Remember that Citigroup, Bank of America Corp. and JPMorgan Chase & Co. have formed a superfund to bail out troubled structured investment vehicles (SIV). The US Treasury Department and Henry Paulson “back” this plan. What it amounts to is another move on the part of the Wall Street-government partnership to garner market “confidence,” salvage credit markets, and bail out the banks. Heck, even Greenspan has conveniently warned against “propping up” the market.
Here’s a good Financial Times piece on Warren Buffett opposing the bailout.
“One of the lessons that investors seem to have to learn over and over again, and will again in the future, is that not only can you not turn a toad into a prince by kissing it, but you cannot turn a toad into a prince by repackaging it,†Mr Buffett said during a visit to South Korea.
“But very imaginative people in the securities market try to do that. If you have bad mortgages they do not come better by repackaging them. To some extent the chickens are coming home to roost for the mortgage originators and securitisers,†he said.
…”I think there should be a requirement that before the securities are put into the new super-SIV, 10 per cent of the holdings should be sold into the market to people who are not associated [with the subprime problem],†he said.
“That way we can be sure that they are being put in at appropriate market prices . . . They should give the market the opportunity to price the super-SIV themselves so we can see what they are really worth.â€
Real value instead of an artificially-inflated price – what a concept. What Buffett is saying is that this bailout amounts to nothing more than taking myriad SIVs and repackaging them as …… SIVs. The problem with this is that special investment vehicles are set up as affiliated funds which are independent of a company’s balance sheet. This means that the banks won’t bear the risk associated with this junk. And Warren Buffett is a man who understands the balance sheet.How is this a government intervention? Of course, Treasury Department backing lends an air of credibility, along with a total endorsement of the plan. Thus, once again government steers investors toward selected investment vehicles through its advocacy of the nature and structure of the bailout. Government works hand-in-hand with the big guns on Wall Street to make sure they continue to profit, even in times of market distress. So the banks that helped to perpetuate the problem in the first place will now profit handsomely – with the government’s assistance and approval – while negating the rick factor that is essential to making the markets truly “free.”
Why was Buffett in South Korea? He was visiting a company in which Berkshire Hathaway bought a large stake. Buffett knows the dollar is toast and thus is very negative on the dollar. He wants earnings and dividends in foreign currencies.
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Karen,
Thanks for posting this. I have been watching the SIV situation with chagrin – actually the entire so called “credit crisis” (everything is a crisis today). I keep hearing that one of the problem is that these instruments “cannot be priced” because there is no market, actually meaning no one will buy them at the price the holders want to sell them. Buffet is exactly correct. These insturments cannot be priced because no one will sell them at their market price.
Say very clearly tells us that supply will equal demand. The credit institutions are running head-long into Say’s Law.
And now they are looking to the government to help them violate Says Law, but if they actually understood Say, rather than holding to the fallacies and fantasies of modern economics, they would understand that Say’s Law cannot be violated.
This is exactly the problem that Austrians and classical economists understand about government intervention. It is one power center using the coercive power of government to force another power center to pay their cost.
The reason credit instruments cannot be priced is not a lack of buyers but a lack of sellers at the market price.
Just an aside I find it instructive that the main player in the SIV scheme is Citi meaning Robert Rubin of the Clinton administation, but no article has mentioned his name. As we found out with the ENRON fiasco and his phone call to the Department of Commerce, Robert Rubin is all about using the power of government to steal from one group, usually taxpayers, to pay for the sins of another group.
Thanks for the article.
If you like British humor and a Socratian interview on how SIV’s and repackaging works, this will certainly humor you
http://www.youtube.com/watch?v=SJ_qK4g6ntM
I take the new fund as sure sign of panic somewhere. It appears someone is desperate to get these items off their balance sheet, but doesn’t want to take the hit by selling them at their market price. It looks like a bait and switch to me. It will be very interesting to see who buys shares in the new fund and wonder if their arms are being twisted by someone at the Fed or at Treasury.
Didn’t Enron do the same thing with their debts, ie put them on off balance sheet “Special Purpose Vehicles”? Will the banks still be liable for these securities? Don’t they still on the super SIV and have to report the losses eventually? So many questions.
speaking of Mssr. Greenspan, my older sister is to attend a corporate lunch thingy today where he is the guest of honor!! I told her to ask him about the gold standard. she’ll probably get fired. sorry sis!
Buffet is something special. I am sure he is buying YUAN every reasonable person is buying it.
I AVE read a lot of Buffett.So I may something about him and Austrian economics.Buffett(and his teacher Ben Graham )has been a great calm pracicer of TRUE economics,especially Austrian economics.He thinks like Mises in the sense that how the individual be thinking and acting actually,but not focus on the imaginary economics that presuppose a over-opistic prediction profits which really want a bull-market.Maybe there is a human nature that they want get a speculative and big money on the market rather than a investment small money.The question is here:modern economics and financial instruments are created in order to match these irrational purpose.What a joke !The rational economist and operationer do their best to get a irrational profits!
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