If Americans were convinced of the Fed’s commitment, they’d buy and borrow more now, he says.

TO BE NOTED: From Bloomberg:

"U.S. Needs More Inflation to Speed Recovery, Say Mankiw, Rogoff

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By Rich Miller

May 19 (Bloomberg) -- What the U.S. economy may need is a dose of good old-fashioned inflation.

So say economists including Gregory Mankiw, former White House adviser, and Kenneth Rogoff, who was chief economist at the International Monetary Fund. They argue that a looser rein on inflation would make it easier for debt-strapped consumers and governments to meet their obligations. It might also help the economy by encouraging Americans to spend now rather than later when prices go up.

“I’m advocating 6 percent inflation for at least a couple of years,” says Rogoff, 56, who’s now a professor at Harvard University. “It would ameliorate the debt bomb and help us work through the deleveraging process.”

Such a strategy would be risky. An outlook for higher prices could spook foreign investors and send the dollar careening lower. The challenge would be to prevent inflation from returning to the above-10-percent levels that prevailed in the 1970s and took almost a decade and a recession to cure.

“Anybody who has been a central banker wouldn’t want to see inflation expectations become unhinged,” says Marvin Goodfriend, a former official at the Federal Reserve Bank of Richmond. “The Fed would have to create a recession to get its credibility back,” adds Goodfriend, now a professor at Carnegie Mellon University’s Tepper School of Business in Pittsburgh.

Preventing Deflation

For the moment, the Fed’s focus is on preventing deflation -- a potentially debilitating drop in prices and wages that makes debts harder to repay and encourages the postponement of purchases. The Labor Department reported May 15 that consumer prices were unchanged in April from the previous month and were down 0.7 percent from a year earlier.

“We are currently being very aggressive because we are trying to avoid” deflation, Fed Chairman Ben S. Bernanke told an Atlanta Fed conference on May 11.

The central bank has cut short-term interest rates effectively to zero and engaged in what Bernanke calls “credit easing” to spur lending to consumers, small businesses and homebuyers.

Bernanke, 55, said the risk of deflation was receding and that the Fed was ready to reverse course when needed to maintain stable prices and prevent an outbreak of undesired inflation. The Fed has implicitly defined price stability as annual inflation of 1.5 percent to 2 percent, as measured by a price index based on personal consumption expenditures.

Lifting Prices, Wages

Even after all the Fed has done to stimulate the economy, some economists argue that it needs to do more and deliberately aim for much faster inflation that would also lift wages.

With unemployment at a 25-year high of 8.9 percent, workers are being squeezed. Wages and salaries rose 0.3 percent in the first quarter, the least on record, according to the Labor Department, as companies including Memphis, Tennessee-based based package-delivery company FedEx Corp. and newspaper publisher Gannett Co. of McLean, Virginia slashed pay.

Given the Fed’s inability to cut rates further, Mankiw says the central bank should pledge to produce “significant” inflation. That would put the real, inflation-adjusted interest rate -- the cost of borrowing minus the rate of inflation -- deep into negative territory, even though the nominal rate would still be zero.

If Americans were convinced of the Fed’s commitment, they’d buy and borrow more now, he says.

Mankiw, currently a Harvard professor, declines to put a number on what inflation rate the Fed should shoot for, saying that the central bank has computer models that would be useful for determining that.

Gold Standard

In advocating that the Fed commit itself to generating some inflation, Mankiw, 51, likens such a step to the U.S. decision to abandon the gold standard in 1933, which freed policy makers to fight the Depression.

Faster inflation might be preferable to increased unemployment, or to further budget stimulus packages that push up the national debt, says Mankiw, who was chairman of the Council of Economic Advisors under President George W. Bush.

The White House has forecast that the budget deficit will hit $1.84 trillion this fiscal year, or 12.9 percent of gross domestic product. Rogoff doubts that politicians will be willing to reduce that shortfall by raising taxes as much as needed. Instead, he sees them pressing the Fed to accept faster inflation as a way of easing the burden of reducing the deficit.

Easier Debt Repayment

Inflationary increases in wages -- and the higher income taxes they generate -- would make it easier to pay off debt at all levels.

“There’s trillions of dollars of debt, in mortgage debt, consumer debt, government debt,” says Rogoff, who was chief economist at the Washington-based IMF from 2001 to 2003. “It’s a question of how do you achieve the deleveraging. Do you go through a long period of slow growth, high savings and many legal problems or do you accept higher inflation?”

Laurence Ball, a professor at Johns Hopkins University in Baltimore, says it’s risky to try to engineer a temporary surge in inflation because it might spark a spiral of rising prices.

Even so, he sees good reasons for the Fed to lift its implicit, medium-term inflation target to 3 percent to 4 percent from 1.5 percent to 2 percent now.

To battle recession, the Fed had to cut interest rates to 1 percent in 2003 and zero in the current period. That implies its inflation target has been too low because it’s left the Fed running up against the zero bound on nominal interest rates.

Inflation Advantage

“The basic advantage of pushing inflation a little higher is that it would make it less likely that we run into the problem of the interest rate hitting zero and the Fed not being able to stimulate the economy if necessary,” Ball says.

John Makin, a principal at hedge fund Caxton Associates in New York, wants the Fed to go further and target the level of prices instead of simply a rate of inflation. Such a policy would mean that if inflation fell short of 2 percent over a period of time, the Fed would have to push inflation above that rate subsequently to make up for the shortfall and keep prices rising on the desired trajectory.

While that might sound radical, it’s the same sort of policy that Bernanke advocated Japan follow in 2003 to fight deflation. In a speech in Tokyo that year, then-Fed Governor Bernanke called on the Bank of Japan to adopt “a publicly announced, gradually rising price-level target.”

‘Bad for Creditors’

Some investors are already worried that Bernanke will go too far. “We’re on the path of longer-term, higher inflation,” says Axel Merk, president of Merk Investments LLC in Palo Alto, California. “It’s good for debtors but it’s bad for creditors. It’s dangerous and irresponsible.”

Billionaire investor Warren Buffett, chairman of Berkshire Hathaway Inc. in Omaha, Nebraska, suggested that faster inflation was all but inevitable.

“A country that continuously expands its debt as a percentage of GDP and raises much of the money abroad to finance that, it’s going to inflate its way out of the burden of that debt,” he told the CNBC financial news television channel on May 4, adding, “That becomes a tax on everybody that has fixed- dollar investments.”

To contact the reporter on this story: Rich Miller in Washington rmiller28@bloomberg.net"

malfeasance and silliness, the triggering events for today's crisis, were much greater and more widespread

TO BE NOTED: From Naked Capitalism:

"Munger on Phony Accounting, Cultural Decay, and Derivatives

Stanford Law Review has a great interview with Warren Buffett's longstanding partner, Charlie Munger. Munger offers much less corn pone and more direct opinion than Buffett does.

The entire piece is very much worth reading, but I wanted to hone in on some key topics. One is the neglect of the role of what amounts to accounting fraud in this mess. Much of this is technically not fraud under the current regime but would be if the standards of 20 years ago were still in place. We now live in a world where everyone knows that the authorities simply will not take down any of the Big Four. Four is now deemed to be the minimum number of big accounting firms permissible. So we de facto have accounting firms "too big to fail", which means "too big to be asked to eat much liability, not matter how indefensible their conduct." So if they do something bad, they might have to fire a few partners and pay a moderate fine.

So effectively, we live in a world that echoes the Nixon Presidency. If the Big Four does it, it must be legal.

From the Stanford Law Review (hat tip reader Hubert):

As we look at the current situation, how much of the responsibility would you lay at the feet of the accounting profession?

I would argue that a majority of the horrors we face would not have happened if the accounting profession developed and enforced better accounting. They are way too liberal in providing the kind of accounting the financial promoters want. They've sold out, and they do not even realize that they've sold out.

Would you give an example of a particular accounting practice you find problematic?

Take derivative trading with mark-to-market accounting, which degenerates into mark-to-model. Two firms make a big derivative trade and the accountants on both sides show a large profit from the same trade.

And they can't both be right. But both of them are following the rules.

Yes, and nobody is even bothered by the folly. It violates the most elemental principles of common sense. And the reasons they do it are: (1) there's a demand for it from the financial promoters, (2) fixing the system is hard work, and (3) they are afraid that a sensible fix might create new responsibilities that cause new litigation risks for accountants....

Very few people realize how much we've screwed up. Even in leading law schools and business schools very few people realize that the mess at Enron never could have happened if accounting customs hadn't been changed. What we have now is a bigger, more widespread Enron.

Munger also has some interesting observations about the decay in values:

Worse than the Great Depression?

The economy hasn't contracted as much as during the Great Depression, but the malfeasance and silliness, the triggering events for today's crisis, were much greater and more widespread. In the '20s, a tiny class of people were financial promoters and a tiny class of people were buying securities. Today, it's deep in the whole culture, and it is way more extreme. If sin and folly get punished appropriately, we're in for a bad time....

The investment banks of yore, chastened by the '30s, were private partnerships, or near equivalents. The partners were dependent for their retirement on the prosperity of the firms they left behind and the customs and culture they left behind, and the places were much more responsible and honorable. That ethos, by the time the year 2006 came along, had pretty well disappeared. Our regulators allowed the proprietary trading departments at investment banks to become hedge funds in disguise, using the "repo" system—one of the most extreme credit-granting systems ever devised. The amount of leverage was utterly awesome. The investment banks, to protect themselves, controlled, to some extent, the use of credit by customers that were hedge funds. But the internal hedge funds, owned by the investment banks, were subject to no effective credit control at all.....

How and why do you think economists have gotten this so wrong?

I would argue that the economists have not been all that good at working concepts of good and evil into their profession. Nor do they understand, at all well, the economic consequences of bad accounting.

In fact, they've made a profession of driving value judgments out of the subject.

Yes. They say it's not economics if you think about the consequences of good and evil, and good and bad business accounting. I think what we're learning is that when you don't understand these consequences, you don't have an adequately skilled profession. You have big gaps in what you need. You have a profession that's like the man that Nietzsche ridiculed because he had a lame leg and was very proud of it. The economics profession has been proud of its lame leg.

There is also a good bit on why he and Warren have been so successful:

You've often said that one of the keys to your success has simply been to avoid making the garden-variety mistakes that you see other people make.

Warren and I have skills that could easily be taught to other people. One skill is knowing the edge of your own competency. It's not a competency if you don't know the edge of it. And Warren and I are better at tuning out the standard stupidities. We've left a lot of more talented and diligent people in the dust, just by working hard at eliminating standard error.

If you had to characterize a few mistakes that you see executives making, which ones jump out at you?

An extreme optimism based on an inflated self-appraisal is one. I think that many CEOs get carried away into folly. They haven't studied the past models of disaster enough and they're not risk-averse enough. One of the very interesting things about Berkshire Hathaway is how chicken it is, how cautious, how low is its leverage.

I can't speak for Berkshire overall, but that is certainly true of their reinsurance business. Ajit Jain is willing to sit around and do no business, even if he has to wait a couple of years, until, say, two hurricanes hit in 72 hours and the industry is desperate for reinsurance capacity and willing to pay big premiums. They are very disciplined and play only in "hard markets". "

Me:

Don said...

"They are very disciplined and play only in "hard markets"

Value investing is very hard, and the reason it is makes me doubt the efficacy of so-called "counter-cyclical" policies.

"the malfeasance and silliness, the triggering events for today's crisis, were much greater and more widespread"

I agree with this, but also believe that it goes against arguments such as Winkler's view that:

"Asset managers are more or less forced to seek higher interest rates through riskier investments."

No one is forced into malfeasance and silliness. They are embraced by human beings for their own reasons and desires.

Don the libertarian Democrat

In exchange for an upfront premium, borrowers use the firms’ credit ratings instead of their own.

TO BE NOTED: From Bloomberg:

"Muni Bond Insurance Buffett Called Dangerous Delivers Comeback

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By Joe Mysak

May 8 (Bloomberg) -- Municipal bond insurance is showing signs of renewal this year as new providers respond to demand from low-rated borrowers whose costs have increased three times as fast as for issuers with top credit grades.

Leading guarantee firms, including Ambac Financial Group Inc. and MBIA Inc. forfeited top credit ratings last year after losses related to subprime mortgage-backed securities. The amount of insured new issues plunged 64 percent in 2008 as the biggest bond-insurance firms wrote down at least $21.3 billion, according to data compiled by Bloomberg.

An early contender to replace them, Warren Buffett’s Berkshire Hathaway Assurance Corp., was downgraded to Aa1 by Moody’s Investors Service in April. The billionaire investor in February called tax-exempt bond guarantees “a dangerous business.” His firm insured $3.3 billion in issues last year, ranking third in the industry.

Buffett’s warning isn’t stopping Macquarie Group Ltd., Australia’s biggest securities firm, from backing a new guarantor: Municipal and Infrastructure Assurance Corp. plans to sell its first policy by July, said Richard E. Kolman, the New York-based startup’s executive vice chairman.

“It is surprising to find that municipal bond insurance is anything but moribund in the early going in 2009,” wrote Philip J. Fischer, a Merrill Lynch & Co. municipal strategist in New York, in an April 6 report.

Carrie Gray, a spokeswoman for Merrill Lynch, declined to make Fischer available for comment.

Diversity Sought

Municipal and Infrastructure Assurance will join new subsidiaries of Ambac and MBIA, along with industry leader Assured Guaranty Corp., in trying to revive so-called credit enhancements. In all, insurers covered $72 billion, or 18 percent, of new tax-exempt bonds last year. That was down from $201 billion, or 47 percent, in 2007.

The amount of insured issues may rebound to about 35 percent over the next two years, said Guy Lebas, chief economist at Janney Montgomery Scott LLC in Philadelphia. Most of that work may go to a nonprofit firm that issuers hope to create, he said.

“I’d like some more diversity in names” to avoid having the same company backing too many issues, said John F. Flahive, who manages $22 billion in municipal debt at BNY Mellon Wealth Management in Boston.

Almost 70 percent of the firm’s tax-exempt bond holdings are insured, he said.

‘Historically Wide’

The coverage guarantees payments on bonds that defaulted about one-fifth as frequently as AAA corporate debt from 1970 to 2006, according to a Moody’s study in 2007. The policies equalize investors’ risk of lending to issuers of varying quality. In exchange for an upfront premium, borrowers use the firms’ credit ratings instead of their own.

Issuers rated BBB, Standard & Poor’s Corp.’s next-to-lowest investment grade, currently pay 4.75 percent to borrow for 10 years, according to Bloomberg data. The rate for insured general obligation bonds is 3.4 percent -- a difference of $135,000 on each $1 million of debt over the life of the loan.

The gap between yields on BBB- and AAA-rated issuers is about 152 basis points, Bloomberg data show. While down from a record 357 basis points in March, it remains “historically wide,” said Kolman, 54, who spent 25 years in municipal bonds at New York-based Goldman Sachs Group Inc., before retiring in 2007. A basis point is 0.01 percentage point.

Between January 2000 and January 2007, the mean spread was 52.9 basis points.

Premiums Higher

In 2006, when at least seven companies competed, premiums were as low as 15 basis points, according to a December report by the National League of Cities and the National Association of Counties. That meant issuers borrowing $1 million for 10 years paid as little as $2,212.50.

With competition dwindling, insuring A-rated general obligation bonds may now cost from 30 basis points to 75 basis points Kolman said -- or as much as $11,062.50 on $1 million for 10 years.

In 2005, their peak year, firms including Armonk, New York- based MBIA and Ambac of New York covered $233 billion, or 57 percent, of new tax-exempt issues, according to data from Thomson Reuters.

Starting in the mid-1990s, the top companies expanded into guaranteeing mortgage- and asset-backed securities. That business soured in 2007 as subprime mortgages began defaulting at record rates. As guarantors reported losses, their shares plunged.

Values Drop

The market value of four municipal-bond insurance firms -- Ambac, MBIA, Assured Guaranty and Syncora Holdings Ltd. -- declined to about $2.7 billion from a high of $45.6 billion in May 2007.

Borrowers with variable-rate debt saw interest rates rise as guarantors lost top ratings. Jefferson County, Alabama, had converted $3.2 billion in sewer debt to auction and floating- rate. Two of the county’s five commissioners suggested declaring bankruptcy in March, partly because downgrades allowed banks to demand the county buy back almost $1 billion in debt.

This year, Assured Guaranty, rated Aa2 by Moody’s and AAA by S&P, covered an industry-leading 426 municipal bonds with a par value of $9.3 billion in the first quarter, according to an April 3 statement.

Its closest rival, Financial Security Assurance Inc. of New York, wrote 122 policies, totaling $1.2 billion. Assured Guaranty, backed by billionaire Wilbur Ross, agreed in November to buy FSA for $722 million in cash and stock.

‘Next Shoe’

Municipal and Infrastructure Assurance, which is also backed by Chicago-based hedge fund manager Citadel Investment Group LLC, will be capitalized at $500 million, Kolman said. It will have the advantage of no subprime baggage, he said.

“Unlike the legacy insurers, the ones who built the business since its establishment in 1971, nobody is going to wonder about the next shoe to drop,” he said.

MIAC deserves a rating of AAA because “our strategy is not to diverge away from municipals,” said Tim Bishop, president of Macquarie Capital (USA) Inc. in New York.

Macquarie, an early proponent of privatizing public facilities, has acquired interests in four toll roads in Chicago, Indiana, California and Virginia.

The new subsidiaries of Ambac and MBIA say they also deserve top ratings.

Ambac’s rankings were cut to Ba3 -- 12 grades below the top tier -- by Moody’s on April 13. Its municipal bond subsidiary, called Everspan, will merit the “best available ratings,” said Douglas Renfield-Miller, the firm’s chief executive officer. That may be AA, he said.

Seeking Top Ratings

Ambac, whose shares have fallen 99 percent since October 2007, intends to raise $1 billion in capital, and Everspan would begin selling coverage sometime in the second quarter, Renfield- Miller said.

National Public Finance Guarantee Corp., MBIA’s subsidiary, is in talks with raters, said Thomas McLoughlin, CEO of the unit.

Third Avenue Management LLC, a New York mutual fund manager, sued the parent company last month to try to block the spinoff. The complaint in Delaware Chancery Court says the move would harm debt holders. MBIA has declined 93 percent since October 2007.

Two hedge funds, Aurelius Capital Management and Fir Tree Partners, filed a similar suit in federal court in New York in March. McLoughlin declined to comment on the litigation.

‘Quite Challenging’

Competition would inevitably force new insurers to cut prices and take on other types of risk, Moody’s said in November.

“A municipal-only guarantor’s ability to overcome these circumstances is likely to be quite challenging,” the rating company said.

Moody’s assigned a negative outlook to U.S. local governments as a whole for the first time on April 7. It cited “unprecedented fiscal challenges” to counties, cities and school districts arising from the steepest recession since World War II.

Buffett, whose Omaha, Nebraska-based Berkshire Hathaway Assurance guaranteed $241 million in the first quarter, said on May 3 that the firm is selling fewer policies lately.

“We basically don’t like the pricing,” he said during a gathering of reporters after a press conference in Omaha. “If you have the wrong pricing, you can lose a lot of money.”

Moody’s downgraded the parent company, Berkshire Hathaway Inc., last month, citing “the severe decline in equity markets over the past year as well as the protracted economic recession.” It also cut financial-strength ratings for the company’s insurance units.

Buffett’s Warning

Buffett told investors in February that governments with guaranteed debt might choose to default rather than raise taxes. “Insuring tax-exempts, therefore, has the look today of a dangerous business -- one with similarities to the insuring of natural catastrophes,” he wrote.

“What mayor or city council is going to choose pain to local citizens in the form of major tax increases over pain to a faraway bond insurer?” he asked in his annual letter to shareholders.

“With all due respect to Mr. Buffett, I’m sure a lot of issuers are pretty insulted by that,” Kolman said.

New municipal bond guarantors are needed -- though perhaps not as for-profit businesses, said Lebas of Janney Montgomery Scott.

Public Insurer Planned

“I would actually anticipate some form of nonprofit solution to come down the pike in the long run -- something akin to a municipal bond bank or issuers’ association,” Lebas said in an e-mail.

Such an entity could cover as much as 25 percent of new issues over time, while traditional companies handled about 5 to 10 percent, he said.

In December, the National League of Cities and National Association of Counties endorsed creating a “voluntary, national mutual credit-enhancement company owned and operated by local governments.”

They’re putting together a business plan for the nonprofit entity and plan to ask the U.S. Treasury for $1 billion in capital, said Cathy Spain, director of the league’s Center for Member Programs in Washington. Andrew Williams, a Treasury spokesman, said the agency had no comment.

Representative Barney Frank of Massachusetts, the Democratic chairman of the House Financial Services Committee, said in February that the federal government should get into the business.

Issuers Slam Ratings

Demand for bond insurance would disappear if states, cities and counties received fair credit grades, according to a third group of public-finance officials, led by California Treasurer Bill Lockyer.

Tax-exempt issuers should be rated as corporate borrowers are, on their chance of default, the officials say. Doing so would result in upgrades for many municipalities.

The issuers sought federal legislation to speed rating changes. Local leaders have asked that the Municipal Bond Fairness Act be reintroduced in Congress after failing to pass in 2008.

Meanwhile, some issuers are going without credit enhancement and paying more to borrow. On April 13, the Butler Health System, a nonprofit hospital and physician group about 35 miles north of Pittsburgh, sold about $76 million in revenue bonds to help pay for an expansion.

‘Lot of Demand’

“We looked at Assured Guaranty, and talked to them, but didn’t pursue it because we didn’t think the pricing would be in our best interest, given the turmoil in the market,” said Andy Majka of Skokie, Illinois-based Kaufman Hall & Associates, the Butler, Pennsylvania medical group’s financial adviser.

Assured doesn’t comment on issues it hasn’t backed, said Ashweeta Durani, a spokesman for the firm.

Butler Health sold its bonds with a Baa1 rating from Moody’s and A- from Fitch, and paid yields that included 7.4 percent on $47.5 million due in 2039 -- about 217 basis points over the Municipal Market Advisors Consensus scale.

“We’d welcome the formation of new insurers -- there’s a lot of demand for credit enhancement,” Majka said.

To contact the reporter on this story: Joe Mysak in New York at jmysakjr@bloomberg.net."

The rest of us should hope that even in the current fervid atmosphere, reasoned argument can win out over impassioned ideology.

TO BE NOTED: From the FT:

Treasury rewards waiting

March 24, 2009 11:56am

by FT

By Christopher D. Carroll

Maybe it was worth the wait.

Judging from preliminary details, the US Treasury’s plan to rescue the financial system is a lot savvier about the relationship between financial markets and the macroeconomy than are the usual-suspects: critics from both left and right who are already pouncing on the Geithner plan.

Unlike the critics, the Treasury has absorbed the main lesson from the past 30 years of academic finance research: asset price movements mainly reflect changes in investors’ collective attitude toward risk.

Perhaps the reason this insight has not penetrated, even among academic economists, much beyond the researchers responsible for documenting it, is that it has not been expressed in layman’s terms. Here’s a try: in the Wall Street contest between “fear” and “greed,” fear fluctuates much more than greed (in academic terms, movements in “risk tolerance” explain the bulk of movements in asset prices).

Such extravagant movements in investors’ average degree of risk tolerance have proven impossible to reconcile with economists’ usual benchmark ways of understanding peoples’ attitudes toward risk. One response has been to try to reverse-engineer a “representative consumer” who would choose to behave in a way that matches the data, under the assumption that market prices are always a perfect and optimal representation of rational choice.

Unfortunately, the reverse-engineered preferences look nothing like what we know of household behaviour from a vast literature that observes the choices households make in their daily lives (as documented in a variety of microeconomic datasets).

The second response to the market’s remarkable fluctuations in risk attitudes is more in tune with Warren Buffett’s view, following his mentor Benjamin Graham, that market prices move much more than can be
justified by the sober judgment of someone with a long horizon and stable preferences. Buffett has arrived at his current perch more by skepticism about the market than by unblinking faith in its wisdom. As Mr. Buffett has shown, patient investors who buy low and wait for underpriced assets to recover can do very well indeed.

Which brings us back to the Treasury’s plan. The details flow from an overarching view that the markets for the “toxic assets” that are corroding banks’ balance sheets have shut down in part because in those markets the degree of risk aversion has become not just problematic but pathological. The different parts of the plan reflect different approaches to trying to coax private investors back into the market by reducing their perceived degree of risk to levels that even a skittish risk-shy hedge fund manager might find tempting.

The government and the private investor would be partners in a Buffett-like arrangement in which the assets would be held long enough that the investors can expect to receive payments that have justified the waiting.

This motivation sounds suspiciously like some of the arguments for the ill-fated Paulson TARP plan from last autumn; but the problem with the Paulson plan was never fundamentally with the idea that there were
problems in the market for toxic assets, but with the idea that the right way to fix that problem (and everything else wrong with the economy!) was simply to have the government drastically overpay to buy
up the toxic assets from whoever was foolish enough to have ended up holding them. (Maybe this is not really what Secretary Paulson had in mind, but it seems the most sensible interpretation). Instead, the new
plan from the Treasury gives private investors (who know more than Treasury about the likely payoffs of these securities) the pivotal role in competing to set the prices of the securities, via a competitive auction process.

The private investors currently on the sidelines are not fools and have no incentive to lose money on the deal. In addition, there is no pretense now (as there was last autumn) that the resolution of the toxic assets problem is the sole remedy for our economic woes; it is part of a carefully conceived plan including the
stimulus bill, the housing foreclosure mitigation plan, the TALF plan for reviving the market for securitised assets, the bank “stress tests” designed to triage the good banks, the salvageable banks, and the zombie banks; and a host of other measures designed to address other aspects of the crisis.

Finally, the new plan’s principal goal, fostered in numerous ways, is to induce private investors to come off the sidelines and reengage with the markets, while the Paulson plan’s mechanisms for accomplishing that goal were either murky or nonexistent.

When fuller details emerge, it would be useful if the economics profession and the financial community could have a mature conversation about whether the plan could be improved before it goes
into operation. For example, it may be necessary to make any bank that participates agree to the sale of all their toxic assets, to prevent the kind of cherry picking that has contributed to the shutdown of
these markets so far. And there is good reason to be very careful to minimize the possibility of “heads-I-win, tails-the-government-loses” kinds of bets.

But broad-brush denunciations are unhelpful, whether they derive from preconceived prejudices of the left (which needs to recognise the important distinction between the greedy people who got us here and the wise captains of finance who can help us get out), or the right (which espouses a destructive ideology according to which all government action of any kind is a mistake).

The rest of us should hope that even in the current fervid atmosphere, reasoned argument can win out over impassioned ideology.

Christopher D. Carroll is professor of economics at the Johns Hopkins University"

This is what Warren Buffett was referring to when he talked about the advantage of being a financial crippled in this economy.

From Clusterstock:

"MARKETS SOAR (C, MSFT)

Joe Weisenthal|Mar. 10, 2009, 4:00 PM|15

Tags: Investing, Stock Market

C Mar 10 2009, 05:55 PM EDT

1.45	Change	% Change
	+0.40	+38.10%

MSFT Mar 10 2009, 05:40 PM EDT

16.48	Change	% Change
	+1.33	+8.78%

After days and days of unending pain and false hopes of a bottom, the market finally roared higher today. If nothing else, it was a nice one-day respite from the steady drip of a melting economy. Of course, throughout this down-cycle we've had several monster rallies and they've never amounted to anything.

The big winners: The banks. After Vikram Pandit's memo suggesting that Citigroup (C) was operating at a profit, they all roared higher. Citi itself was up 36%.

Other big winners: Big tech. Lost in all the news was Microsoft's (MSFT) announced dividend hike to $.13 per quarter from $.11. It's a modest amount nominally, but given where the stock was trading, it now pays a pretty juicy 3.4% dividend. It ended up over 8%, and the NASDAQ as a whole was up over 7%.

The final levels on the indices: The Dow ended up 379.44, to 6926.49, the S&P 500 added 43.07, to close at 719.60 and the NASDAQ gained 89.64, finishing at 1,358.28.

Clearly the market was due for some kind of vicious move upwards. Eventually the easy trade -- shorting the banks day in and day out -- was going to come back and bite the traders in the ass.

None of this means the market is "back" however, and there's even a negative spin on the Citi news, which is that the bank is profitable merely because of the massive amount of help its received from the govermnent, lowering its cost of capital, potentially creating a competitive advantage over sound, healthy institutions. This is what Warren Buffett was referring to when he talked about the advantage of being a financial crippled in this economy."

Me:

Don the libertarian Democrat (URL) said:

Mar. 10, 6:01 PM

"None of this means the market is "back" however, and there's even a negative spin on the Citi news, which is that the bank is profitable merely because of the massive amount of help its received from the govermnent, lowering its cost of capital, potentially creating a competitive advantage over sound, healthy institutions. This is what Warren Buffett was referring to when he talked about the advantage of being a financial crippled in this economy."

That's a very good point. So, when John Hempton quotes this:

http://brontecapital.blogspot.com/2009/03/fools-seldom-differ.html

"BUFFETT: Yeah, and interestingly enough, they don't need to supply the banks, in my view, with lots of capital. They need to let almost all of--I mean, the right prescription with most of the banks is just let them pay very little in the way of dividends and build up capital for awhile, and they will build up a lot of capital. The government has needed to say--what the government needs to say is nobody's going to lose a dime by having their deposits in these banks. They're going to make lots of money with the deposits."

Buffett is making a point about how government help hurts private investments, like his. Right?

Also, the amount of the profit wasn't announced, was it?

Whether Buffett and I are fools – well I will leave that for others to decide.

From Bronte Capital:

"Fools seldom differ

Warren Buffett was on CNBC last night. Maybe he is getting old and vain and likes to be on TV. Maybe he is falling for the (considerable) charms of Becky Quick – but he allowed himself to be interviewed for three hours starting at 5am Omaha time.

That made it good evening TV for me in Sydney Australia.

I was amused to hear my own views – parroted back to me in a more articulate and folksy manner than this blog.

There is a saying – usually ironic – that “great minds think alike”. I immediately think of the come-back that “fools seldom differ”.

Whether Buffett and I are fools – well I will leave that for others to decide. However Joe Kernan (and not the dulcet Becky) got out of Buffett what I believe to be the money quote of the whole interview:

BUFFETT: Yeah, the interesting thing is that the toxic assets [of American banks is] if they're priced at market, are probably the best assets the banks has, because those toxic assets presently are being priced based on unleveraged buyers buying a fairly speculative asset. So the returns from this market value are probably better than almost anything else, assuming they've got a market-to-market value, you know, they have the best prospects for return going forward of anything the banks own. The problems of the banks are overwhelmingly not toxic assets, you know. They may have been one or two at the top banks, but they are not going to do in--if you take those 20 banks that are subject to the stresses, they're not going to do those banks in. Those banks have the earning power which has never been better on new business going out of this to build capital positions if they pay low dividends which they're starting to do now.

JOE: Hm.

BUFFETT: Toxic assets really are not the problem they were. Now, when I said it was contingent--I didn't remember being exactly contingent on TARP, but it was contingent on the government jumping in.

JOE: Right.

BUFFETT: The government needed to act big time in September, I will tell you that.

JOE: So...

BUFFETT: And they did act big time.

JOE: So you are OK with the shift to providing the banks with capital as opposed to the original intention of the TARP for actually getting the toxic assets off the books?

BUFFETT: Yeah, and interestingly enough, they don't need to supply the banks, in my view, with lots of capital. They need to let almost all of--I mean, the right prescription with most of the banks is just let them pay very little in the way of dividends and build up capital for awhile, and they will build up a lot of capital. The government has needed to say--what the government needs to say is nobody's going to lose a dime by having their deposits in these banks. They're going to make lots of money with the deposits.

JOE: Hm.

BUFFETT: The spreads have never been wider. This is a great time to be in banking, you know, if you just get past the past and they are getting past the past. I mean, right now every time a loan is made to somebody to buy a house--and we're making, you know, making millions of loans--four and a half million houses will change hands this year out of a total stock of less than 80 million. So those people are making good mortgages. You want those assets on your books and you get a great spread in putting them on now. So it's a great time to be in banking, but you do have to get past this past. But the toxic assets, in my view, you know, if they've been written down to market, I'd rather buy those assets from the bank than any other assets they've got.

JOE: Hm. OK...

Lets pick this apart: Warren Buffett has been saying that the toxic assets are the best assets of the bank (provided they are marked to market). This is precisely what I have been saying. Moreover he says it for precisely the same reasons that I do – which is that they are being priced based on “unleveraged buyers” buying a fairly speculative asset. Compare this to my explanation in the “long post” – which was that they had large yields because you could not borrow to buy them.

Then Buffet says that the returns from the toxic assets are better than almost anything else. Several people (including some high profile academic economists) disagreed with me about the spread on those assets. That is fine – they are also disagreeing with Warren. He is wrong fairly regularly too.

Then he says the problem of American banks are not overwhelmingly toxic assets. This is a radical view – but it is in my view correct. The problem with the banks is that nobody will trust them and they have not been able to raise funds. The view that this is a liquidity crisis – and not a solvency crisis – has long been a staple of the Bronte Capital blog. It is radical though. Krugman, Naked Capitalism and Felix Salmon think alike – asserting – seemingly without proof – that the problem is solvency. Buffett doesn’t even think the US banks (on average) require capital – a view that most people would find startling (though again I think is correct provided appropriate regulatory forbearance is given).

Moreover Buffett thinks it is not solvency for the same reason as me. To quote: “those banks [including presumably most of the big 20 banks in the US] have earning power which has never been better on new business going out of this to build capital positions even if they pay low dividends which they're starting to do now.” I have been criticised endlessly for pointing out that on pre-tax, pre-provision earnings American banks can quickly regain solvency provided they can maintain funding. This was the point of my Voodoo Maths post – and also the point of much of the long post.

Moreover he goes on to repeat that the opportunities in banking are simply wonderful now – so long as you can get past the past. This was the point in my series of posts on Bank of America’s quarterly numbers. To anyone that looks at the American numbers it is self-evident that the margins in banking are going up sharply and that the opportunities are large right now. However this simple observation set my inbox on fire – to the point that I felt I needed four posts (links 1, 2, 3, and 4) to defend the obvious.

(Incidentally the margin expansion is not evident in the UK – where the banks are properly insolvent – and it is not evident in France where the banks are almost certainly highly solvent. I can’t work out why it is not in evidence in France but if someone wants to explain it send me an email. I would be pleased.)

There were other parts of the interview where Buffett simply agreed with me. For instance he thinks that bank liabilities should simply be guaranteed at this point (at least for the large banks) and that guarantee should carry the personal weight of the President. The alternative is either endless government injections costing as much as the guarantees or uncontrolled liquidation –a dozen Lehmans - as the banks run out of funding. They did issue guarantees in Sweden – and I was hoping and praying that the US would become Swedish.

Krugman is finally coming to the view that the important technical question is whether to issue that guarantee. He is right. Provided the guarantees can be issued at reasonable cost they should be issued. Both Warren and I think the cost would be reasonable in the USA. By contrast I am not sure the UK has the blanket guarantee option because the UK banks are very large relative to the UK economy and they started highly capital inadequate. US banks by contrast started with a lot of capital.

Buffett did not approach the issue of how you treat banks after you have issued that guarantee. I think you should have a process for assessing their capital and require that they have sufficient. Those that do not have sufficient and can't raise it you should nationalise (by diluting the shareholders and preference shares out of existence). That was the point of my “nationalisation after due process” post. Though the nationalisation question is entirely secondary to the question of whether you treat this like a liquidity crunch (by guaranteeing liquidity) or whether you treat it like a solvency crunch (by forcing insolvent banks to liquidation). I know which side I am on – and it is the same side as Warren.

Now it is all very nice to be demonstrably thinking the same way as Warren Buffett. I should have an operating funds management business after I get through complexities of Australian licensing and similar hurdles. If people widely believed that I thought like Warren I would be inundated with money – and that would be a good thing – at least for me.

But I have to note that Warren was not entirely straight forward in the interview. Warren did not think he could get the preference share deals he got from GE or Goldman Sachs now. That might be true with Goldies – but it was unequivocally false with GE. With GE you could construct a better deal on market.

This blog (painfully) admits its mistakes and tries to analyse them. A money manager should be brutally honest with himself. Warren however is an old man and his credibility is harder to question that mine. But Warren was wrong with his GE preferred (if only because he could get a better deal later). He should have admitted that (at a minimum) his timing on that one was awry.

It would be inordinate vanity to hope that I will be better than Warren. But I hope at least to think clearly and rationally like him. Oh, and to hold myself to a decent standard of self-analysis and criticism when I stuff up.

John

Posted by John Hempton at 3:48 PM

Me:

Don said...

Just a few points:

"The government has needed to say--what the government needs to say is nobody's going to lose a dime by having their deposits in these banks."

"For instance he thinks that bank liabilities should simply be guaranteed at this point (at least for the large banks) and that guarantee should carry the personal weight of the President."

In order to end Debt-Deflation, the government has to issue such a guarantee. I believe that they have done that. It's not a question of the guarantees any more, but the cheapest and best way to spend our money. We're going to spend whatever is necessary. In my mind, their actions, if not their words, prove that.

"Moreover he goes on to repeat that the opportunities in banking are simply wonderful now – so long as you can get past the past."

Buffett is a follower of Graham, I believe. I'm not a big investor, but I follow most of Graham's views. There is no doubt that there are good investments in Toxic Assets, Corporate Bonds ( Junk ), Distressed Equities, and that a downturn is generally a good place to buy. But it is awfully hard to do, and you do need to look at each specific case.So, given his investment philosophy, Buffett is saying what I would expect him say, more or less.

"Yeah, and interestingly enough, they don't need to supply the banks, in my view, with lots of capital."

I know that you went to great pains to discuss insolvency, but most people assume that, if you NEED money or a loan, you're insolvent. Otherwise, why in hell is the government giving them money? To the extent that the government provides funds or subsidies, taxpayers will assume that the borrowers are insolvent, otherwise, they shouldn't be getting any money from us.This is especially true if they don't use the money for more loans, even if that's not a good idea. In other words, I don't think that you can get away from selling this aid as a solvency crisis, even though that has the effect of making calls for nationalization stronger.

Don the libertarian Democrat

Only post this if you think it adds anything to the debate.

March 11, 2009 6:38 AM

“If Paulson was still an employee of Goldman Sachs and he’d done this deal, he would have been fired,”

Back in October, I argued that it was incumbent that the taxpayers get a better deal than private investors. From Bloomberg:

"By Mark Pittman

Jan. 10 (Bloomberg) -- Henry Paulson’s bank bailouts, done under “great stress” during the worst financial crisis since the Great Depression, failed to win for U.S. taxpayers what Warren Buffett received for his shareholders by investing in Goldman Sachs Group Inc.( TRUE )

The Treasury secretary made 174 purchases of banks’ preferred shares that include warrants to buy stock at a later date. While he invested $10 billion in Goldman Sachs in October, twice as much as Buffett did the month before, Paulson gained certificates worth one-fourth as much as the billionaire, according to data compiled by Bloomberg. The Goldman Sachs terms were repeated in most of the other bank bailouts.( A DISGRACE )

Paulson’s decisions to prop up the financial system included purchasing shares in institutions from Goldman Sachs, the most profitable Wall Street firm last year, to Saigon National Bank, a Westminster, California, lender whose market value is $3.8 million.

“We were not looking to replicate one-off private deals” in the transactions, made under the $700 billion Troubled Asset Relief Program, Paulson said in a Bloomberg TV interview yesterday.( I ARGUE JUST THE OPPOSITE )

“The market was under great stress and the private sector was extracting very, very severe terms( IT WAS THE OTHER WAY AROUND! ). What we were attempting to do, which I think we did successfully, was design a program that would be accepted by a large group of healthy banks( ? ) with terms that would replicate what you would get in normal market conditions,” he said.

‘20-20 Hindsight’

“With 20/20 hindsight,” the bank-capital injections have achieved their objectives and the decisions on TARP will “prove to be the right ones,” the Treasury secretary said.( HUH? )

Paulson’s warrant deals may give taxpayers less profit from any recovery in financial stocks than shareholders such as Goldman Sachs Chief Executive Officer Lloyd Blankfein and Saudi Arabian Prince Alwaleed bin Talal, owner of 4 percent of Citigroup Inc., said Simon Johnson, former chief economist for the International Monetary Fund.

The transactions are “just egregious,” said Johnson, a fellow at the Peterson Institute for International Economics in Washington. “You want to do it the way Warren does it.”( OBVIOUSLY )

Paulson said “he had to make it attractive to banks, which is code for( COLLUSION ) ‘I’m going to give money away,’” said Joseph Stiglitz, who won a Nobel Prize in 2001 for his work on the economic value of information.

‘Giveaway’

“The worst aspect of this is that they were designed not to do what they were supposed to do,” he said in a telephone interview from Paris Jan. 7. “In many ways, it’s not only a giveaway, but a giveaway that was designed not to work.”( TRUE )

The Treasury would have held warrants for 116 million shares of Goldman Sachs under Buffett’s terms, which would be equivalent to a 21 percent stake when added to those currently outstanding. Instead, the dilution is 2.7 percent under the Treasury plan. Blankfein is the company’s biggest individual investor, with 2.08 million shares worth about $178 million today, according to Bloomberg data. His 0.47 percent interest would have declined to 0.36 percent under Buffett’s terms and would be 0.44 percent if the Treasury’s warrants were exercised.

Senator Judd Gregg, a New Hampshire Republican, estimated in a Jan. 4 Wall Street Journal opinion article that TARP investments have earned about $8 billion while recapitalizing the banking system.

Changes to TARP

Government agencies have committed more than $8.5 trillion to shoring up the financial system, including TARP, signed into law Oct. 3 by President George W. Bush. The program was sold to Congress as a way to buy securities that had fallen in market value. Paulson shifted his emphasis to direct capital injections to banks to prevent the financial sector from foundering.( NOT ACCEPTABLE. BAIT AND SWITCH. )

The House Financial Services Committee and TARP Congressional Oversight Panel plan hearings on how federal bailout money will be used during the administration of President-elect Barack Obama. The financial services panel scheduled its meeting for Jan. 13.

The oversight panel has contracted an independent analyst to examine the terms of TARP investments and is scheduled to deliver a report by Jan. 30, said Elizabeth Warren, chairwoman of the oversight panel, in an interview today. The question matters, Warren said, because shareholders are now being protected by taxpayer dollars.

“Supporting equity is such a profound shift in American economic policy that we must take a hard look at that decision( A GOOD IDEA ),” said Warren, a Harvard Law School professor who specializes in bankruptcy.

‘Something Worth Nothing’

Stiglitz said finance professionals at Treasury possessed expertise on warrant pricing that members of Congress didn’t. As a result, Paulson gave lip service to the lawmakers’ intent on TARP without gaining much value for taxpayers, said Stiglitz, a Columbia University professor who described the pricing mechanism as “a gimmick to make sure that they were giving away something worth nothing.”( I AGREE )

“If Paulson was still an employee of Goldman Sachs and he’d done this deal, he would have been fired,” he said.

A $5 billion U.S. loan last week to GMAC LLC, the Detroit- based finance affiliate of General Motors Corp., was made under the Treasury program and was part of $6 billion advanced to keep the automaker afloat.

In advancing the $5 billion, Paulson accepted warrants that reward taxpayers with an additional $250 million, or 5 percent of the stake. That compares with 15 percent on the 174 completed bank rescues as well as the 100 percent Berkshire Hathaway Inc. Chairman Buffett obtained on an investment in Goldman Sachs in September, Bloomberg data show. A warrant is a company-issued certificate that represents an option to buy a certain number of shares at a specific price by a predetermined date.

‘Stronger Terms’

“You’d certainly hope that the trend would be in the other direction, for stronger terms,” said Rep. Scott Garrett, a New Jersey Republican on the House Financial Services panel, in a telephone interview Dec. 26. “I don’t buy the methodology that they have to be circumspect to protect the parties involved. Ultimately their position has to be to protect the American taxpayer( CORRECT ).”

While the government has pledged to recover its investments, Congress provided little guidance on how to accomplish that. Legislation mandated that the Treasury receive warrants to acquire shares in companies tapping the program to potentially reward taxpayers. The law didn’t specify how many warrants or how they should be priced, factors that will determine how much money, if any, taxpayers get in exchange for their risk.

Buffett’s Warrants

The government has received warrants valued at $13.8 billion in the 25 biggest capital injections from TARP, according to Bloomberg data. Under the terms Buffett negotiated for his $5 billion stake in Goldman Sachs, the TARP certificates would have been worth $130.8 billion.( PLEASE DON'T TELL ME THAT. )

Buffett received 43.5 million Goldman Sachs warrants valued at $82.18 apiece on the date of the transaction, or $3.6 billion, Bloomberg analytics show. Paulson, who served as the New York- based bank’s chief executive officer until 2006, injected twice as much taxpayer money into Goldman Sachs a month later and got 12.2 million warrants worth $72.33 each, or $882 million.

If the Treasury had received the same terms as Buffett, taxpayers would have become the biggest investors in most of the bailed-out banks and existing stakes( COLLUSION ) would have been diluted, Bloomberg data show.

No Confidence

“I halfway believed that the taxpayers would make money in September, but I really don’t believe it now,” Rep. Brad Miller, a North Carolina Democrat on the House Financial Services committee, said in a telephone interview last month.

“We have to have confidence in Treasury to run the program in a way that protects taxpayers, and there’s very little in the way they’ve run it that inspires confidence( TRUE ),” he said.

Congress left it to Paulson and his staff to decide how warrants would be priced and how many the U.S. would receive under the TARP, according to Caleb Weaver, a spokesman for the program’s oversight board. Treasury imposed identical terms for 140 capital injections. Thirty-four closely held lenders issued certificates to the government for preferred stock instead of common shares and one community development institution wasn’t required to issue warrants, according to the Jan. 6 Treasury report on TARP.

Bailouts for American International Group Inc., GMAC, GM and the second of two infusions into Citigroup were reported separately in the Treasury statistics.

‘Not Day Traders’

Paulson and former Goldman Sachs banker Neel Kashkari, who runs TARP as the interim assistant secretary of the Treasury for financial stability, have said the bank bailout will pay off.

“We’re not day traders, and we’re not looking for a return tomorrow( YOU SHOULD BE LOOKING FOR THE BEST DEAL GENIUS. ),” Kashkari told a Mortgage Bankers Association conference on Dec. 5 in Washington. “We are looking to try to stabilize the financial system, get credit flowing again, and over time, we believe that the taxpayers will be protected and have a return on their investment.”

Jackie Wilson, a spokeswoman for Omaha, Nebraska-based Berkshire Hathaway, didn’t respond to e-mail and telephone messages seeking comment. Goldman Sachs spokesman Michael DuVally declined to comment, as did Citigroup spokesman Michael Hanretta.

Paulson left money on the table in three ways, according to economist Johnson:( 1 ) accepting fewer warrants than Buffett did;( 2 ) setting the certificates’ price trigger, or strike, above market values; and( 3 ) receiving an annual yield on the preferred shares that is half of what Buffett will get for the first five years.

Dividend Payments

The government will forgo almost $48 billion over the next five years in preferred stock dividend payments from the 25 biggest TARP infusions, as compared with Buffett, according to the terms of the deals.

Buffett’s five-year warrants for 43.5 million shares of Goldman Sachs were valued at $82.18 each using the Black-Scholes option pricing model developed by Fischer Black and Myron Scholes to estimate the fair market value of such contracts. The model uses, among other data, the implied price volatility of the underlying security. The Treasury received 10-year warrants for 12.2 million Goldman shares priced at $72.33 on Oct. 28 using the same method.

The taxpayers’ certificates were set at the 20-day trailing average of the share price, which for Goldman Sachs was $122.90 on Oct. 28, when the company closed almost $30 cheaper at $93.57. The trailing average ensured a higher strike price, and lower value for the warrants, because bank stocks were plummeting.

8 Percent

By contrast, Buffett received an 8 percent discount to the market price at $115 a share on Sept. 23, when the stock closed at $125.05.

Taxpayers also acquired preferred shares as part of the bailout. These securities, which can’t vote unless the issue at hand is the creation of a more senior preferred stake, carry an interest payment of 5 percent that increases to 9 percent in five years. Buffett’s preferred shares in Goldman Sachs pay a 10 percent yield.

If Goldman Sachs rises to its five-year average price of $147, Buffett will be able to profit by $1.4 billion from exercising his warrants. The government warrants will be in the money for $294 million, or about a fifth as much for twice the investment.( COME ON )

TARP was set up to recapitalize banks and other financial institutions that lost money on subprime mortgages and commercial lending. It allocated $125 billion to nine of the largest banks and securities firms, and then invited all banks or savings and loans to apply for part of another $125 billion.

Saigon National

Recipients range from JPMorgan Chase & Co. in New York, which got $25 billion, to Saigon National, which received $1.2 million.

The government plans billions more in cash injections to companies including credit-card networks Discover Financial Services and American Express Co.

Under Buffett’s terms, the Treasury’s investment in Citigroup would also have brought greater potential for profit to taxpayers. The two cash infusions totaling $45 billion would have resulted in warrants for about 5.6 billion shares, which would more than double the 5.4 billion of existing shares. The Treasury’s warrants call for 464 million shares, or 8 percent of the number under Buffett’s terms.

None of the bank warrants for the biggest 25 capital injections from TARP funds can be exercised profitably now. Goldman Sachs closed in New York Stock Exchange composite trading at $83.92 yesterday, 32 percent less than its $122.90 strike price. Citigroup closed at $6.75, or 62 percent less than its highest exercise price of $17.85.

Exercising Warrants

Four of the 25 bank warrants could be exercised in the next year, based on Bloomberg surveys of analysts’ 12-month share- price forecasts. The average projection for Morgan Stanley at $26.46 is more than $3 higher than its strike price.

Analysts also expect American Express Co., Bank of New York- Mellon Corp. and the second capital injection for SunTrust Banks Inc. to rise above their strike prices, according to the surveys.

Congress may have another chance to get money back. The TARP legislation includes a requirement that lawmakers find a way in five years for taxpayer losses to be recouped from the financial industry.

To contact the reporter on this story: Mark Pittman in New York at mpittman@bloomberg.net."

I said at the time that it was a disgrace.

Now, in graphic form, from The Big Picture:

"Earlier this morning, we discussed how badly the Treasury department, along with Congress, had bungled the bailout monies.

These two graphics show exactly what an awful deal the taxpayer got for our monies.

Buffett’s Better Deal

click for much larger graphs

>

Source:
Paulson Bank Bailout in ‘Great Stress’ Misses Terms Buffett Won
Mark Pittman
Bloomberg, Jan. 10 2009
http://www.bloomberg.com/apps/news?pid=20601087&sid=aAvhtiFdLyaQ&"