Wednesday, September 10, 2008

Rogers and Buffett disagree on bailouts

On the bailouts of Fannie Mae and Freddie Mac, investors Jim Rogers and Warren Buffett cannot agree.

Rogers feels the US government takeover of Fannie and Freddie is a disaster that signals the US' shift to socialism, while Buffett has called it a "sensible deal" and the best option available at the time.

Excerpts from the Money Morning piece, "Jim Rogers and Warren Buffett at odds on Fannie/Freddie bailout":

" Few analysts have abstained from voicing an opinion about the U.S. government’s plan to seize control of Fannie Mae (FNM) and Freddie Mac (FRE), the nation’s embattled mortgage behemoths, and that include such eminent investors as Jim Rogers and Warren Buffett. Of course, two of the world’s greatest financial analysts have very two very different perspectives.

"It is socialism for the rich," Rogers said yesterday (Monday) during an interview with CNBC Europe, "It’s just bailing out financial institutions."...

...Of course, the Oracle of Omaha sees things differently. He praised the plan as a wise move for Treasury Secretary Paulson, who Buffett said "did exactly the right thing."

"I wouldn’t change anything in the plan myself," Buffett said in his own interview with CNBC. "It’s the best deal and the most sensible deal available now." "

Warren Buffett told CNBC that Secretary Paulson did "exactly the right thing" in structuring this bailout deal, and that he basically agreed with the deal terms which gave the Treasury an 80 percent warrant on Fannie and Freddie's common shares.

At the same time, he noted that the Treasury was on the hook for losses that would arise from the preferred and common shares being wiped out. Still, he stressed that the Treasury's takeover was the best option to avoid "greater losses down the road".

Jim Rogers told CNBC Europe that the bailout was an outrage that showed America to be "more communist than China is right now". Unfortunately, this seems to be the way the US is leaning now, and the politicians we have voted in generally support these kind of policies.

Rogers responded to the CNBC anchor's ridiculous assertion that bank failures and crises have always ended in nationalization or state takeover by reminding him that this was not the case historically, as most financial panics and bank failures were solved through bankruptcy in the private markets, rather than taxpayer-funded bailouts and nationalization schemes.

He also noted that the nationalization is likely to fail, and that Hank Paulson knows this to be true, as they have merely "papered over" the problem until the next administration inherits it.

Bottom line: While I have great respect for Jim Rogers and Warren Buffett as investors, on this matter I am in full agreement with Jim Rogers.

In fact, I've come to realize that Rogers usually trumps most commentators and famous investors when it comes to spelling out reality and understanding the ethical questions that arise from these situations.

I believe this is due to his blunt personality, his critical thinking skills, and his knowledge of history and sound economic principles.