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Tavakoli: "We Should Impose a 95% Excess Profits Tax—Or Windfall Profits Tax—On Certain Financial Institutions... Enriching Themselves" at Our Expense
- Bear Stearns
- Ben Bernanke
- Ben Bernanke
- Berkshire Hathaway
- Credit Line
- Credit Suisse
- Excess Profits Tax
- Federal Deposit Insurance Corporation
- Federal Reserve
- Goldman Sachs
- goldman sachs
- Hank Paulson
- Hank Paulson
- Janet Tavakoli
- Lehman
- Lehman Brothers
- Merrill
- Merrill Lynch
- NBC
- New York Fed
- Structured Finance
- Timothy Geithner
- Tom Brokaw
- Warren Buffett
The following is an advanced copy
of an essay by Janet Tavakoli to be released tomorrow. Reprinted with
permission of Tavakoli Structured Finance.
Warren Buffett’s Wall Street War
By Janet Tavakoli
October 20, 2009
In a January 2009 interview with NBC’s Tom Brokaw, Warren Buffett criticized leveraging “to the sky,” and creating “phony instruments
[RMBSs, CDOs, et al.] that fool other people so you stick money in your
pocket.” In 2002, he claimed over-the-counter derivatives are
“financial weapons of mass destruction”1 and participants who account for them have “enormous incentives to cheat.” 2
Warren Buffett, the blogosphere’s “Oracle of Omaha,”
often chastises the financial community. If you cost him money, he’s
liable to write an expose. He posts annual shareholder letters on a low-tech website
and seems to labor under the assumption that rational people eagerly
read his blog. Congress and regulators are dismissive of Buffett’s
hyperbolic rhetoric; it is fit only for a banana republic.
In 2003, Buffett wrote
of the manufactured housing industry’s “business model centered on the
ability…to unload terrible loans on naïve lenders…The consequence has
been huge numbers of repossessions and pitifully low recoverie[s].” 3 Buffett alleged that the manufactured housing industry’s consumer financing practices were “atrocious,”4 and securitizations provided the money to fuel the financing.
Berkshire
Hathaway’s investment in the distressed junk debt of Oakwood Homes lost
money after the designer and manufacturer of modular homes went
bankrupt in 2002. Buffett claimed “Oakwood participated fully in the
insanity.” 5
Warren
Buffett’s diatribe suggested that most of the manufactured housing
industry was involved along with several Wall Street firms that
underwrote the securitizations. Using money from new investors to pay
returns to old investors in unsupportable investments is called a Ponzi
scheme.
Oakwood’s
loans to purchasers of manufactured homes were made possible by a line
of credit from Credit Suisse First Boston (Credit Suisse). The credit
line was similar to a credit card except that Oakwood had to put up the
home loans as collateral. Credit Suisse earned fees for the loans and
further fees when it packaged (securitized) Oakwood’s loans. Credit
Suisse (the old investor) bought the securitized loans and then sold
them to new so-called sophisticated investors.
Sales
of manufactured homes declined. Loan delinquencies (late payments) and
repossessions rose. Oakwood Homes had crushing debt and falling income
for at least three years before it filed for bankruptcy in November
2002. But securitizations had temporarily inflated the bubble for the
collapsing enterprise. A June 2008 court opinion said Oakwood’s
aggressive lending practices led to the high number of repossessions
and a debt load that Oakwood could not support. Oakwood’s liquidator
said the transactions it did with Credit Suisse were “value destroying.”6
Someone
should have muzzled Warren Buffett back in 2003. The Slumbering
Esquires’ Club might have believed Buffett’s preposterous theory that
after private securitizations became popular, the “industry’s conduct
went from bad to worse.” 7 Buffett’s wacky warnings could have jeopardized Wall Street’s subsequent mortgage lending securitization Ponzi scheme.
The SEC might have investigated Lehman Brothers’ questionable shenanigans, especially after it was held liable in 2003 by a California jury for allegedly helping FAMCO cheat borrowers. The SEC might have looked into the unsavory practices at Goldman Sachs Alternative Mortgage Products, Bear Stearns, Merrill Lynch or the entire private securitization industry, and their mortgage lending subsidiaries.
While the SEC slept inside a collapsing debt bubble, the Omahaconspiracy theorist spooked Goldman Sachs into believing it needed his money. In the fall of 2008, Buffett closed a deal
for $5 billion in Goldman Sachs’s preferred stock paying a 10% annual
dividend. Goldman even gave Buffett warrants to buy $5 billion in
common stock at a price of $115 anytime before October 1, 2013. [The Fed let Goldman buy back its warrants for chump change.9] Buffett’s warrants are now about $3 billion in-the-money and worth much more—a sweetener for his crispy calamari.
Hank Paulson, Ben Bernanke, and Tim Geithner10 ignored the historic ravings of the most successful living investor, and fueled some of the bombers piloted by Wall Street before finance’s Pearl Harbor. After they used taxpayer money to save the system and enriched the culpable with no strings attached, Buffett said “it could have turned out a lot differently,” and called each of them a four-letter word. The label was undeserved.
Four-letter
words aside, Warren Buffett raised a good point. It could have—and
should have—turned out a lot differently. But it’s not too late.
Buffett called the crisis an economic Pearl Harbor and said that “Wall Street owes the American people one at this point.”8 During World War II, we imposed an excess profits tax. We should impose a 95% excess profits tax—or windfall profits tax—on certain financial institutions (including Goldman Sachs) enriching themselves with ongoing low-cost Fed funding and debt guarantees.
Adapted from Dear Mr. Buffett, What an Investor Learns 1,269 Miles from Wall Street (Wiley 2009) by Janet Tavakoli
Disclosure: Janet Tavakoli is an investor in Berkshire Hathaway Inc.
1 Berkshire Hathaway Inc. 2002 Annual Report, 15.
2 Ibid., 13.
3 Berkshire Hathaway Inc. 2003 Annual Report, 5.
4 Ibid.
5 Ibid.
6 OHC Liquidation Trust, et.al
v. Credit Suisse First Boston et al., U.S. Bankruptcy Court, Delaware.
Civil Action No. 07-799 JJF (Chapter 11 Case No. 02-13396) Memorandum
Opinion June 9, 2008. (Partial Summary Judgment)
7 Ibid. [1]
8 Warren Buffett on ABC’s Good Morning America, July 9, 2009.
9 The Treasury got a paltry 23% return on its $10 billion investment in preferred shares and warrants
in Goldman Sachs. The Fed accepted only $1.1 billion for warrants that
had more than nine years to run during a quarter when Goldman Sachs was
awash in cash and profits and would report record earnings made
possible only by taxpayer intervention. The Fed gave up the right to
buy 12.2 million shares of Goldman for $122.9 per share. [As of Oct 16,
the warrants were in-the-money by around $750 million and would have
been worth much more with just over nine years to the original October
26, 2018 expiration date.] This does not include ongoing near zero-cost
funding, relaxation of accounting terms, temporary protected status as
a bank holding company (guarding against a run on Goldman) before switching its status to a protected financial holding company on August 14, 2009 [The Treasury may designate it a Tier 1 Financial Holding Company], and issuance of $25.15 billion (as of June 2009)
unsecured FDIC guaranteed debt [GS is allowed $35 billion outstanding
prior to Oct. 31, 2009. Goldman’s first issuance was for $5 billion of
3.35% maturing in 2012 on November 25, 2008; at the time its
stand-alone debt traded at 8.25% for a comparable maturity].
10
In the fall of 2008, Henry (“Hank”) Paulson was Treasury Secretary
(Paulson was formerly CEO of Goldman Sachs), Ben Bernanke was (and
currently is) the Chairman of the Federal Reserve, and current Treasury
Secretary Timothy Geithner was the Chairman of the New York Fed.
[Geithner was succeeded by Stephen Friedman as Chairman of the NY Fed.
Friedman was a former Goldman Sachs co-chairman and owned shares of
Goldman Sachs and was a member of Goldman’s board while he held his
influential Fed position, a conflict of interest and a violation of Fed policy. Friedman resigned the Fed position in May 2009.]
I think Warren is one of the least IRRESPONSIBLE guys out there. Nevertheless he shares his fair share of responsibility for the mess as he also was fueling this out of proportion debt bubble.
The most egregious thing is that even he is playing the game with the elephants in DC and NY. Once push comes to shove he does not behave different than the perpetrators from WSt and DC. This is all a facade Mr Buffett and you don’t have any credibility about responsible social behavior with me anymore. I know you don’t need my approval, but I let you know anyway.
His holdings in Finance, Consumer and Building have suffered and would have suffered even more if the liars on Wall Street, the FED, in Congress,and in the Administration hadn’t played their insider card to bail out the big guys so they can prosper unbeknown their bad behavior and miscalculation. BRK would have probably survived the Economic Pearl Harbor but the Moral Hazard created will only postpone the inevitable. So lets continue to hand out each other accolades for the heroic stands all of you have taken, to enrich yourself. Yes thats right, enrich, because most of you were/ would have been bankrupt if you wouldn’t have manipulated the markets we all operate in.
Thank you very much for setting this horrible example for the credibility of the western market economy. Go on with: Heads I win, tails you lose!
I'm not sure I understand this argument at all. Mr. Buffet, like many great men, is great at business and bad at things like economic and political theory. They tend to generalize from their personal experience to create "universal truths" that aren't, well, universal.
He should stick to what he knows. The premise of the article is that Wall Street's greed caused the crisis, and that poor Goldman was panicked into accepting his money? And Hank Paulson saved the world economy? Come on. It's not that Wall Street didn't do dumb things, but after the Fed creates a crazy money boom, and Washington incentivizes liar loans, what do they expect would happen?
And now that Wall Street was "saved" with taxpayer money, we should take it away from them? Well, I suggest that we never should have bailed them out in the first place, and maybe if they and Warren went belly up, they would learn what they did and what really happened in this crash. Wall Street wasn't saved, it was poisoned.
Nothing makes sense here.
One problem with taxing corporations is that the executives can still take out every single penny in compensation, leaving little left to tax. Lord Blankfein is preparing to take $23billion out in accrued bonuses, nearly 60% of GS profits before tax.
I'm surprised Tavakoli would recommend this 'solution' without the caveat of taxing the income, "Pre-Bonus".
The profits earned by the banks are due to the taxpayer bailout via TARP, discount window bonanza, and devaluation of the dollar as we know.
If we were following proper accounting standards, the profits would have to be retained as a capital item to cushion what should be the unwinding of the falsely accounted assets. This whole extravaganza has occured in order to re-capitalize the banks, which is sorely needed. Let's demand that the profits be applied to capital under mark to market standards as originally proposed by FASB 157. In this fashion, we could at least begin the process of repairing the balance sheets. This is even more necessary due to the impending FASB 166/7 incoming artillery.
Avoiding the necessary capital build matter while distributing profits for compensation is simply silly.
Buffet is a self-serving greedy modyfo, and a very successful one at that. Screw the excess profits tax! Just stop giving the banks free money and let them stand on their own wobbly legs. Down with capitalist socialism! Up with FULL DISCLOSURE (versus 'transparency', whatever the hell that is), regulators who regulate and legislators who have the balls to do their jobs to act in the best interests of the United States of America (oligarchs need not apply).
Damn, she's making me a fan.
Seriously though, why the hell do we need HFT trading either? We have enough traders in America to support the market, hell there's an entire generation of us. Speaking of which, soon it's going to be time to separate the children from the adults... Everyone getting excited? :)
Dunno bout you but the message I get from this article is that people are going to participate in bubbles no matter who and how many tell them its a bad idea. I call it the law of fear of missing out.
People would rather risk thousands in a scheme or stock that has the potential to go up then admit they thought it was a bad idea after the fact and miss out. It is why this rally is sucking in hundreds of thousands even though there is nothing that I (or anyone at Zerohedge from what I gather) can see as justifiable cause (other than the various forms of stimulus and never-ending stream of government data propaganda...
Just goes to show you that no matter how many times we get caught by bubbles most are all more than keen to participate in the next one.
Raising taxes is always a bad idea unless the government is trying to altogether discourage or punish a behavior... Unfortunately, in most cases it is punishing hard work, risk taking (in starting a new business for example) or plain ingenuity which is why onerous taxes don't usually last very long.
But then I never understood the intelligence of the US citizenship based system that taxed Americans on income no matter where in the world they lived. It is the only country (other than Eritrea and the Philippines) that taxes on citizenship not domicile... but that is another topic.
She's wrong. The excess profits tax rate ought to be 150%
Warren Buffett had the foresight to understand that derivatives and excessive leverage are the roots of the problem. Wish someone was paying attention to him at the time! Apparently, not many people did, the mess resulted, and then the bailouts.
The end result of all these bailouts is that many assets, stocks included, have become much more expensive, and may consolidate a bit from where they are now. But nobody knows when, and that brings in the question of how to figure it out. Maybe using a market timing system is the answer!
Consider http://invetrics.com
Its daily DJIA index trading signal is up a respectable 64.84% for the year (as of October 19, 2009) and it is free of charge for individual investors.
Warren Buffett is a hypocrite and DISGRACE.
+1
The Oracle of Omaha, sure he can see into the future when he's got government greasing the slimy skids.
...and a has been. There are much better money makers out there now. He doesn't even look at macroeconomics when making an investment decision. Give me a break.
COP, Moody's, etc.
How convenient that the guy who runs an insurance company whose products help customers avoid and evade taxes in perfectly legal ways wants a higher tax rate.
Frankly, his arguments for higher taxes are weak and unpersuasive. My sense is that they are entirely self-serving.
Warren needs to go away. The man is smart, no doubt, but he is also as shrewd and cutthroat as anybody on Wall Street. His folksy demeanor has charmed many, but it's merely a ruse.
i have been a life long opponent of high taxes for
the simple reason of believing in small government...
however there is a good case for higher taxes on
capital gains and rentier activities and for
lowering or eliminating labor taxes....michael
hudson give good arguments for this as the fire
economy has grown so powerful that it now owns
the government....
i was wondering why tavakoli slobbered over him
so much....
from a morals point of view, he is much worse
than a hypocrite and disgrace....as far i have
been able to determine he was knee deep in the
franklin bank scandal of the 1980s and the
sex slave ring running straight out of omaha...
buffet is a bankster through and through....
Was there ever any doubt? He was able to maintain good PR because he appeared to be outside the NYC/DC sphere of influence. No one and I mean no one makes huge profits at the big casino without the blessing of the family.
We should impose a 95% excess profits, or windfall tax, on the Feds, and return that money to the taxpayer:
Robinhood didn't steal from the rich- he stole from the local government (king, sheriff of Nottingham) and returned to the community what the government stole from them in the first place.
And these are different?
Yes.
One you volunteer your money to for goods or services (rich merchant); the other takes your money at the point of a "sword" (king, gov't)
Proverbs 9:11
..."In those days Alan Grayson arose, and ya he spake, he sayeth, where is our goddamned money ? , so sayeth the Alan Grayson".
Grayson is as stupid and corrupt as everyone else there -- he is just pinging on the Fed because he wants Congress to be doing what the Fed is doing -- it is a control thing.
lol
chronicles 15:25-31
"and it came to pass that the spirit of the lord
overcame alan son of a brooklynite while he sojourned
in the land of the floridians causing a great wroth
to overcome his countenence for the banksterites
had done exceedingly wicked in the eyes of the
people....
so alan gathered a remant among the people to
go down into the valley of wall street to do
battle against the banksterites....but the banksterites were too numerous and taunted the floridianite....
and when he saw that the lights of the television
stopped shining brightly on his face he returned
to the land of his people to politick for more
shekels of silver....
and the banksterites grew stronger and did not
hearken unto the voice of the people or to the
voice of their congress.
and so the people perished in the wilderness after
wandering 40 years grumbling and murmering..."
The government is not stupid in how it handles our money, it is totally corrupt. The thieves, crooks & con-men have taken over the government. We should be demonizing the Wall Street corporations and their toadies in the treasury, the congress & the Fed. Stick that in your quartile!
This is a common mistake that many people make. Based upon observable behavior they pin the label of stupid or corrept on our government.
What they are missing is the simple truth that our elected officials are both stupid and corrupt. Once you make this realization, their behavior is much easier to understand.
+1
Many people make the subconscious choice to always choose incompetence over deep-rooted and complete corruption.
It makes life that little bit simpler and more palatable.
well said....i am listening to an
outfuckingstanding interview of john perkins who
wrote confessions of an economic hitman....he
describes how corruption hides by surrounding
itself with good people who make believing in
corruption nearly impossible...it is so sophisticated
and subtle that most sheeple need to hear it to
believe it....
i will post this link multiple times because
it is so good but it is an absolute must watch
in dealing with conspiracy deniers....
even though i knew what he had to say i was still
shocked and fascinated by the details and his
story...absolutely a first class interview for
anyone wanting to understand how deliberate
corruption and aggression occur under the guise
of incompetence or accident
http://www.youtube.com/watch?v=yTbdnNgqfs8&feature=related
Them's some real balls on that guy . . . a little late, perhaps, but he coulda just kept quiet. Great material. Inconvenient for the Patriots of American Exceptionalism, but.
hear hear!
History (or my children and grand children) will view Paulson, Geithner, Bernanke, Greenspan as economic terrorists! Bought and paid for by the "masters of the universe" with their political financial/lobbying gifts.
We need to stop giving the government the means to take so much of our money -- then they won't be able (less able) to give it to companies you don't like. We need to starve the beast. But most of you all voted to ramp this process up in the last election. This administration is set on controlling as much of the economy and your actions as possible via health care and the environment. You don't realize it, but the government is smarter than you are -- so hand over your money and they will make sure you get your fair share. Trust them -- they have done so well with your money to date (see Social Security and Medicare as prime examples of how they operate).
"We should impose a 95% excess profits tax—or windfall profits tax—on certain financial institutions (including Goldman Sachs) enriching themselves with ongoing low-cost Fed funding and debt guarantees."
How about we just stop giving them low-cost Fed funding and debt guarantees? Too simple? Why on pile yet another regulation designed to fix the problem you created in the first place (a regulation that will only inspire new creative ways to sidestep the regulation, while continuing to profit from the Fed money machine?) I honestly don't how somebody can correctly diagnose the root of the malady, then suggest we go on treating the symptoms rather than excising the cancer. What???
I agree, this seems ass backwards to me. Quit giving them money, break up the too big to fails. Let them go bankrupt. Make them pay back the money they were given.
i would agree that removing the privilege of free
money is a more sensible approach
but the issue is not one of regulation - a 95%
windfall as merely an additional tax...
i suppose that the argument is that there are
some truly deserving banksters for the reduced
interest rates thus the windfall continues the
program but penalizes misuses of it....
but i agree that taking away the slop from the
pigs is the best way to go....
So the government is stupid in how it handles our money?? Presumably this is shocking news to liberals. Have you not been paying attention the last 60 years?
So let's punish those who are smarter than the government --a very popular collectivist thought. It is a part of the grander scheme of demonizing corporations generally and anyone who is top quartile succesful particularly -- so we can provide for the bottom quartile. The grand smoothing of outcomes.
This fits well with the administration's entitlement, government dependency agenda.
104031, I suggest you get an ID to post here. Your rap would fly well on Newsvine. Go back and post there.
smoothing of outcomes? the middle class is disappearing.
This is the Obama agenda -- smoothing outcomes. And the nearly 50% of people who pay no income taxes is in wildly in favor of this.
it has nothing to do with punishing those who
are smarter than the government....the problem
is the collusion between industry and government
which in time past was known as fascism....
a government loaning 0% money so that someone
can invest in a 60% stock market rally or in 4%
bonds - a privilege available only for the top
percentile - is not an equitable way to manage
tax payer dollars....
the dependents are your beloved corporations receiving
obcene entitlements...the same corporations
who have spread financial terror and mayhem in
this country.....
it takes two to tango and i am all for stopping
the music....
you show me how the bottom quartile is supposed
to survive with octopus squids sucking all jobs
and capital out of the productive economy and i'll
show you a bridge in brooklyn with vacant office
space i'll sell to you wholesale....
Taxes are punishment/disincentives for certain behavior. So the suggestion is we should punish corporations who took and used the free money the government gave them?? Like offering candy to a child and punishing him for eating it. Corporations will stop using the free money when the government stops giving it to them and not sooner. Government is the primary problem. The best way to get government to stop handing out money is to give the government less money (I know - they will still spend more than they are "given," but you can lower the spending bar). Starve the beast.
But the folks running the government think they are the answer (and never the problem) because they are wiser and all knowing in how to allocate capital (or build cars or run health care or do anything else) as they take from some and give to others. Government does not want "equitable" treatment of citizens -- unless by "treatment" one means "outcomes" -- which is what seems to underly most of their policies.
Our bottom quartile are still among the richest in the world.
Your first sentence is
incorrect. Does the income
taxes punish or disincentivise
labor? If so, then the
income tax should be
immediately disbanded along
with all other taxes on
things which are seen as
good (sales, land, estates,
etc.). If not, then you must
ask why their is an income
tax. The answer is because
the government wants revenue
and will do anything to get
it.
now that's change we can believe in.....