As Paulson’s bailout plan continues to face resistance in Congress, the New York Times’ David Leonhardt wonders if Warren Buffett’s Goldman Sachs plan is actually a better idea. He puts money into the firm and gets a seven-per cent stake in exchange. Which begs the question: How generous are you feeling Warren? Any chance you want to help out all of our financial firms?
NY Times: Treasury Secretary Henry Paulson has spent a good part of the last two days on Capitol Hill arguing that the government should not demand a stake in any Wall Street firms it bails out. Demanding such a stake, Mr. Paulson says, could scare away many of those firms from participating in the bailout, leaving the credit markets as hobbled as they are now.
And then Mr. Buffett swooped in on Tuesday evening and announced that his company, Berkshire Hathaway, was investing $5 billion in Goldman Sachs, money that would help the firm — which made far fewer bad investments than most of Wall Street — shore up its balance sheet. What will he receive in exchange for his investment? Something like a 7 per cent stake in the firm…
But as imperfect as the Buffett analogy may be, it still raises a real question: Is the government getting a raw deal? The inability of Mr. Paulson and Mr. Bernanke — as well as President Bush — to make people comfortable with the answer is the main reason that the bailout has encountered so much hostility…
He goes on to argue that Buffett’s investment will help Goldman, whereas the government’s plan is like trying to cut a tumour out of a sick patient.
Mr. Buffett’s deal with Goldman injects $5 billion in cash into the firm, and those dollars strengthen Goldman’s balance sheet. Goldman will then presumably become more willing to lend money, and the credit crisis will be one small step closer to lifting…
Mr. Paulson, on the other hand, has asked for a $700 billion credit line to buy distressed assets from financial firms. It’s the equivalent of trying to cut a tumour out of the financial system. But there is a potential downside.
The Treasury wouldn’t just be giving money to the firms. It would be buying an asset of some value (albeit much less value than a year ago). As a result, the transaction might not do enough to bolster the firms’ balance sheets.
The second worry is that even if the Paulson plan works, it may end up being needlessly expensive. There is huge uncertainty about the true value of those distressed assets. If the government overpays for them, it won’t have any way to recoup the money.
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