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Wall St. Bailout: 'Plan B' for Buffett

By Brent Budowsky
October 3, 2008

Editor’s Note:  As Congress struggles to find a solution to Wall Street’s financial crisis, former congressional aide Brent Budowsky suggests that the federal government follow the lead of billionaire Warren Buffett – and demand some investment upside for the taxpayers:

Plan A is Treasury Secretary Henry Paulson’s plan to spend about $50 billion a month buying distressed assets for resale later. With current law – and with the Paulson bill as written – the government can increase the odds of success by simultaneously executing a Plan B that tracks the recent moves of America’s most respected investor, Warren Buffett.

The government could inject $200 billion into American financial institutions by purchasing preferred stock as Buffett recently did. The government could negotiate a 5 percent dividend (half of Buffett’s) and receive risk-free warrants to buy common stock at slightly below current prices for five years.

That would put the government in line to make money if the stocks rise above the target price of the warrants. Unlike Buffett’s deal, however, the government would never buy the stock, just auction the warrants to private investors, thus reaping a potentially huge profit for taxpayers if and when markets recover.

This Buffett-like plan has other advantages: Major liquidity would be injected quickly into credit markets under terms attractive to companies. The government’s principal would be largely protected. The dividend would create a taxpayer bonus. And the warrants would create a potentially huge taxpayer gain.

Plan B also wouldn’t require changes in the existing legislation. If Congress passes the current bill, including Paulson’s Plan A, this Plan B could be executed simultaneously in a two-pronged attack that would inject far more liquidity into the system than Plan A – the purchase of troubled assets – alone.

Paulson’s plan for moving $50 billion a month alone is grossly inadequate to the task. Adding Plan B would offer far greater support to the economy, very quickly, with less downside risk and greater upside potential than Plan A alone.

So, a Buffett-like move by the government would provide fast benefit to credit markets, bolster consumer confidence and enlist greater taxpayer support because it’s easily understandable and mirrors the moves of the person often called the world’s smartest investor.

Time for truth: If Secretary Paulson sought venture capital financing in the private sector with his current proposal, the deciders would say: “Nice concept, come back with a business plan.” If he then fell to his knees and pleaded for money, saying he would go bankrupt within 72 hours, they would suggest counseling, not financing.

Paulson’s approach has been a ridiculous way to push a proposal of such momentous risk, danger and cost. Paulson waited far too long, then dumped on the Congress and markets a plan he could not cogently explain, seeking powers that would have made Leonid Brezhnev proud.

Paulson also used fearful rhetoric that is grossly inappropriate for any Treasury secretary. It was destructive to market psychology, consumer confidence and public support. Making matters worse, no Democratic, progressive or conservative alternative was seriously considered.

Soviet elections under Brezhnev involved one candidate. The current congressional debate involves only one highly speculative and incompetently explained plan that alarms and confuses markets, depositors and voters.

My advice to members of Congress: Vote for the plan. Let Paulson begin work but demand that he be flexible and receptive to also executing Plan B – or some other Plan C.

Let changes from the Federal Deposit Insurance Corporation reassure depositors. Let mark-to-market accounting changes allow some distressed assets to be properly revalued upwards, some write-downs to be written back up, and credit rating agencies to withdraw some recent downgrades to ease credit conditions as the plan begins and global central banks cut rates.

The Treasury secretary and all public officials should stop rhetoric that wrongly promotes panic. Cable television hosts who throw chairs on shows named “Mad Money” and yell about Great Depressions should shut up.

We will get through this, calmly.

Brent Budowsky was an aide to Sen. Lloyd Bentsen and to Rep. Bill Alexander, then the chief deputy whip of the House. A contributing editor to Fighting Dems News Service, he can be read in The Hill newspaper, where he is a columnist. He can be reached at [email protected].

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