Warren Whitney

"Goldman Sachs Group Inc. [GSG] said it will get a $5 billion investment from billionaire Warren Buffet's company, marking one of the biggest expressions of confidence in the financial system since the credit crisis intensified early this month. ... The move by Mr. Buffett's Berkshire Hathaway Inc. capped a day of bruising hearings in Congress over the fate of the Treasury Department's plan to buy $700 billion in distressed assets from financial institutions, in a bid to shore up the banking system. The plan is still expected to pass, though coming under increasing fire. ... Berkshire will also get warrants granting it the right to buy $5 billion of [GSG] common stock at $115 a share, which is 8% below the 4 p.m. closing share price Tuesday of $125.05. ... While Mr. Buffett's investment is unquestionably a vote of confidence in Goldman, it is structured to protect him from losses. ... Buffett was one of the first people Lloyd Blankfein, now Goldman's chairman and chief executive, went to see when he became president of Goldman in 2003. 'They just don't come any smarter,' Mr. Buffett said of Mr. Blankfein in 2006", my emphasis, Susanne Craig, Matthew Karnitsching and Aaron Lucchetti (CK&L) at the WSJ, 24 September 2008.

Jesse at Jesse's Cafe Americain has a 24 September 2008 post referring to Richard Whitney (RW), replete with 1929 newspaper headlines worth reading. Jesse likens RW's 1929 actions to the current Paulson plan. I have a different take. Here's a link: http://jessescrossroadscafe.blogspot.com/2008/09/bens-policy-errors-bankers-rescue-in.html.

"For six months, as the credit crisis deepened, billionaire investor Warren Buffett turned away a string of Wall Street firms that came hat in hand looking for help. ... Tell us what kind of investment you'd consider making in Goldman, the banker urged him, and the firm would try to hammer out a deal. ... The swiftness of the deal underscores the intense pressure now faced by Goldman, long regarded as one of the most financially secure firms on Wall Street. ... Buffett's decision to invest now in Goldman gives an indication of how the famed investor believed the financial crisis might shake out. ... In a telephone interview Wednesday morning from his office in Omaha, Mr. Buffett said he believes the proposed federal bailout will be approved by Congress and that it will succeed. ... If Congress fails to approve the bailout, Mr. Buffett says, all bets are off. His investment in Goldman will 'get killed, and so will all our other investments' ... His holding company, Berkshire Hathaway, had often used Goldman as an investment banker on deals. His reputation, both for smart investing and solid ethics, would likely give investors the reassurance they needed, the executives reasoned", Susan Pulliam, Kate Kelly and Matthew Karnitshnig (PK&K) at the WSJ, 25 September 2008.

"Billionaire Warren Buffett, calling turmoil in the markets an 'economic Pearl Harbor,' said his $5 billion investment in [GSG] is an endorsement of the Treasury's $700 billion bank rescue plan. 'I am betting on the Congress doing the right thing for the American public and passing this bill,' Buffett said. ... 'I think the Treasury will pay back the $700 billion and make a considerable amount of money,' Buffett said", Erik Holm at the Houston Chronicle, 25 September 2008.

"In the latest unexpected deal stemming from the financial crisis, General Electric Co. turned to Warren Buffett to inject at least $3 billion in the company--and, GE hopes, provide a much-needed boost in investor confidence. ... The deal is vintage Buffett: buying into a blue-chip company on favorable terms when its shares are depressed. ... GE's immediate problems are rooted in its finance unit, which propelled much of the conglomerate's growth for the past 25 years. ... The GE deal again highlights the troubles of companies that rely on short-term funding when investors have become skittish about all but the safest investments. GE Capital has assets of $695 billion, more than many banks though at lower leverage. It lends money to businesses such as restaurant franchisees, and finances the loans by borrowing for short periods at low rates and lending at higher rates for longer periods. The company acts like a bank, but it can't borrow from the [Fed]. ... GE also said it would curb long- and short-term borrowing at the finance unit, suspending plans to sell $10 billion in long-term debt in the fourth quarter", Paul Glader and Liz Rappaport at the WSJ, 2 October 2008.

Jesse previously asked, "Or did Warren just decide to get a place at the table with the new ruling power in the US", 23 September 2008.

Warren Whitney? Confidence in GSG? Lloyd Blankfein smart? Of course, AB and JD Harvard. He must be smart. Look at consitutional scholar Obama, JD Harvard. Law Review to boot! Whitney? Who?

"Richard Whitney was born in ... 1888. ... Richard graduated from Groton and Harvard, where he was elected to the prestigious Porcelland Club. ... Whitney's claim to fame [in the 1920s] was that he was J.P. Morgan & Company's broker, while his brother was a partner at Morgan. ... He also belonged to all the right clubs and bred race horses. ... Black Thursday, October 24, 1929, was the beginning of horrible things to come for the stock market. ... The leading bankers on Wall Street gathered at Morgan's offices to form a 'pool,' raising $130 million to be spent on selected blue chip stocks in the hope that it would stop the panic and bring some level of confidence back into the market. [RW] was chosen as the 'pool's' agent and went to the exchange at around 1:30 p.m. to 'walk the floor'. Stoppping at the post for U.S. Steel, he announced in a loud voice, "I bid 205 for 10,000 steel.' A huge cry went up and Whitney made similar purchases of AT&T, Anaconda Copper and General Electric, among others. The strategy had its desired effect and the Dow Jones roared back, closing Black Thursday at 299. ... Richard served three years and four months of a five-to-10 year sentence in Sing Sing. ... Whitney died on December 5th, 1974", http://www.u-s-history.com/pages/h1808.html.

I do not know why Buffett does anything. But I think a man who gave away $31 billion is not interested in making more money. Could Buffett be today's RW? Jesse's question is worth pondering. Consider Buffett's position on estate taxes. No matter what Buffett was or wasn't in the past, I conclude he is a socialist now. If Berkshire spent $5 billion to ensure Buffett's place at the Wall Steet table, I view it as Buffett's "consumption expenditure". He has lived in the same house since 1968. Jesse also wrote, "Goldman is paying Warren a pretty rich return for his buy-in". If GSG used Buffett deal for "signalling" thinking it would push Paulson's plan over the top, the $5 billion in question is peanuts.

GSG rents Buffett's name to lend credibility to Paulson's bailout plan. Wonderful. GSGs action shows how little credibility it and its "former" executive Paulson have. The title of this article was: "Buffett Drove Hard Bargain With Goldman". I wish the WSJ would stop editorializing on its newspages.

Buffett is entitled to express his opinion. However, the markets do not share it. Neither do I. His GSG 'investment" is a political statement, not an investment as I understand the term.

What's Buffett doing? Just what RW did in going from post to post on the NYSE in 1929. Imagine, he even bought into GE, just like RW! History does repeat. Not "unexpected" by me. This time, the crash will not be in the stock market, oh no. The bond market. Full disclosure: I have never liked GE, considering it to be an incompetently managed bank with an egomainiac CEO. These clowns didn't even match maturities. What was GE, a poorly managed S&L of 25 years ago? See also my posts on GE's Joe Jett fiasco.

Happy Sputnik Day

Sputnik 1 was launched 4 October 1957, 51 years ago today. Sputnik is the first major news story I followed after learning to read on or about 17 September 1957. It fascinated me so much I read all I could about: astronomy, rocketry and the "IGY". IGY? International Geophysical Year, 1957-58. I remember when the American public made Werner von Braun, 1912-1977, a "rock star". Now we follow the antics of that drunken fool Paris Hilton. We passed 1958's NDEA, National Defense Education Act, which Admiral Hyman Rickover, 1900-86 pushed. Now we have No Child Left Behind. In 1961 JFK gave a speech announcing we would land on the moon by 1970. And so we did. What's happened since? In 1969 I figured we would have landed on Mars by 1980 and had a permanent moon base by 1990. Didn't happen. Instead we've "lost" at least 25 years of scientific advancement. Look at where we've gone and what we've done in the last fifty years. Amazing!

Calculated Risk on HTM Pricing

Calculated Risk's 23 September 2008 post, "Hold-to-Maturity Pricing" I agree with, the link: http://calculatedrisk.blogspot.com/2008/09/hold-to-maturity-pricing.html.

"Well Mr. Bernanke, if buying the garbage stinking up the American financial system is such an opportunity why don't you partake in this adventure with some of your own capital? ... Why not call the new plan 'Opportunity USA', and get the best minds in the industry to run the entity, and entice Greenspan, Bush, Gross, and other proponents of the plan to invest funds. After all, under such an scenario it is not inconceivable that taxpayers dollars would start voluntarily rolling in to also invest. ... By Bernanke and Paulson's own admission the plan in question would not be successful if assets were purchased at 'fire-sale' prices. ... Which brings us to the crux of the situation: you cannot protect the financial system and the taxpayer at the same time", Brady Willett (BW) at Gold-Eagle.com, 24 September 2008, the link: http://www.gold-eagle.com/editorials_08/willettalway092408.html.

In concluded Henry Paulson's (HP) plan does nothing for taxpayers. If HP wants to keep his "clients" alive with public funds I suggest this plan. Uncle Sam buys say $10 billion of 10-year subordinated Goldman Sachs (GS) debt at prime plus 8%. GS will: cancel all outstanding stock options, not lobby for anything on Capitol Hill, agreeing to use no lobbyist for any purpose and surrender lawyer-client privilege in any dealing with any federal agency until the loan is repaid. Take it or leave it. If GS fails at least its common and preferred stock get wiped out before Uncle Sam loses a dime. Uncle Sam could make similar offers to other troubled firms. Take it or leave it, "An offer they dare not refuse". Alternatively, HP can offer to buy the troubled assets personally. He has $500 million. Let him spend it. How much money does that other "genius" Richard Fuld have? Between Paulson, Fuld, O'Neal, Gross, et. al., we might find enough money to fund the "plan" in addition to finding enough "brains" to profit from it. I note, the House passed the slightly altered Paulson plan.

Well said BW. Let's us American taxpayers renounce the wonderful profit opportunity the Paulson-Bernanke "dynamic duo" presented us. Let them make the billions or tens of billions.

Egg and Tomato Oligopoly

"A Justice Department official confirmed that it had opened investigations into tomatoes and eggs. Federal agencies already are pursuing criminal or civil inquiries in markets including fertilizer, cheese and milk, examining whether suppliers worked in league to manipulate prices. ... Higher food prices have become a hot issue in the presidential campaign and a rising source of anxiety in the global economy. ... 'When big guys get bigger, it makes collusion easier,' said Peter Carstensen, a University of Wisconsin law professor who testified in Congress on competition in the food induistry. ... In the tomato-industry probe, a federal grand jury in Sacramento, Calif., had issued subpoeneas, and [FBI] agents are interviewing executives of big California tomato processors, lawyers close to the case said. The officials are trying to determine if dominant processors of tomatoes for canning, ketchup, salsa and sauces conspired to fix prices, these people said. ... In an unrelated probe, the three largest U.S. egg processors also have received grand-jury subpoenas. The criminal investgation is focused on the pricing and marketing of egg products, such as liquid and powdered eggs, lawyers and industry executives said", John Wilke at the WSJ, 23 September 2008.

I have a better idea Mike Mukasey. If you must indict someone over high food prices, why not Helicopter, now Zimbabwe Ben? If you want to see potential collusion, look at the CPA industry. The DOJ and I live in alternative universes. Why does the DOJ bother with this? To divert attention from the probes it should conduct of Wall Street machinations?

Paulson's Plan Revealed

"Perhaps the biggest looming fight is over Democratic efforts to require the program's participants to curb what they pay their executives. ... Many are unnerved by Treasury's request for a blank check with few conditions. The proposal has also stirred a populist backlash, with many members of Congress saying the bill needs to be better geared to Main Street than Wall Street. ... Paulson is resisting efforts to limit the pay of executives whose firms participate in the program and plans to fight 'hard,' according to a person familiar with the matter. He fears that provision would render the program moot, since many firms might choose not to participate", my emphasis, WSJ, 22 September 2008.

"Why should American taxpayers give US Treasury Secretary 'Hank' Paulson [HP] a blank check to bail out the shareholders of busted banks? ... If America is to adopt socialism, why not have socialism for the poor, rather than for the rich? Why should American households that earn $50,000 a year subsidize Goldman Sachs partners who warn $5 million a year? ... Part of the problem is that Wall Street, like the ethnic godfather in the old joke, has made America an offer it can't understand. ... Contrary to what the Bush administration says, it is not the case that banks' troubled mortgage assets cannot be sold in the private market. ... Why is Lehman bankrupt, and Goldman Sachs still in business? ... Where, oh where, is America's Vladimir Putin, who will drive the oligarchs who have stolen the country's treasure and debased its currency", Spengler at http://www.atimes.com/, 22 September 2008.

"While it is dizzying to predict how this plan will be implemented, it is fairly simple to forsee the macroeconomic consequences. The U.S. dollar will be shattered beyond repair. ... The global mass exodus from the U.S. dollar and Treasury debt is about to begin: do not get caught in the stampede", Peter Schiff at http://www.europac.net/, 19 September 2008.

"To bankers and politicians who insist that the world will come to an end if the US Congress does not approve the proposed $700 billion bailout package, I wish to say, 'It is not the end of the world. It is just the end of you.' Sadly, it won't be. America's financier caste will live to fleece another day. ... The trouble is that the banking system is insolvent; that is, it lacks sufficient capital to hold its existing portfolio if assets, let alone to make new loans. ... Why anyone believes that the Treasury plan will prevent widespread economic misery is unclear. ... Nonetheless, the bailout package will pass in some form. America's intellectual class, right, left and indifferent, is too dependent on the begging-bowl proferred to the financier class to conceive of its existence after the prospective demise of its patrons", my emphasis, Spengler at http://www.atimes.com/, 1 October 2008.

Why does HP care what Wall Street executives earn, unless that is what his program is about: maintaining executive compensation. Suppose a firm fails to participate to continue to pay its executives fortunes? Where are our corporate governance people? Where is such a firm's Board? Would such an executive be sued for breach of fiduciary duty if his firm could have gained from the program? Will HP disclose which firms were so concerned about their exceutives' pay they opted to save the taxpayers money and taken their chances in the market?

Yes, where is our Czar Putin or dare I say it our master, "So he made a whip of cords, and drove all from the temple area, both sheep and cattle; he scattered the coins of the money changers and overturned their tables", John 2:15 (NIV). One duty of the American President is "tribune of the people", my 29 August 2008 post. We haven't had a president discharge that function in decades. Wall Street money changers out of Washington!

Right on Peter Schiff!

Spengler strikes again. Nothing a supposed expert says about the Paulson plan should be accepted no matter what pedigree he has.

American Fascism?

"Exactly what the government will do remains to be determined. Officials from the Treasury and the Fed and members of Congress intend to spend the weekend hammering out the details. Be afraid, be very afraid. ... If, as anticipated, the Treasury moves next to assume the rotten paper currently being held by banks and other lenders (presumably mortgages and related securities, for the most part), then it is fair to conclude that the government has given up entirely on the free market and has decided to to occupy the wasteland where outright socialism and economic fascism meet. ... The question is, How many times can the government race its emergency bailout vehicle toward the cliff without dragging the entire economy irretrievably into the abyss of outright socialism or full-fledged, Mussolini-style economic fascism?", Robert Higgs (RH) at Beacon, 19 September 2008, http://www.independent.org/blog?p=198.

"I was opposed to George W. Bush's presidency from the very start. I have always known he was no conservative, and that he bore no allegiance to the Constitution he once described as nothing but 'a goddamned piece of paper.' ... With yesterday's announcement of the fifth and largest bailout to take place this year, the Bush administration has shown itself to be easily the most left wing since FDR was ensconced upon the Cherry Blossom Throne. ... The reality is that the American financial system is not a free market, and it is not even remotely capitalist. It is actually a parasitical system, in which the financial elite prey upon the capitalists by virtue of having purchased political approval for their predation. ... The global economy concept should be the next to fall. Although they don't realize it yet, Americans are facing their most important nexus since the Civil War", my emphasis, Vox Day (VD) at World Net Daily, 22 September 2008, the link: http://www.worldnetdaily.com/index.php?pageId=75866.

Book suggestion, Crisis and Leviathan by RH, 1987. RH says plenty.

Yes, VD, that's what our financiers are, parasites, not capitalists. Vladimir Nuri makes similar points, see my 14 June 2008 post, http://skepticaltexascpa.blogspot.com/2008/06/most-wonderful-paper.html.

University Degrees

"'More will mean worse,' wrote an angry Kinglsey Amis in 1961, contemplating plans to expand university education. His prediction has been tested past anything he could have imagined, as that era's new universities were joined by the ex-polytechnics in the 1990s, and the proportion of youngsters who go on to university rose from less than 10% to almost 40% now. ... Similar rumblings have continued since Amis's jeremiad. With less government money (in real terms) per student than in his day, universities have to pack them in and keep them to balance the books. ... In June a barnstorming lecture by Geoffrey Alderman, of Buckingham University gained wide attention with its claims of impotent external examiners, widespread unpunished plagarism and a 'grotesque bidding game' in which universities dished out good grades in order to claw their way up league tables. ... So worried is the committee that it is considering an inquiry into standards. Some think it should have turned a blind eye: 'We have been told that simply by looking at this question we are bringing this country's universities into disrepute,' says Phil Willis, its chairman. ... A system predicated on achievement, not potential, is under further pressure from a government that wants universities to admit more children from state schools, many of which offer a sketchy academic education. ... Cambridge is considering a foundation year for students who show potential but are ill prepared. ... Robin Naylor, at Warwick Univeristy, has found that the average return to a degree has held up well over the past 20 years, but is has become more variable: the university now matters greatly, as does the degree class", my emphasis, the Economist, 18 September 2008.

Affirmative action for Cambridge! Is Cambridge the CUNY of 1970 with "open enrollment" or California's State System today, in which over 40% of freshman need "remedial education" and the average freshman reads at at 10th grade level? What a waste of money.

"America is obsessed with educating everyone, regardless of ability, so admission standards have been lowered". Caucasian college grads' mean IQ fell from about 114 to 105 from the 1960s to the 2000s, Inductivist, 5 June 2008, link: http://inductivist.blogspot.com/2008/06/mean-iq-of-college-grads-dropped-9.html.

Comrade Seiyo Reports From Japan

"Employing PhD's in high mathematics, [CEOs] diced and mixed the financial offal, stuffed it in sausage skins, gave this dubious balogna properly pinstriped labels such as 'Mortgage-backed Securities' and 'Collateralized Debt Obligations', and sold it off by the slice to equally greedy and heedless financial institutions down the line. ... But reality is stubborn. The underlying loans went sputtering, then died. ... The mega-hustlers who steered venerable financial institutions into this mega-iceberg are not hurting. ... The banks themselves have not had to drink the hemlock they had brewed either. Instead of falling under the weight of their own malpractice, except for Lehman they have basked in the largesse of the Federal Government. ... America's main industry, finance, has turned out to be a pyramid scheme of reckless, interlocking bets, essentially a stratospheric swindle. ... What's going on is a base perversion of both morality and justice. It substitutes an innocent party to be punished for the malfeasance of another. ... Therein lies the specter of the Weimar Republic: people exchanging wheelbarows of banknotes for a loaf of bread ... and a strong, indignant leader saving them from the nightmare with passionate oratory, national socialism, and the goose-step. ... For fifty years now, and perhaps for the first time in 350 years, the West, en masse, has been retreating from the Enlightenment that had catapulted it to the pinnacle of civilization. The forces of reason, empiricism, truth-seeking, basic freedoms (before they become 'rights'); the flowering of genius in all areas of human endeavor, all are in retreat everywhere at the same time" Takuan Seiyo at Vdare.com, 23 September 2008, http://www.vdare.com/misc/080922_seiyo.htm.

Thank you Comrade Seiyo (CS) for your observations from Japan. CS makes some other points similar to those I raised at:

http://skepticaltexascpa.blogspot.com/2007/12/of-quants-faith-and-alcoholics.html.
http://skepticaltexascpa.blogspot.com/2008/09/dead-elephant-in-living-room.html.
http://skepticaltexascpa.blogspot.com/2008/09/todays-sat.html.

Gold Mines and Operating Leverage

"Valuing asset-backed securities is tricky. But commodities producers are easy right? ... Unfortunately for speculators, reality is more complex. ... Since the start of July, the miners have performed much worse than would have been expected, having fallen 40% while gold is down just 18%", my emphasis, Liam Denning (LD) at the WSJ, 11 September 2008.

The WSJ should do better than this. Apparently LD does not understand 'operating leverage". I'll explain. Assume gold is $800 an ounce. Our mine has current operating costs of $600 an ounce, leaving a $200 an ounce margin. Suppose gold falls to $700 an ounce, a 12.5% decline, the mine's margin falls to $100, a 50% decline. Why was LD surprised with this result? I would expect the mine's stock price to fall more than 50%. Why? At least some of its ore will become "extramarginal" as the gold price falls so will not be mined at all.

SEC Alumni(ae)

"The [SEC's] top New York enforcement attorney is expected to leave next month for a law firm, according to people familar with the matter. Mark Schonfeld, 45 years old, has been the top cop at SEC's New York regional office since 2004. In that time, he has overseen and investigated some of the biggest cases to cross Wall Street. One person familar with the matter says he's heading to Gibson, Dunn & Crutcher LLP [GD&C]. A spokeswoman for the SEC declined to comment. ... Schonfeld ... is investigating whether hedge funds and others spread false rumors", Kara Scannell at the WSJ, 11 September 2008.

"Former [SEC] Commissioner Annette Nazareth is joining law firm Davis Polk & Wardwell [DWP], as the firm seeks to bolster its financial-regulation practice. ... [DPW's] clients include Morgan Stanley and Citigroup Inc., and the firm has advised key players in the middle of the recent events. The firm represented the [Fed] and Treasury Department in the financing of American International Group Inc., and Citigroup in connection with the Lehman Brothers Holdings Inc. bankruptcy. The firm also represented Freddie Mac in the government's takeover of the mortgage backer. ... Ms. Nazareth is 'a thought leader across the widest possible range of financial regulation,' said John Ettinger, managing director of Davis Polk", Kara Scannell at the WSJ, 22 September 2008.

Will anyone review every enforcement decision Schonfeld made with repect to GD&C's clients for the last three years? Schonfeld is investigating hedge funds for spreading "false rumors". Why? Who will investigate the SEC for covering up bad accounting by major investment and commerical banks? Why ask? The SEC is a joke.

Quoted without comment.