SpursFanFirst
10-02-2008, 01:00 PM
Investment guru proposes his own solution to the credit crisis after warning that the $700 billion bailout may not be large enough.
By Chris Isidore, CNNMoney.com senior writer
Last Updated: October 2, 2008: 1:51 PM ET
(Fortune) -- Warren Buffett said Thursday the pricetag of the controversial $700 billion Wall Street bailout may have to rise, and suggested that Treasury team with private investors to buy the distressed mortgage assets at the center of the rescue plan.
Buffett, the chairman and CEO of Berkshire Hathaway (BRK.A), likened the recent turmoil in the markets to an "economic Pearl Harbor" and said that the economy needs a quicker response than Congress has provided.
"We had an economic Pearl Harbor hit," he said during an appearance at Fortune's Most Powerful Women Summit in Aviara, Calif. "For a couple of weeks we've been arguing about who's fault [and] fooling around while things have gotten a lot worse."
On Wednesday, the Senate passed a $700 billion bailout package. The House is expected to vote on the revised bill on Friday, four days after rejecting an earlier version.
"It will cost more to solve this problem today than it did two weeks ago," said Buffett, referring to when Treasury Secretary Henry Paulson's first proposed that Congress help rescue Wall Street, which has seen the collapse of Lehman Brothers and Bear Stearns and the sale of Merrill Lynch. "It's that bad. If we don't get it solved next week, I may go back to delivering papers."
He didn't estimate how much more money would be needed to buy enough toxic mortgage investments in order to create a more stable market and get credit flowing.
Finding a price for distressed assets
But Buffett described a plan he thought of Thursday morning on the way to the Summit that would allow Treasury and private investors to buy assets together. He said his proposal would quickly kickstart demand for mortgage-backed securities and help find a market price for these troubled assets.
"One easy way to do part of the program is to say to anybody - hedge fund operators, Wall Street firms, or anybody else - that the Treasury will lend you 80% of the purchase cost of a bunch of distressed assets," he said, explaining the concept of his proposal. The investors benefit from borrowing at lower rates, but Treasury would get first claim on the sale of those assets, which means it would get its loan back plus interest and possibly turn a profit.
"Now you have someone with 20% skin in the game," he explained. "Believe me, I won't be overpaying if I'm buying with that kind of leverage. And you have someone [the investors] to manage the assets to the extent they need to be managed."
Buffett said that the bill that passed the Senate Wednesday evening isn't perfect, but that it's crucial to prevent the global economy from grinding to a halt. He then warned it will take a while to work and that the economy is going to struggle even with its passage.
He said the problems now facing the economy are unprecedented, and likened the the crisis to a great athlete that has had a massive heart attack.
"We've never seen anything like this where perfectly credit-worthy companies can't get funds," he said.
"Anyone who thinks this bill is a panacea is [making] a mistake," he said. "Without it, it's a disaster."
By Chris Isidore, CNNMoney.com senior writer
Last Updated: October 2, 2008: 1:51 PM ET
(Fortune) -- Warren Buffett said Thursday the pricetag of the controversial $700 billion Wall Street bailout may have to rise, and suggested that Treasury team with private investors to buy the distressed mortgage assets at the center of the rescue plan.
Buffett, the chairman and CEO of Berkshire Hathaway (BRK.A), likened the recent turmoil in the markets to an "economic Pearl Harbor" and said that the economy needs a quicker response than Congress has provided.
"We had an economic Pearl Harbor hit," he said during an appearance at Fortune's Most Powerful Women Summit in Aviara, Calif. "For a couple of weeks we've been arguing about who's fault [and] fooling around while things have gotten a lot worse."
On Wednesday, the Senate passed a $700 billion bailout package. The House is expected to vote on the revised bill on Friday, four days after rejecting an earlier version.
"It will cost more to solve this problem today than it did two weeks ago," said Buffett, referring to when Treasury Secretary Henry Paulson's first proposed that Congress help rescue Wall Street, which has seen the collapse of Lehman Brothers and Bear Stearns and the sale of Merrill Lynch. "It's that bad. If we don't get it solved next week, I may go back to delivering papers."
He didn't estimate how much more money would be needed to buy enough toxic mortgage investments in order to create a more stable market and get credit flowing.
Finding a price for distressed assets
But Buffett described a plan he thought of Thursday morning on the way to the Summit that would allow Treasury and private investors to buy assets together. He said his proposal would quickly kickstart demand for mortgage-backed securities and help find a market price for these troubled assets.
"One easy way to do part of the program is to say to anybody - hedge fund operators, Wall Street firms, or anybody else - that the Treasury will lend you 80% of the purchase cost of a bunch of distressed assets," he said, explaining the concept of his proposal. The investors benefit from borrowing at lower rates, but Treasury would get first claim on the sale of those assets, which means it would get its loan back plus interest and possibly turn a profit.
"Now you have someone with 20% skin in the game," he explained. "Believe me, I won't be overpaying if I'm buying with that kind of leverage. And you have someone [the investors] to manage the assets to the extent they need to be managed."
Buffett said that the bill that passed the Senate Wednesday evening isn't perfect, but that it's crucial to prevent the global economy from grinding to a halt. He then warned it will take a while to work and that the economy is going to struggle even with its passage.
He said the problems now facing the economy are unprecedented, and likened the the crisis to a great athlete that has had a massive heart attack.
"We've never seen anything like this where perfectly credit-worthy companies can't get funds," he said.
"Anyone who thinks this bill is a panacea is [making] a mistake," he said. "Without it, it's a disaster."