Not so fast CNBC; Warren Buffett and Henry Paulson didn't save the world.
In a recent blog post I discuss in general terms the media's role in the financial crisis and its aftermath. In particular, I discuss the notion of how the media - whether consciously or unconsciously - in crisis after crisis "appears to do little more than parrot false narratives as part of an overarching agenda of more and bigger government." (1) This quote came from a discussion of how the media advanced Hillary Clinton's narrative on the origins of the Flint Water Crisis and completely ignored the role played by local political corruption, exclusively perpetuated by Democrats.
Something similar was seen this week from CNBC. In a brief article CNBC lionized Warren Buffett - and to a lesser extent Henry Paulson - for their supposed role in saving the country from an even worse financial crisis. (2) The time the events described in the article took place was October 2008, in the immediate aftermath of the passage of the TARP legislation. The Troubled Asset Relief Program, TARP, authorized the Treasury to spend $700-billion to purchase distressed assets from banks. According to CNBC's version of events, on October 11, 2008 Buffet placed a late-night call to Paulson. Buffett recommended taking some of the recently passed TARP funds and investing them directly into banks. Specifically Buffett proposed that the Treasury take some of its $700-billion - all of which the Federal Reserve created out of thin air - and invest $125-billion of it into nine banks. In return the government would receive preferred stock that paid dividends of around 5 or 6 percent.
As with most media narratives, what is left out of an article is far more telling than what is left in. The unspoken assumption in this article is that the economy needs competent, selfless and heroic figures like Henry Paulson and Warren Buffett to don red capes – even late at night – to save the country from certain disaster. There is no acknowledgement of the enormous role that the government and the Federal Reserve played in the crisis. There is no consideration of the glaring fact that as the government – see Bill Clinton’s “goal” for homeownership – and the Federal Reserve – see the extremely low rates of the post-tech bubble era – have become more involved in the economy the economic crack-ups have become much larger, not smaller.
Granted, that tackling the government’s or the Fed’s role in the crisis was likely beyond the scope of a short article. However, what of the two principles that CNBC lionizes in its article – Henry Paulson and Warren Buffett? Is there anything relevant to either their competence or their selflessness that might cast their actions in a different light? Furthermore, if their competence and selflessness are called into question, doesn’t that contradict CNBC’s “heroic” interpretation of October 11, 2008 and the attendant belief that the economy constantly needs people like Paulson and Buffett to step into the breach of a crisis? As it turns out, it isn’t even particularly difficult to find things to call into question their competence (Paulson) or selflessness (Buffett).
Henry Paulson’s post-crisis memoir On the Brink is quite useful as a diary of the crisis and what happened when. While it is virtually useless as a source of information on the cause of the crisis, it does provide insight into Paulson’s interpretation of events and the faulty mindset that animates these interpretations. A telling insight into Paulson’s faulty mindset is provided by a call Paulson received from a fellow Dartmouth alumni and the CEO of GE, Jeff Immelt. Paulson relates being “alarmed” that GE was having a difficult time raising money in the commercial paper market. Of the difficulty in firms like GE borrowing money, Paulson wrote, “I’d never expected to hear those troubles spreading to the corporate world, and certainly not to GE.” (3)
Henry Paulson was obviously unaware that GE – circa 2008 – was not a staid corporation that threw off plenty of free cash from predictable operations. In 2008, GE was little more than a hedge fund that had side business including power generation equipment and jet engines. In 2008 – because of its GE Capital unit – GE’s balance sheet was an $800-billion monstrosity that hardly anyone understood. The fact that a company with such a complicated capital structure found it hard to borrow money during a financial crisis should surprise no one, but it came as a great surprise to Paulson. Further evidence of Paulson’s ignorance of what was going on at GE is provided by what has happened since 2008. Even after disgorging GE Capital and virtually eliminating it dividend payment, GE is still saddled with well over $100-billion in debt and its stock trades close to its 2008 low. There is virtually no chance that GE continues in anything close to its current form. The fact that Paulson was ignorant of all the problems with a company as large as GE speaks volumes of his general cluelessness.
With Buffet, his actions of October 11, 2008 pertain to his purported selflessness, not his competence. There were a total of nine banks selected to take part in what came to be called the Capital Purchase Program (CPP). The nine banks that the CPP would invest $125-billion in were;
- JPMorgan, Wells Fargo, Citigroup and Bank of America (commercial banks)
- Goldman Sachs, Morgan Stanley and Merrill Lynch (investment banks)
- State Street and Bank of New York Mellon (clearing house banks)
Just prior to making his late night call to Paulson, on September 23, 2008 to be precise, Buffett purchased $5-billion worth of Goldman Stock and had the option to purchase $5-billion more. (4)
The fact that the Treasury would be investing billions of dollars into Goldman through the CPP made Buffett’s Goldman stock far more valuable. It certainly didn't take the "sage of Omaha" to see this in advance. Indeed, on October 13, 2008 when the CPP was announced to the world and implemented, the shares of Goldman soared 25% in one day! (5) At the time, Buffett also had a large position in Wells Fargo and the value of these holdings also increased in the wake of the CPP. Don’t let the folksy demeanor fool you – Warren Buffet is a crony capitalist pure and simple. His role in secretly advancing what become the CPP and the enormous profits he accrued when the CPP was enacted prove this. According to CNBC we should be eternally grateful to Warren Buffet and all those like him who put outmoded “free market” ideology aside to save this country in its darkest economic days since the Great Depression. It is a farcical interpretation of events!
Like much of what occurred in the financial crisis, there are enormous lessons to learn from Warren Buffett's late-night call to Henry Paulson. Regrettably, the media - even the "financial news" media which CNBC claims to be part of - fails to scratch below the surface and provide real insight into what occurred and why it did. Because the role the government and the Federal Reserve played in causing the crisis has not been scrutinized in any meaningful way, there is no reason to believe a crisis equally as large as 2008 can't occur again. Indeed, after a financial crisis debt levels have historically gone down. In the aftermath of the 2008 crisis the zero percent interest rate policy (ZIRP) and quantitative easing policy (QE) of the Federal Reserve have caused debt levels to soar! By this measure, the financial system appear to be far more vulnerable to a crisis now than it was in September 2008. Not exactly the interpretation you get from the media today.
16 DEC 2018
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(2) Yoni Blumberg, "How a late-night phone call from Warren Bufett may have helped save the US economy," CNBC, December 11, 2018 https://www.cnbc.com/2018/12/11/how-warren-buffett-helped-save-the-economy-during-the-financial-crisis.html
(3) Henry Paulson, On the Brink, Business Plus, New York, 2013, p. 227
(4) Jonathan Stempel, "Buffett to invest $5 billion in Goldman," Reuters, September 23, 2008, https://www.reuters.com/article/sppage012-n23412774-oisbn/buffett-to-invest-5-bln-in-goldman-idUSN2341277420080924
(5) Michael Grynbaum, "Stocks soar 11% on aid to banks," New York Times, October 13, 2008 https://www.nytimes.com/2008/10/14/business/14markets.html