Friday, October 3, 2008

WWWBD: What Would Warren Buffett Do?

Warren Buffett paintingWhen all else fails, ask WWWBD, or "What would Warren Buffett Do?" What are the Oracle of Omaha’s thoughts on the current state of the financial markets and the economy? Well, according to Buffett, we are looking at an economic Pearl Harbor. While that probably doesn’t sound too reassuring, he is also optimistic. In fact, he is so optimistic that he is one of the few people actually buying right now. He recently invested $5 billion in Goldman Sachs and $3 billion in GE. Buffett said the current bailout plan isn’t perfect, but he pushed for it to get passed nonetheless. In a Fortune article, he also proposed a bailout plan of his own.

In Buffett's bailout plan, he recommends that the government involve private investors in the mix by loaning up to 80 percent of the purchase price to hedge funds and the like to buy up the distressed mortgage assets. Buffett said that this would create less risk for taxpayers, and also provide better management of the assets. The biggest advantage, though, is that this would overcome the potential problem of the government paying too much for the assets, as many are worried will happen under the current bailout proposal. Since these sophisticated investors are going to have 20 percent equity in the game, you can bet they will make sure to not overpay for the troubled securities.

I definitely prefer Buffett’s plan to the one that the house just passed, but it is still hard to predict what the ultimate impact would be to taxpayers.

Another point that Buffett made in the article--and that is being echoed elsewhere, too--is that $700 billion probably isn’t going to be enough to fix this problem. The Buffett proposal would bring in private money to help shoulder the burden, but the big problem with it is that we don't know that private investors will even be interested. If they are interested, are banks going to be willing to sell the toxic assets at the prices investors demand? Will prices ultimately get pushed down even further, making things that much worse? It is hard to say, but at the same time, that echoes the main fear of the current bailout plan. How do we know that we are getting a good deal? I don’t know about you, but somehow I have a feeling that if the government is left to their own devices, we are going to end up paying a hefty premium for these assets and taxpayers will get stuck with the bill.

Typical investors, who, unlike Buffett, don’t have billions lying around, need to be smart with their investments right now. Make sure to protect yourself in the event things don’t turn out as planned. Also be aware that there is no guarantee that things are going to get better even now that the bailout has passed. We are likely still heading to recession, and things are still going to get ugly.

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