Buffett likens financial crisis to Pearl Harbor
Warren Buffett, the billionaire investor who foresaw the credit crisis, described the turmoil in the financial markets an "economic Pearl Harbor" that required immediate action by politicians.
Piling pressure on Congress, amid growing rancour over the terms of a $700bn bailout for the financial system, Mr Buffett said that the panic of last week would "look like Nirvana" if the legislation is not passed.
His comments came a day after he paid $5bn (£2.7bn) for a stake in Goldman Sachs, the banking giant, in what he described as a bet that politicians would indeed act to repair the battered credit markets.
On Capitol Hill, in a second day of testimony in front of sceptical lawmakers, the Federal Reserve's chairman, Ben Bernanke, pleaded with them not to attach punishing conditions on participation in the bailout, which allows the Treasury to buy the toxic mortgage assets that are clogging up bank balance sheets.
Mr Bernanke and Hank Paulson, the US Treasury Secretary, faced another tongue-lashing from lawmakers, reflecting public fury that taxpayer money could be used for bailing out Wall Street and the very people who have taken the economy to the edge. The pair struggled to explain that a failure to stabilise the banking system could have very serious consequences for jobs and for savings.
One Congressman questioned whether the bailout is necessary, since Mr Buffett's purchase suggested confidence was returning. But Mr Bernanke said: "Mr Buffett said on TV this morning that he thought Congress would act, and if Congress didn't act we would go over a precipice." It seemed increasingly likely yesterday that the Treasury would accept legislation to limit executive pay as a quid pro quo. Democrats were also pushing for the government to take equity stakes in companies that receive assistance, and some suggested the $700bn should only be released in increments.
Financial markets remained on tenterhooks. Investors bought short-term US government bonds as a safe haven, fearing a credit market meltdown if legislation is not passed. In Hong Kong, thousands of savers mobbed the offices of the Bank of East Asia amid text message rumours that it was about to go under. The bank vehemently denied the rumours.
"The market could not have taken another week like what was developing last week," Mr Buffett told CNBC. "Last week will look like Nirvana if they don't do something. I think they will. I understand they're very mad about what's happened in the past, but this isn't the time to vent your spleen about that." He predicted that the taxpayer would make a profit on its investments in toxic mortgage debt. "If I had $700bn on the government's terms to buy distressed assets, I would," he said. "Unfortunately, I'm tapped out."
The value of trillions of dollars of mortgage-related derivatives has collapsed since the housing market turned down, and their ultimate value rests on where house prices settle and how widespread foreclosures become. The latest data on the sale of existing homes, out yesterday, showed 10.7 per cent fewer transactions in August than a year ago, at an average price down 9.5 per cent.
In his testimony to the Joint Economic Committee of Congress yesterday, Mr Bernanke painted his bleakest outlook yet for the US economy, and he warned it would get even worse if the bailout is not successful.
"Ongoing developments in financial markets are directly affecting the broader economy through several channels," he said. "When worried lenders tighten credit, then spending, production and job creation slow. Real economic activity in the second quarter appears to have been surprisingly resilient, but, more recently, economic activity appears to have decelerated broadly." He said that the market turmoil was causing problems overseas that would hold back exports – which has been the most robust plank of economic growth and kept the US out of recession since the credit crisis broke.
The Fed chairman also gave more details of government thinking on how the purchase of toxic mortgage assets will be organised, with a reverse auction used to set a market price. The more firms are bidding to offload their assets, the lower the price the taxpayer pays, he said. "If you stigmatise the institutions that participate, you guarantee no participation," he said.