One of the annoying and persistent Big Lies of the financial crisis is that the rescues were a really good thing because they saved the world as we know it. That argument is dubious for a host of reasons: the world as we know it is the very same one that went off a cliff, so we seem to be committing ourselves to the financial markets version of Groundhog Day; the choice was not between rescue and no rescue, but the type of rescue the officialdom implemented and other forms of intervention.
At Minyanville (hat tip reader Michael Thomas), former Reagan budget director David Stockman eviscerates a New York Times op-ed by Warren Buffett in which the Shill of Omaha contends that the seize-up of the commercial paper markets in September 2008 been allowed to persist, it would have represented a comet-wiping-out-the-dinosaurs level event as far as ordinary Americans were concerned. Key excerpts:
If Warren Buffett wants to tarnish his golden years emitting the gushing drivel that appears in today’s New York Times, he has undoubtedly earned the privilege. But even ex cathedra pronouncements by the Oracle of Omaha are not exempt from the test of factual accuracy. Specifically, his claim that “many of our largest industrial companies, dependent upon commercial paper financing that had disappeared, were weeks away from exhausting their cash resources” is unadulterated urban legend. Nothing remotely close to this ever happened….
Indeed, even a cursory review of the composition of the $2 trillion CP market as of September 2008 shows that the “blowup” was actually about losses on reckless bets by a few thousand money managers, not the availability of ready cash to millions of Main Street businesses.
In the first instance, well less than $400 billion of the total CP outstanding consisted of industrial corporation paper — that is, funding of the kind that might have been ordinarily used to cover payrolls and similar operating expenses. But let some enterprising graduate student investigate the limited universe of investment grade industrial companies then accessing the CP market. How many of these issuers lacked unused back-up revolving credit lines at the banks — for which they had been paying “standby” fees year in and year out for just such a contingency as the Lehman event seizure in the CP market? The answer is virtually none: The great industrial companies to which Buffett refers used CP because it was cheaper (even with 15 bps of standby revolver fees), not because they wished to put their enterprise in harms way every 45 days. Moreover, there is not a shred of evidence that any bank even threatened to default on contractual obligation to fund these back-up lines.
The next crucial fact is that the entire balance of commercial paper then outstanding — some $1.6 trillion — had nothing whatsoever to do with funding business payrolls or heat and light bills. Instead, it consisted entirely of the short-term liabilities of the shadow banking system — funding that permitted the financial arbitrage profits on which the whole system was based….
ecause the securitized ABS market has now shrunk to a shadow of its former self, it can be definitively said that nothing was flushed down an economic black hole in the fall of 2008 or at any time since. Not one auto loan has even been denied and not one credit card authorization request has even been disapproved because the CP-ABS market disappeared. Instead, such loans are now largely funded and retained on the balance sheets of the banking system originators — which, drowning in excess reserves anyway, haven’t broken a sweat. What has disappeared are the arbitrage profits that banks were raking off from foolish money fund managers who have finally seen that the “enhanced yield” they were obtaining from CP-ABS paper was not evidence of a better mousetrap — just their own cupidity.
You can read the piece in its entirety here.
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ge had ~100bn of cp back then, but as stockman notes, the massive growth from ’04-’08 came from asset backed cp, ie siv type dreck. this is the cp link and outstamdings chart tells the story.
http://www.federalreserve.gov/releases/cp/
If Stockman is correct that originate and securitize has been replaced by loan and hold, the “bailout” would have to be judged a success in bringing lending back within the sphere of regulatory oversight and also a success in restoring self interest (or fear of loss), i.e., the market to a self regulating mechanism. Recall Alan Greenspan’s confession of a flaw in his ideology in Congressional testimony–his surprise that originate and securitize at high velocity removed that self regulatory mechanism. And recall Bernanke’s testimony in the early days to the effect that the Fed’s various rescue programs were aimed at the near 50% of credit dependent on the securitization markets, which is to say the balance sheets of trading counterparties.
“back within the sphere of regulatory oversight”- Grand words for a bought-out process. “Regulatory pimple” might fit reality better.
Not to mention that if it were really necessary, the government could easily have set up a direct corporate paper lending facility. Sovereign currency. No banks needed to be involved at all.
There again we see how absolutely no aspect of the Bailout was ever necessary.
Well, there’s a little more to the story that Stockman leaves out.
Money market funds were huge buyers of commercial paper (of all types) and the “large industrial companies” to which Stockman refers had parked large amounts of cash in these MMMFs. We were in fact pretty close to having a whole series of MMMFs break the buck.
Again, I agree that the bailouts could have been structured much better, but I’ll never buy into the nonsensical position that we could have let the entire money market go off a cliff without there being any significant economic repercussions.
Agreed!
The most egregious and infuriating mistake of this whole saga was the absolutely criminal neglect of the regulators and politicians after the collapse of Bear Stern.
That was the window of opportunity to examine, analyze and prepare for an eventual repeat.
But no! Let’s fuck around with such important issues such as how fit for Speaker of the House a woman can really be or the latest from the judges on American Idol.
Bear Stern was too many months from the 2008 election to risk demonstrating to Congress and the public that the world would not end absent torrents of public resources.
Buffett and Stockman are arguing over the issue of corporate funding (payrolls, lights, flushing toilets). IMO Stockman has the better of that argument.
You seem to be concerned with the harm which might have been occasioned third-parties (MMF investors) from runs on the MM funds. Weren’t those harms obviated by the Federal Reserve establishing the AMLF? And that facility was established within a week of the Lehman bankruptcy.
As Stockman implies, institutional MMF investors knew full well that they were accepting a high degree of risk in consideration of receiving the extra basis points they were getting. Bailing out Harvard and Wharton MBAs — who were paid big bucks to take risks — at anything near 100 cents on the dollar was immoral.
Right, but as Ellen1910 points out, weren’t MMFs backstopped anyway?
Buffet seems to have been on CNBC subsequently ,saying that he was referring to the actions taken the week after Lehmans failed(establishment of the AMLF?). I suspect he did not word his op-ed as carefully as he could have done.
The temporary money market fund insurance was the only one of the bailouts which was actually necessary to avoid worse disasters. The *only* one.
Loved your allusion to Groundhog Day!
Or, as Yogi might say: It’s Groundhog Day all over again!
I always like to hear Stockman’s comments. He wrote a book “Triumph of Politics- why the Regan Revolution Failed”. He was the OMB director under Reagan (remember taken to the woodshed), The book is a facinating account of what happens behind the scenes and admits he was a idologue going in. He describes why the Laffer curve did not work. He is a bright guy capable of intelligently commenting.
He also pretty much debunks the theory that Reagan was a true conservative. Like Bush II, good with the talk, Reagan had no substance. The debt curves when wild under both Reagan and Bush II. Bush I tried to do something about it and was thrown out by his own party.
“we seem to be committing ourselves to the financial markets version of Groundhog Day”
Witty :). Love the metaphor.
Buffett has credibility earned through 6 decades of insight and excellent investing. Stockman is a political hack, without 1/1000th the success of Buffett. But he has a big mouth. Everyone these days, no matter how moronic, gets to be taken seriously.
Stockman is no moron, but he’s no Buffett. He’s not even in the same solar system as Buffett.
Buffett did not say everything was left in perfect shape. He simply said things could have been a lot worse.
Stockman saying it was all a big mistake is gutless. Anyone can open his big yap and say nonsense like that now. Things aren’t good, no. But he has no basis to say things are worse than they would have been.
This is why the US is toast. Every moron with an opinion gets taken seriously by a bunch of other morons. And no one’s held responsible for facts or good old-fashioned hard analytical work. It’s all blowhardism.
Your arguments are all either ‘ad homneim
attacks’ ( I. E stockman is gutless) and/ or
based on a form of idol worship (ie ‘Buffet
6 decades of insight and successful
stock selection’).
Please be more specific when giving your reasons as to why Stockman us incorrect.
Yes, Stockman is no Buffett. However, Buffett to me is no longer a capitalist. To me, he is now just a guy on the make to ensure his legacy as the greatest investor ever. A capitalist would have said that the economy crashing—no matter how hard—was a necessary correction so that fools would be punished and lessons would be learned. That is what is supposed to make capitalism work. If you don’t want to deal with the short term inconvenience of crashes, become a communist or something. This bailout just delays the inevitable and has made it worse—as the readers of this blog know so well. And funny how all these “necessary” steps endorsed by Buffett et al, have enriched themselves and made the average Joe poorer. It’s not how much money you have; it’s how much money you have relative to everyone else. The crash would have punished the top more than the bottom and a flattening of wealth would have occurred. Instead we have a widening of wealth.
Dirk, you hit the nail square on the head. Great insight. The game is rigged
He’s not even in the same solar system as Buffett.
Yes, Buffett’s level of crime has been matched by few in history. There he truly is an elite.
Why should anyone other than a fool admire Warren Buffett? Any thinking person should despise him for the hypocrite he obviously is:
In August 2009, Rolfe Winkler pointed out the following facts:
“Were it not for government bailouts, for which Buffett lobbied hard, many of his company’s stock holdings would have been wiped out.
Berkshire Hathaway, in which Buffett owns 27 percent, according to a recent proxy filing, has more than $26 billion invested in eight financial companies that have received bailout money. The TARP at one point had nearly $100 billion invested in these companies and, according to new data released by Thomson Reuters, FDIC backs more than $130 billion of their debt.
To put that in perspective, 75 percent of the debt these companies have issued since late November has come with a federal guarantee…..
http://blogs.reuters.com/rolfe-winkler/2009/08/04/buffetts-betrayal/
I’d like to add a anecdote to the “Buffet is God” theory- one based upon a personal encounter with his chief lieutenant.
In the late 90’s I owned a yacht manufacturing company in Washington State. One day I received a call from a naval architect associate, asking if I would like to meet with a potential client for a new yacht. We met with a dapper little man in an ill-fitting business suit who claimed to be the recent purchaser of an uncompleted large yacht designed by my friend. I knew the details of the project– the builder had stiffed the designer his fee, and built it with no structural engineering input and no quality control. The vessel was not salvageable, and its only use was as filler for dumpsters.
Our “prospective client” showed us a series of pencil sketches literally drawn upon napkins. He was proposing to acquire a shipyard and spend several million dollars finishing out a hulk that would break apart as soon as it took to the open ocean. The most hair brained proposition I have ever encountered, and believe me there plenty in the yacht business. When he claimed to be representing Berkshire Hathaway, I concluded that he was a delusional imposter because no chief officer of the richest investment firm in the country could be that naive.
A year or so later Warren Buffet was on TV celebrating his latest triumph, and standing at his right hand was our pigeon, Charlie Munger. I shudder to think what might have happened had I fed his delusions— Buffet and Munger going to a watery grave and me condemned to 1000 years in debtors prison by the angry stockholders. I guess the lesson to be learned is that its better to be lucky than smart, and that you don’t have to be smart to become a billionaire!
Counterfactual arguments are easy to write and impossible to prove. deep in my gut, I would say that I’m in the middle of Buffet and Stockman here.
On the one hand, it is very clear that the immediate losses in the CP market would not have directly lead to stress on businesses.
on the other hand, it is also very clear that our economic structure is too complicated for our brains to really understand
For instance, few if any foresaw the Reserve Fund breaking the buck, leading to fears of a mutual fund panic. with all these synthetic derivatives it was and is impossible to know what would have failed and what would have been left standing.
so on the one hand I agree with Stockman: the CP market was clearly supported to help the financial houses, and not Main Street Businesses. Buffet saying otherwise is a joke.
but on the other Buffet makes a true point: that we were facing into the abyss.
obviously this doesn’t mean that Team Bush/Obama did the correct thing. Nationalization would have been better IMO (there’s that counterfactual thought process again!)
Certainly, there could hardly be a worse system than what we have now… crony capitalism that protects and enshrines Too Big to Fail zombie banks and connected interests.
Yes, TARP really saved the day. Bernanke warned us at the time that if we didn’t hand over a trillion dollars, unemployment would go
up to 10 percent. I’m glad that didn’t happen.
The other great myth is that TARP has been repaid.
Anyone out there want to give me 20 billion dollars, then pay
me interest on that 20 billion. Oh, and also give
me 10 billion through a third party insurance company. I promise
to give you 20 billion of your completely deflated dollars in
a couple of years.
Obama is awarding Warren Buffet The Presidential Medal of Freedom, the country’s highest civilian honor, given to people who have made “especially meritorious contributions to the security or national interests of the United States. The same medal Bush awarded to George Tenet, direct of the CIA, for exemplary service in the run-up to the Iraq War. Orwell is laughing hysterically in his padded casket.
http://www.marketwatch.com/story/obama-to-honor-buffett-with-medal-of-freedom-2010-11-17
George Soros’ support for the legalization of cannabis means that he’s against the war on drugs. And if he’s not a neocon, he’s probably also against the war on terror. I must say that any man that’s willing to use his wealth and power to undermine our totalitarian warfare state by trying to cut off the gravy train to our illegal war and drug profiteers is a man after my own heart.;~)
And perhaps this explains why our warmongering, peace prize-winning president awarded the 2010 Metal of Freedom to Billionaire Buffett rather than to Billionaire Soros. Come to think of it, if Obama had been successful at raising taxes on the super rich, he wouldn’t feel the need to hand out awards to billionaires like Buffett for being so charitable with their billions!
Made even more Orwellian by the close juxtaposition in time with the recent awarding of the Medal of Honor to Staff Sgt. Salvatore Giunta a soldier that probably makes about 30k per year. You have to worship the wealth spread here.
“The presidential medal of freedom
The Presidential Medal of Freedom is America’s highest civilian honor, the equivalent of the military Medal of Honor in times of war.”
http://www.essortment.com/all/presidentialmed_rlxd.htm
Congratulations to Banana Republic General Warren Buffet. Will he wear his golden knee pads to the ceremony? Stay tuned.
Deception is the strongest political force on the planet.
Funnier still is that Obama is also awarding this highest medal of honor to George Bush, Sr. No, really. I’m not sure why, perhaps for saving the monarchy of Kuwait, or maybe Obama just enjoys rubbing a bit more salt into the wounds of his crazy, drug-addled base of whiners. Up yours, professional left; wait ’til you see my second act.
http://www.albuquerquenews.net/story/709187
I hear Buffett is wearing gold-plated diapers, wears a gold pacemaker, and pops in a half a dozen gold-plated Viagra pills before jumping the bones of his secretary (who’s his grandfaughtrr’s age). That makes him feel young and manly…lol
Psychoanalystus
Better yet is Barry Ritholtz’ “Dear Uncle Sucker . . .”
http://www.ritholtz.com/blog/2010/11/dear-uncle-sucker/
This pathetic old mad, Buffett, makes me sick. He is a disgusting greedy bastard with ADHD that can’t seem to get his fill of money. His “golden age” is a caricature of what all psychological research indicates a man his age should be like. Sad, pitiful, and ridiculous. That’s how this doctor views the “oracle of Omaha” or whatever he calls himself today.
And now, in case some Buffett employee reads this, I have a direct message for Mr. Buffett: why don’t you go see a shrink to get some ADHD medication, and calm down a little. Then pick up the phone and call ALL your children and grandchildren and apologize for what you have done to them (and that included the daughter you ostracized because she won’t go to your church and won’t subscribe to your red-neck ideas). Learn to be a father and a grandfather, you ridiculous man, you. And put a lid to your lies and your greed already. Put a stop to your greed, and discover what it means to be a human being, a father, a grandfather. How’s that for a diagnosis and treatment plan?… you disgusting, pathetic, greedy piece of red neck, you?…LOL
Psychoanalystus
Buffet is emitting this “gushing drivel” for a reason. We should be asking WHY it is sooooooo important that these myths be given such credence.
These myths are a control mechanism, and Buffet’s amplification is a response to Black, Ferguson, and others that have cried out “the emperor has no clothes!”
This raises a disturbing question: How far will TPTB go to protect the current banker-friendly regime? (This question would seem to apply equally to Euroland.)
there is a small but vocal band of hardy paleontologists who say the dinosaurs were in general decline for several million years before the comet/asteroid of the Yucatan came and that about half the species continued to linger on for several million years later. Perhaps they are the first examples of QE and easy money success.
As a leading shareholder of Goldman Sachs, Warren Buffett once said he admires Lloyd Blankfein so much that “if Lloyd had a twin brother I would vote for him”. And as a leading shareholder of Moody’s, Buffett, the “smartest investor in the world” (as the media constantly reminds us) claims to have been completely unaware of the housing bubble. According to him, he was also unaware of Moody’s willing participation in subprime mortgage fraud. “I’m not aware of any fraud”, Buffett said in the interview. “They made big mistakes, but who didn’t during the housing bubble.”
Give me a barf bag, Warren Buffett is a complete fraud. He’s nothing more than a walking turd. It’s incredible that there are still Americans who are naive and gullible enough to idolize this piece of garbage.
i waas reading ‘diary of a very bad year’, the anonymous hedge fund manager being interviewed described that the cargo fleet started to go idle because of the short term commercial paper market…
other people were saying the atms might stop. which i can believe, if the bank that runs the ATM network for an area shuts down and nobody shows up for work, alot of things would have quit.
i mean just imagine a bank that processes utility bills… if that bank shuts off immediately, overnight, no warning… then suddenly the utility companies dont get that big transmission in the morning of the money they raked in from payments last night…
i know some people say ‘well they could have taken over the bank’, i have been hearing that “inside job” by charles ferguson deals with how in other countries the law is that the bank has to completely shut…
i would be very interested to know if this is all… well, how the need or non-need for bailout arguments match up with these alleged incidents.
just .. im having trouble understanding what happened actually. thank you
I can see why Mr Buffett would be so thanksful for the bailouts
http://blogs.reuters.com/rolfe-winkler/files/2009/08/buffett-bailout2.jpg
I say to him fuck you
A crash would have been the best way to reboot the economy. The real estate and corporate assets would have still been there. Better to let young people buy a cheap house than to force them to pay a mortage for the rest of their lives based upon the artificially propped up phoney prices we have today. The toxic debt behind this is still there and smelling worse and worse.
Whatever you think, don’t forget that had Glass-Steagall not been eliminated through criminal collaboration in all the applicable high places, this mess you’re seeing today wouldn’t have happened. Criminal complicity as a result became the norm and remains the norm.
Restoring confidence in our financial system no matter who or what is hung today cannot be restored without Glass-Steagall being reinstated and vigorously enforced.
Every so-called ‘solution’ being regurgitated by pundits left and right, conservative and liberal, present day and historically retrospective, to ‘fix things’ that are wrong with our system under our wink and a nod of doing unethical business, is pretty much unadulterated mental masturbation and wishful thinking.
Nothing will get fixed until the crux of the problem is addressed: we have no significant-enough laws that are being followed and enforced.
Stockman points fingers just like everybody else in the limelight. And everybody is pointing their fingers at the other as being the real culprits and malcontents be they Reagan, Buffett, Bush, Obama, etc., etc., etc.,. It is all nothing more than wax museum amusement.
I guess ultimately in that regard everybody is right.
RH