Buffet In?

Wednesday, August 22, 2007
Maybe.

If he is, then a careful reading of the Panic of '07 that leads MHA's post just below is in order. Mauldin calls for Buffet to step in and restore confidence by buying Moody's
Second, the rating agencies need to restore their credibility. Warren Buffett's Berkshire Hathaway owns about 19% of Moody's. I would suggest that Mr. Buffett step in take over the company (much as he did with Salomon years ago) and put his not inconsiderable credibility on the line for all future ratings and the inevitable re-ratings that are going to be done.

The Panic of 1907 was solved by the credibility of one man, J. P. Morgan, who stepped in to provide liquidity. The Panic of 2007 is not a problem caused by lack of liquidity. It is a problem caused by lack of credibility. Morgan could (and did) provide liquidity. Buffett can (and should) provide credibility.
Countrywide isn't Moody's but Buffet would still be sending a very strong signal. Maybe even stronger than if he did buy the rest of Moody's. Remember the S & L Crisis? I recall estimates that it was a $500 billion dollar problem (it actually came to about $150 billion). That was in 1988 and the equivalent today would be $870 billion. According to Mauldin's charts (but my calculations) a 100% loss on all the Liar's mortgages would come to around $324 billion - and I think that's overstated. A 50% loss would be chump change in a $14 trillion dollar economy.

Builders already cut back to 2002 levels in '06 and are headed for 1996 levels. The total "overbuild" in SFR's looks like 500K units so we could see a building turnaround by next May. If the hysteria doesn't drive buyers into a huddle.

If Buffet actually has come in then the "bottom" has been called. We'll know in a few days.

7 comments:

Buddy Larsen said...

The last two days have sure looked good. Lotsa resets and markdowns yet to come --but it looks like order is restored.

Countrywide is up back to mid 20s (up 3 or 4 after-hours on big Bank of America buy-in announced at close) from mid teens last week. This week, Dubai has gone thru with big purchase of MGM, BHP (Billiton) just raised divvy 30%, metals up 3-6%, First Data/KKR deal going thru soon (they've said), Rio Tinto/Alcan deal way oversubscribed, and the indexes are steeply off last week's bottoms, with, crucially, financials leading the way.

Dammit, what's wrong with this picture? If the smart guys are going thru with their mega deals, then we must be ok. right? right?

Luther McLeod said...

Buddy

You make it sound like rationality has anything to do with the market. You dreamer :)

Rick makes the good point of who has the most/or some, greatest influence. Buffet is a trump, but maybe not the only one.

The largest is the MSM, they will spin this to hell, if they can. They don't care about noses, their spite will win every time.

Buddy Larsen said...

right you are --but i remember a month or so ago, the wise guys were sneering at Buffett because his returns weren't keeping up with the quants. He was 'old timey' and no longer relevant. Now suddenly, without his having changed at all in any way, he's the Oracle of Omaha again!

It's called 'risk management', they say.

Rick Ballard said...

Buddy,

The problem I have is watching the "quants" not "quanting". I don't know where Mauldin fits along the value - quant curve but his illustration was pretty pathetic. His "worst case" involves a payment that is about 35% of income (using national averages) and if the loan was reset to market (6.5%), the percentage drops to 30%.

I remain surprised as to the minimal impact of the housing drop in terms of emplyment. There were somewhere between 700K and 1M jobs "lost" and I can't find them in the jobless claim stats.

Knucklehead said...

Rick,

It is possible that a large portion of the jobs lost due to the drop in housing starts (and even home improvements) are illegal immigrants. Perhaps they aren't filing for unemployment and, therefore, now showing up in the stats. Just a guess.

Buddy Larsen said...

fast-moving case this is. Today, talking heads (remember, the 'bear' money managers that get press in these times are almost always supporting their existing shorts) are moving recession probability to '50%', saying they believe that the dollar is too weak to allow the Fed to cut rates.

However, there's a solid bid back under stocks.

(scratch head, rub chin, mull)

Yep, illegals are skewing the job-loss numbers --money transfers into Mexico are falling, said the news a few days ago.

Rick Ballard said...

I'm sure that the illegals count for part of it. I think I found the rest in stats on "total" private construction spending that show an increase through Oct. '06 with the "worst" occuring in March/April '07. Total private construction spending in '07 is still outpacing '05.