If you’re writing a Financial Tip of the Week, in this economic environment, you want to wait until the last minute to see what, if anything, is going to change. These are dramatic times, or as Charles Dickens wrote in The Tale of Two Cities (1859):
It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way – in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.
The above says it well for how many have felt over our lives. Yet, for most of you, today’s news must seem like a harbinger of doom as you work to manage the resources of your household, while preparing for retirement or college expenses. On the other hand, you may be near your beginning and are actively preparing yourselves for jobs after college or are planning on investing in yourself by attending college. (College education continues to be one of the best investments one can make in one’s self.)
Rather than try to provide you with my thoughts on this week’s events and to avoid talking about another financial topic of interest – many exist but nothing trumps what is going on in Washington and Wall Street – I thought I bring you some bullets of wisdom from the Sage from Omaha, Warren Buffett.
Warren Buffett was interviewed on CNBC news on Wednesday morning about his surprise investment of $5 billion in Goldman Sachs (complete transcript: http://www.cnbc.com/id/26867866/site/14081545/). Some bullets, from his comments:
- If I didn’t think the government was going to act, I would not be doing anything this week. I might be trying to undo things this week…..government will do the rational thing here and act promptly. It would be a mistake to be buying anything now if the government was going to walk away from the Paulson proposal. (Editor’s note: As of this afternoon, Congress has supported Paulson’s proposal.)
- Last week we were at the brink of something that would have made anything that’s happened in financial history look pale.
- …the economy and the financial markets, but they’re so intertwined that what happens, they’re joined at the hip. And it doesn’t pay to get into horror stories in terms of naming institutions or anything. But I will tell you that the market could not have, in my view, could not have taken another week like what was developing last week. And setting forth the Paulson plan, it was the last thing, I think, that Hank Paulson wanted to do. There’s no Plan B for this.
- …it’s everybody’s problem. Unfortunately, the economy is a little like a bathtub. You can’t have cold water in the front and hot water in the back. And what was happening on Wall Street was going to immerse that bathtub very, very quickly in terms of business.
- …a collapse of the kind of institutions that were threatened last week, and their inability to fund, would have caused industry and retail and everything else to grind to something close to a halt.
- …you have all the major institutions in the world trying to deleverage. And we want them to deleverage, but they’re trying to deleverage at the same time. Well, if huge institutions are trying to deleverage, you need someone in the world that’s willing to leverage up. And there’s no one that can leverage up except the United States government (underline added for emphasis). And what they’re talking about is leveraging up to the tune of $700 billion to, in effect, offset the deleveraging that’s going on through all the financial institutions.
- …if I could buy a hundred billion of these kinds of instruments at today’s prices, and borrow a non-recourse $90 billion, which I can’t, but if I could do that, I would do that with the expectation of a significant profit. (Editor’s note: This implies that the $700 billion price tag may be substantially reduced as the government oversees the disposition of these distressed assets.)
- But they (the U.S. government) have the ability to borrow. They can borrow much cheaper than I can borrow. They can borrow unlimited. They don’t have covenants. They don’t have — I mean, they are in the ideal position…..I will tell you that the buyers of the instruments these days are going to do better than the sellers…..In fact, one thing you might do is, if someone wants to sell a hundred billion of these instruments to the Treasury, let them sell two or three billion in the market and then have the Treasury match that, for what they pay. You don’t want the Treasury to be a patsy.
- But I’ll tell you, with Hank Paulson on top of it, you couldn’t have any better guy to do that.
I’ll join Mr. Buffett with my hope and prayer for a growing public confidence in the wisdom of our leadership and for an end to the foolishness of recent history. I’m sure many of you join me in a sincere desire to see us learn from this lesson of the markets. In particular, we must remember that ethics and principles have a place and that place is in the forefront of our personal and work decisions – each and every day. If principles guide us, the result will be Financial Success…with an Abundance of Wisdom.