Manchester United are playing. It is fitting that their uniforms used to feature the AIG symbol brazenly across the chest.
The opponent is a blue-collar, but outmatched, team like Wolverhampton that the everyday man would like. It's been a good game, but they are still down 2-0 with five minutes left, when a Manchester United cherry-picker scores on a breakaway to put the game out of reach for good. However, instead of acting like gentlemen, the entire team breaks out into an obnoxious dance mocking Wolverhampton. The match was almost unfair. Manchester United knew they had much more money than the other team, as well as important relationships with all of the big sponsors and influential people. They certainly worked hard to earn the right to dance, but it was completely unnecessary.
Buffett has certainly earned the right to celebrate his investments, but I believe this public victory dance was unnecessary. I am not going to argue the merits of the bailouts, and whether we would be better off with or without the assistance. Fortunately, we'll never know if the country would have gone into the abyss if the government did not intervene. However, I will argue that the bailouts have benefitted Warren Buffett much more than the majority of Americans, and that thanking the government is like thanking the arsonist who burned down your house for cleaning up the mess.
Sorry about the mess
The government shouldn't bear all of the responsibility for the financial crisis, but let us not forget who repealed Glass-Steagall in 1999. In fact, only eight United States senators voted against what President Bill Clinton's administration at the time was hailing as one of the most important breakthroughs in the history of our financial system. The law is what separated "Main Street" commercial banking from investment banking, essentially preventing banks such as Citigroup (NYSE: C ) , Bank of America (NYSE: BAC ) , and JPMorgan Chase (NYSE: JPM ) from becoming "too big to fail."
Then-Treasury Secretary Larry Summers said, "This historic legislation will better enable American companies to compete in the new economy."
The government also waived laws that restricted the amount of leverage these megabanks could take on. In addition, credit agencies like Moody's (NYSE: MCO ) , of which Buffett owned 20% of the shares outstanding around the time of the crisis, were allowed to change the way they were compensated. This new profit extravaganza allowed the credit agencies to charge the actual underwriters for their highly minted ratings. So it didn't matter how overlevered these banks were because the agencies were now incentivized to give favorable ratings to everything on the banks' balance sheets.
The global savings glut
This is what Ben Bernanke called the pre-crisis global economic condition in 2005. This referred to the increasing amount of saving over consumption across the globe in emerging and large economies, due to a lack of investment opportunities domestically. Much of this foreign savings was invested in America, and low interest rates provided incentive for spending over saving. Pre-crisis, foreign funds bought U.S. Treasuries and mortgages, keeping already artificially low interest rates even lower. In the late 1990s, this went into the hot tech bubble, and of course more recently it helped Americans fuel the housing bubble. Increasing stock prices or inflated home values help consumers feel wealthier, which in turn creates more spending.
As Buffett said himself, "In truth, almost all of the country became possessed by the idea that home prices could never fall significantly. ... This bubble was a doozy, and its pop was felt around the world."
But it wasn't the millions of Americans who saw the value of their homes plummet that got bailed out. It was the financial institutions that helped fund the bubble, and that were counterparty to many of Buffett's investments and his own company Berkshire Hathaway (NYSE: BRK-B ) .
Buffett's largest equity holding at the time TARP money was handed out was in shares of Wells Fargo (NYSE: WFC ) . The bank received a cool $25 billion of taxpayer-backed TARP funds. And who can forget Buffett's deal with $10 billion TARP recipient Goldman Sachs (NYSE: GS ) ?
In September of 2008, Buffett invested $5 billion in the investment bank, which gave him preferred shares that came with a 10% yield and warrants that allowed him to buy $5 billion in common stock about $10 below the price of the stock when the deal was first announced. I don't know many other Americans who were allowed in on this one.
The long cleanup
Indeed, Warren Buffett should be thankful for the government work that bailed out many of his investments, and perhaps his own company. Unfortunately, Americans whose homes didn't get bailed out or the nearly 10% unemployed Americans who still don't have their jobs bailed out don't have as much to be thankful for.
The fire that the government helped ignite may be cleaned up on the Buffett estate, but for many the flames still rage on, and the cleanup has yet to begin.
Congratulations on your personal victories, Mr. Buffett, but the celebratory dance was not necessary.
RSS Headlines
Fool UK