Does The US Government Have A "Buying Opportunity" In The Financial Sector?

By Big Tent Democrat, Section Economy
Posted on Wed Mar 11, 2009 at 05:58:52 AM EST
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Now that Citi and the financial industry are "good investments", another way to look at the current situation is as a "buying opportunity" for the US government. I am largely being facetious here, but here is one description of what the "Oracle from Omaha" said about bank stocks:

[Buffett] says the problem of American banks are not overwhelmingly toxic assets. . . . The problem with the banks is that nobody will trust them and they have not been able to raise funds. The view that this is a liquidity crisis – and not a solvency crisis – has long been a staple of the Bronte Capital blog. . . . Buffett doesn’t even think the US banks (on average) require capital – a view that most people would find startling (though again I think is correct provided appropriate regulatory forbearance is given). . . . [Buffett went] on to repeat that the opportunities in banking are simply wonderful now – so long as you can get past the past.

Buffet is already in deep with Goldman Sachs and GE, but it would be interesting to know why he is not buying banks himself. In any event, the US government is not going to let the financial industry fail for lack of liquidity. The question then is why not make the taxpayers back some money in the process? If "investing" in the financial industry is such a good deal, why would the US government just give away its money for free, instead of getting a piece of the action?

Maybe we can make enough money on this "investment" to pay for the "entitlement crisis?" Or for universal health care? Or "green" investment? Or any number of great ideas that have gone looking for money in the budget? Or even the novel idea of paying down the debt?

I admit I am very skeptical of the claims being made about the financial sector but I know the government can not let it fail. I believe temporary takeovers are going to be necessary to save that sector. But suppose those who think the financial industry has a great upside are right? That there is no "solvency" crisis? That all that is needed is shrewd investors willing to pony up cash now? It turns out that only the US government can and will be that "shrewd investor." Why shouldn't the US government be the one to "make the killing" this time?

Speaking for me only

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Does The US Government Have A "Buying Opportunity" In The Financial Sector? | 11 comments (11 topical)

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Credit worthy (5.00 / 1) (#10)
by cal1942 on Wed Mar 11, 2009 at 11:44:59 AM EST

are having trouble getting loans.

Lowering borrower standards had a lot to do with an awful lot of capital in too few hands.

Bad idea brother.... (none / 0) (#1)
by kdog on Wed Mar 11, 2009 at 08:19:56 AM EST

In theory at least, the people's government is supposed to play the role of a gaming commission when it comes to high finance money-changing...ensuring the deals are square and the dice ain't loaded...they aren't supposed to be at the tables gambling with us, that's a major conflict of interest.

Well (none / 0) (#2)
by Big Tent Democrat on Wed Mar 11, 2009 at 08:30:06 AM EST

A little late for that now.


: Very late.... (none / 0) (#3)
by kdog on Wed Mar 11, 2009 at 08:38:55 AM EST

point taken, that ship sailed, though we can try to stop any further inappropriate entanglements.

ordinarily, i'd agree. (none / 0) (#4)
by cpinva on Wed Mar 11, 2009 at 09:04:27 AM EST

except, at the moment, the gov't has to play the part of "the house", and provide credit to the players.

that being the case, i see no reason why the house shouldn't also take a profit, given the level of risk it's assuming.

Not for government (none / 0) (#6)
by diogenes on Wed Mar 11, 2009 at 10:55:35 AM EST

Buying opportunity for private citizens, but when governments run banks (as in China), then political pressures lead to dodgy loans (can you imagine forcing a bank to write off old loans or make new loans to Chrysler, etc?).

: Right (5.00 / 1) (#7)
by CST on Wed Mar 11, 2009 at 11:12:23 AM EST

Because privatly owned banks never make dodgy loans...
Banks in China are doing a lot better than banks in the U.S. right now - bad analogy.
Finally, no one is suggesting this be permanent.

: My bank collapsed in October 2007 (none / 0) (#15)
by FreakyBeaky on Wed Mar 11, 2009 at 02:15:05 PM EST

The feds ran it for a while and found a buyer. If I hadn't been paying attention, I'd never have noticed. The name on the door changed, I got a new batch of checks, and I didn't lose a dime.
The point being, our government can run a bank, for a while, without us becoming China.
Furthermore, I think it is disingenuous on your part to conflate the kind of temporary bank takeover that our government has been doing it seems like at least once a week every Friday for the last 36 months with banking as a permanent State enterprise, a la China.

Well (none / 0) (#9)
by CST on Wed Mar 11, 2009 at 11:38:03 AM EST

Good point.

Although I think there is room in between what banks are doing now (not much of anything) and what the government would force banks to do without going into "dodgy" territory.

Not to mention the fact that a nationalized bank probably wouldn't give crazy bonuses to retain employers who have no where else to go. The government ultimately has to answer to the people, privately owned companies do not. Therefore, I think it more likely at this time for government run banks to do what is good for the general populus. Bank execs do what they do so they can personally have more money, politicians do what they do so they can get re-elected. Right now, I'll take the second motive over the first. Since the only way for bank execs to make money right now is by "robbing" the bank.

A few things (none / 0) (#13)
by CST on Wed Mar 11, 2009 at 01:16:58 PM EST

Number 1 - we need someone to lend money to businesses/develpers/homeowners/students, etc. If a bank is the middle man, who is the front man? Direct lending from person to person won't work in a world this big. People don't want to have to make all those decisions personally. That's why they hire investors, put money in banks, etc. They have day jobs.

Number 2 - I do think "too big to fail" also means "too big to exist". These companies need to be broken up. Preferably in such a way that whomever was doing business with them previously doesn't get scr*wed. This could be done better by the federal gov't than by bankrupcy (my opinion - I admit this one is just a gut reaction).

Number 3 - Letting them fail completely also means putting thousands out of work, completely giving up the 401ks of millions, and would require FDIC intervention on personal accounts. So unemployment would go up, savings would go down, and the Fed would still have to give away money.

Good Question (none / 0) (#16)
by squeaky on Wed Mar 11, 2009 at 03:41:57 PM EST

Buffet is already in deep with Goldman Sachs and GE, but it would be interesting to know why he is not buying banks himself.

And the implicit answer is right on the money.