Sep 8, 2008
Warren Buffett on Fannie Mae and Freddie Mac
CNBC featured a great audio interview with Warren Buffett today about the Treasury’s decision to intervene in Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE). Here’s a few key quotes:
Becky Quick: Mr. Buffett, thank you for joining us this morning. I want to get your thoughts on this plan for Fannie Mae and Freddie Mac.
Warren Buffett: Well, I think the Secretary (Paulson) did exactly the right thing. I don’t think there was an alternative that was anywhere close to this one in terms of calming the markets, in terms of providing an ongoing function for the two that makes any change less abrupt, the changes that are going to occur with the two companies. So I couldn’t, I wouldn’t have changed anything in the plan myself.
On systemic risk:
Joe: You could argue about Bear Stearns, Warren, about whether the systemic risk of Bear Stearns would have affected securities world-wide. Hard to argue with this one. I would say, being Berkshire Holdings, I mean, you’re probably breathing a sigh of relief. You’ve got some derivatives, you’ve got across the board a lot of different securities that could have been affected very negatively, I guess, if this hadn’t been done. You must be breathing a sigh of relief as well, right?
Buffett: Well, I suppose you could say that, although Joe, I would say that if there is chaos in the market, if would probably net as good for us over a long period of time. But you’re quite correct that, if Bear Stearns was an 8.5 on the Richter, the financial Richter scale, this was about a 9.9 or something of the sort. It would, the government really had no choice but to do something, and the question is, is what they did the most sensible thing, and they did do that.
Carl Quintanilla: Warren, you’ve been on this show more than a couple times telling people that the economic correction we’re in is going to be harder, deeper, more severe than a lot of people expect. Has the move by Treasury done anything to alter your macro view?
Buffett: Well, they’ve certainly done the right thing. So, where it would have been without doing this, I think, would have been worse than having done this. Now it doesn’t solve all our problems or anything of the sort, but it’s a big, big step in the right direction.
Warren Buffett Tells CNBC Treasury “Did Exactly the Right Thing” on Fannie/Freddie (CNBC)
Right now a lot of libertarian or proponents of completely free markets are denouncing the plan and comparing it to communism. The characterizations may be fair, and this may be bad for moral hazard – but what other choice did they have? It’s great in theory, but that kind of action just does not play in the real world when the consequences fall on the public.
Like Buffett says, if the Treasury had not done this, we’d be much worse off. Buffett does not go into detail on what he thinks that scenario would have been like, but Tyler Cowen of Marginal Revolution puts forward a pretty convincing case for intervention:
Let’s say that the Treasury did not support the debt of the mortgage agencies. The Chinese bought over $300 billion of that stuff and they were told that it is essentially riskless. The flow of capital from them and from other central banks, sovereign wealth funds, and plain old ordinary investors would shut down very quickly. The dollar would fall say 30-40 percent in a week, there would be payments system gridlock, margin calls at the clearinghouses would go unmet, and only a trading shutdown would stop the Dow from shedding half its value. Most of the U.S. banking system would be insolvent. Emergency Fed/Treasury action would recapitalize the FDIC but we would lose an independent central bank and setting the money supply would be a crapshoot. The rate of unemployment would climb into double digits and stay there. Many Americans would not have access to their savings. The future supply of foreign investment would be noticeably lower. The Federal government would lose its AAA rating and we would pay much more in borrowing costs. The deficit would skyrocket.
What if we didn’t bail out the creditors? (Marginal Revolution)