Q: I think most of your readers will have difficulty evaluating the relative merits of your plan versus the Paulson plan. Here is Buffett’s read on the Paulson Plan.
Charlie Rose Interview with Warren Buffett Oct 2 2008
The gist of Buffett’s comments follow. Are you saying he’s got it wrong?
Warren Buffett: Well, they need plenty of money and they really need plenty of flexibility to carry out this plan. They also need in my view to very much tie it to market prices. I have said, Charlie, that the 700 billion, if they buy mortgage-related securities or mortgages themselves at current market prices, they’re going to make money over time because the United States government has staying power and it has a low cost of borrowing. And if I could take one percent of that $700 billion pot and take the gain or loss from it and be their partner, and they would buy the stuff at market, I’d make a lot of money. It’s — I mean you have hedge funds and people like that buying these assets to yield 15 or 20 percent, I mean, that’s the buyer for these people that are trying to unload them. The U.S. Treasury has got borrowing costs like nobody else has. They can borrow basically unlimited amounts. They can stay there for years and years. These assets will be worth more money over time. So when Merrill Lynch sells a bunch of mortgage-related assets at 22 cents on the dollar like they did a month or so ago, the buyer goes — is going to make money, and he’s going to make a lot more money if it happens to be an institution like the U.S. government which has very, very cheap borrowing costs.
Charlie Rose: So you are saying to those taxpayers who are worried about what’s going to happen to the $700 billion, chances are good that when these securities are purchased and sold, you’ll get a lot of your money back.
Warren Buffett: I think [inaudible].
Charlie Rose: Or all of your money back, and maybe something else [spelled phonetically].
Warren Buffett: I would bet on it. I mean, if I got a chance to take one percent of the deal either way, I would make that bet. When Berkshire Hathaway laid out three billion dollars for GE today, we didn’t spend it, we invested it. When the Federal government buys the mortgages, they’re not spending it, they’re investing it. Now, they’re investing it in distress type assets but they’re buying them at distress prices if they buy them at market. It’s the kind of stuff I love to do. I just don’t have $700 billion. Maybe we could go in it together. [laughter] You know, with your money and my brains, I mean, there’s no telling how far we’d go.
A: I think most of my readers are able to evaluate the relative merits of my plan versus the Paulson plan. They’re pretty interested in the economy and investing or they wouldn’t have requested my letter in the first place. From the e-mails and questions I’ve received, I think they get it.
I don’t think Buffet’s got it wrong, but I also don’t think he’s seen my plan, yet.
Both plans have the government buying distressed mortgage debt at a discount to face value. The government then receives any cash flows that troubled homeowners can pay on this debt. What Buffett is describing above is that the government could receive cash flows from the troubled homeowners in excess of what the government pays to buy the debt.
My plan doesn’t envision trying to do this. I don’t think it would help the problem for any of us to try to make a profit off of the troubled homeowners. The way I’ve laid out my plan, the discount at which the government buys the debt would be passed on to the troubled mortgage holders. This would make it more likely that they will be able to service their mortgage debt and stay in their home. In the long-run, I think this would be more beneficial to all of the taxpayers.
