Monday, April 20, 2009

Cripples vs. Gibraltar

In his 2008 Letter to Shareholders, Berkshire Chairman Warren Buffet notes how the government's policies are making it difficult for the best corporations to borrow while making it relatively easy for the "financial cripple":

Funders that have access to any sort of government guarantee –banks with FDIC insured deposits, large entities with commercial paper now backed by the Federal Reserve, and others who are using imaginative methods (or lobbying skills) to come under the government’s umbrella – have money costs that are minimal. Conversely, highly-rated companies, such as Berkshire, are experiencing borrowing costs that, in relation to Treasury rates, are at record levels. Moreover, funds are abundant for the government-guaranteed borrower but often scarce for others, no matter how creditworthy they may be.

This unprecedented “spread” in the cost of money makes it unprofitable for any lender who doesn’t enjoy government-guaranteed funds to go up against those with a favored status. Government is determining the “haves” and “have-nots.” That is why companies are rushing to convert to bank holding companies, not a course feasible for Berkshire.

Though Berkshire’s credit is pristine – we are one of only seven AAA corporations in the country – our cost of borrowing is now far higher than competitors with shaky balance sheets but government backing. At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one.

This represents the essence of altruism in theory and in practice. In theory, when the able are forced to sacrifice for the unearned benefit of the unable - when the "need" of the borrower is the only standard by which to determine who is to be the recipients of sacrifice, a monumental inversion of justice must occur. In practice, the most irresponsible are encouraged to continue and expand their activities while the most responsible are impeded.

But this is just the tip of the iceberg. In a Forbes article titled, Ayn Rand Rises Again, John Tamny documents how corporations are lining up to suck at the public teat.

With Washington having signaled that it is open for business through various "stimulus" measures and corporate aid programs, all manner of private entities have lined up for handouts.

He notes "that life insurance companies will be the latest recipients of TARP funds. Having "gamed" the system through the purchase of banks, insurers are now eligible for their own government funding" and "having seen how successful the housing industry has been in terms of procuring government subsidies, the commercial real estate industry is presently trying its hand. With the Federal Reserve already offering short-term loans through its "TALF" program, commercial real estate firms are now lobbying for the Fed to offer longer-term low-interest loans in order to avoid a wave of commercial property defaults." He even quotes Alcoa president Klaus Kleinfeld who is not worried despite a 41% drop in sales since the federal government's "current stimulus programs that target infrastructure and energy efficiency will create a demand" for aluminum.

Probably the most disturbing examples of companies seeking taxpayer funds are the companies that once exemplified the entrepreneurial spirit:

Intel Chairman Craig Barrett told reporters that stimulus packages being rolled out by governments around the world should lead to recovery in the next 6 to 18 months.

Gregg Stahl, a technology administrator for the North Carolina Court System, has lately had to suspend a $9 million project that would have given its courts a Cisco phone system. No problem there: The company employs grant writers skilled at crafting applications for federal stimulus funds. Stahl told the Wall Street Journal that "companies like Cisco have a tendency to spend time with lobbyists."

According to the same article in the Journal, over the last four weeks "Microsoft has trained its U.S. education sales staff to identify eligible stimulus funds and apply for them." This month Oracle plans to "hold an event for customers offering advice on how to tap stimulus funds."
Tamny, after discussing the "crowding out" effect such subsidies have on private capital, rightly concludes:

Much ink has already been spilled by commentators on the economic paralysis being caused by a bailout culture that seemingly has no endpoint. What's unknown, however, is the kind of destruction massive government outlays will bring to the healthy companies in our midst. The answer is still to be determined, but if our best and brightest firms increasingly author their growth through connections to the state, they'll have nothing to show for it when the truly productive shrug and the once-generous state ceases to be generous.

Incidentally, see Thrutch for a truly inspiring story of a phenonmenal businessman who rejected government money and of the "absurdity and injustice of our regulatory landscape."

Meanwhile, for banks that want to pay back capital they have "borrowed" from the taxpayers, the Financial Times reports that the U.S. government isn't so sure that it is a good idea:

Strong banks will be allowed to repay bail-out funds they received from the US government but only if such a move passes a test to determine whether it is in the national economic interest, a senior administration official has told the Financial Times.

“Our general objective is going to be what is good for the system,” the senior official said. “We want the system to have enough capital.”

In other words, the government will now enforce its "deal with the devil" by keeping banks under their thumb by not allowing them to pay back the money.

Lest you might be tempted to call Obama a "tax and spend" liberal - here is some evidence that he intends to actually "cut" the size of government - by $100 million! Now, the ratio of $100M to $4 Trillion (the government's 2009 budget) is 0.000025 so that would be like asking a millionaire to cut his expenditures by $25 so I have a better idea - instead of spending $4,000,000,000,000, just spend $3,999,900,000,000. [update: Gus Van Horn addressed this very nicely here.]

My favorite recent story has to be the so-called "stress tests" that are apparently being secretly conducted by the federal government on banks to determine their viability "considered one of the key components of Treasury Secretary Tim Geithner and President Barack Obama's plan to fix the financial system." First of all, aren't we told everyday that the problem was a lack of "transparency" that can only be solved by more government intervention ostensibly to make information more public (despite the fact that the banking industry is the most heavily regulated industry in America)? Yet, the whole premise of these stress tests is that they must remain secret lest the public wish to divest from a company that is bankrupt. So, the heavily regulated banks which have been chastised for their lack of regulations which evidently would have made the public more informed are now being secretly examined by bureaucrats with strict instructions not to make the results known to the public? Got it?

But that is not all - apparently, the result of these examinations led to a big surprise for the bureaucrats:

the most surprising result from the stress tests and related discussions may be this: bankers continue to appear oblivious to the nation's insistence that regulations be put in place to keep banks from ever again putting the economy at such risk. "I just don't think they get it," the official says, referring to bankers' unwillingness to take responsibility for past behavior. "Bankers seem to have no understanding how much damage their actions have done to their and their bank's reputation," the official says.

You mean the federal government showered paper money on the banks, underwrote mortgages by purchasing them through GSA's, forced banks to lend to unqualified borrowers through the Community Reinvestment Acts and then redistributed taxpayer money to them at the slightest sign of "stress", and yet the bankers are not learning to take "responsibility"? The federal government is accusing the banks of not taking responsibility for past behavior?

Here is the lesson: let us alone and reality will see to it that each person take's responsibility.

2 comments:

Kendall J said...

Your observation on lending costs for the likes of AAA rated companies is worrying. The fact that Buffet raises this observation however, is rich, since the ideas he's been espousing would directly lead to this. He's suggested in the past that he is quite wealthy (read: successful) and should be taxed at a higher rate as a result. i.e. that his success should be burdened. Here we see his proverbial chickens coming home to roost, just maybe not in the way he anticipated.

Doug Reich said...

That's an excellent point. Buffet is an example of the classic pragmatist businessman who appears to not see the relationship of morality and individual rights to capitalism going so far as to advocate higher taxes on himself as you mentioned.

This issue is something that personally really bothers me because I see it all the time. In other words, there are so many great businessmen who think that they can always find a way around whatever obstacle is put in their way and they treat government intervention as just another obstacle rather than understanding that individual rights and the proper conception of morality is essential to freedom and capitalism as such. Then when they find themselves in the position that Buffet is currently in, they are bewildered and frustrated.

I think that trying to spread this message to businessmen should be a high priority. Imagine the impact that Bufffet could have if he were to take a principled moral stand against the Obama's of the world.