Jim Rogers and Warren Buffett at Odds on Fannie/Freddie Bailout
By Jason Simpkins
Associate Editor
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."
The emergency plan announced Sunday by Treasury Secretary Henry Paulson has technically been branded "conservatorship," a term that implies the government will take its hands off Fannie and Freddie once they have been stabilized.
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The CEOs of Fannie and Freddie, Daniel Mudd and Richard Syron respectively, will be removed immediately and replaced by former Merrill Lynch & Co. Inc. (MER) CEO Herb Allison, and David Moffett, formerly vice-chairman of US Bancorp (USB).
More importantly, though, the U.S. Treasury Department will purchase up to $100 million in special preferred securities. Current shareholders won’t be eliminated, but they will move to the back of the line for any future claims. The Treasury will also make secured loans to the companies if needed and even buy some mortgage-backed securities itself.
This is the biggest point of contention, as it puts taxpayer money at risk while at the same time boosting the value of Fannie and Freddie’s mortgage backed securities and bonds.
"This is madness, this is insanity, they have more than doubled the American national debt in one weekend for a bunch of crooks and incompetents," Rogers said. "I’m not quite sure why I or anybody else should be paying for this."
Fannie and Freddie will broaden their operations to support the shaky housing market until 2010. At that point, however, the two will be forced to unwind their portfolios by 10% a year, until they reach $250 billion, to reduce the risk to the taxpayer.
Though, according to Rogers that plan could backfire as well.
"That’s going to also ensure that house prices continue to go down. It’s going to be harder and harder to get a mortgage," Rogers told CNBC’s "Squawk Box Europe."
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."
While he admitted the Treasury is officially "on the hook" for the depth of the housing downturn, Buffett argued that the government had no choice but to bail out Fannie and Freddie.
"Whatever they lose from this plan, if they hadn’t acted there were going to be greater losses down the road," Buffett said. He also pointed out that the arrangement between the two insurers and the Federal government, from the point of inception, is truly to blame for current troubles and nothing can be done now to erase that.
"They got into this position many, many decades ago when they got into, sort of, half-slave, half-free position where they said, ‘We don’t guarantee Freddie and Fannie’s obligations,’ and wink-wink.
"You can argue that there should have been some different rules put in decades ago in terms of what these companies have done, and it wouldn’t have come to this," Buffett went on, "but those rules weren’t put in by this Administration, or this Congress or this Treasury Secretary, and they face the problem of, in effect, $5 trillion plus of a combination of portfolio and insurance out there, and, really, chaos in the housing and mortgage markets."
News and Related Story Links:
- Money Morning:
Dueling Views on Housing: Jim Rogers Sees More Pain to Come While Warren Buffett’s Housing Expert Sees Rebound Under Way
Comment by Dean on 9 September 2008:
The reason they differ in opinions is because maybe one is a collectivist and the other isn’t.
Comment by Bill J. on 9 September 2008:
“but those rules weren’t put in by this Administration, or this Congress or this Treasury Secretary”
Pretty simplistic thinking from the man who just happened to be attending a golf tournament with other rich and powerful folks at Offutt Air Force base on 9/11/01, the same base that the president bizarrely rushed to that evening.
The rules were put in place by the Nixon and Bush I administrations. The same socialist bankers that infested those administrations and Congresses infest the current ones. What we’re seeing is just a culmination of the plan. The bankers and international investors were gambling with house money. What do they care?
As Jim Rogers said, the USA is more communist than China right now. Socialization of costs, privatization of profits.
Pingback by rogers and buffet on the bailout — award tour on 9 September 2008:
[...] Jim Rogers and Warren Buffett at Odds on Fannie/Freddie Bailout. Jim Rogers called the US “more socialist than China”. [...]
Comment by Bill J. on 9 September 2008:
“America is more COMMUNIST than China is right now. You can see that this is welfare of the rich, it is socialism for the rich… it’s just bailing out financial institutions,” Rogers said.
http://www.cnbc.com/id/26603489
Comment by elwind45 on 10 September 2008:
The mess is still a mess except for the fog of 100 dollar bills raining down on rich demi-gods!
Comment by Ken Kautsky on 10 September 2008:
At least the rampant socialism is now being exposed.
The network media have hidden it for a long time – and continue to do so.
Give government back to the people.