Bear Stearns and the continued demolition of the US economy - Part 3

[rollhead]

Originally Posted by stonemonkts

It's the same old story.

Herbert would have more credibility if he were more specific and detailed. There was nothing substantive in that screed to act upon, so to speak. Anyone can write a similar piece about intellectual laziness, the childishness of religion, the destruction of the environment, is football any better than dog fighting, etc...and in the end nothing has changed except a few thousand people feel their sense of righteousness coddled by an opinion piece before they go have a bagel with lox and pick up their kid from band practice.

Of course I disagree. As soon as a few hundred people with pitchforks and torches show up on Wall Street, the banking industry will start caring about "community" again.

Things will change only when the cozy, who are cozy at the expense of 99 percent of the population, start feeling less cozy.

Afflict the comfortable and comfort the afflicted and things will start to move.

And Herbert does that.

[jazzy mary]

Just a word about Bob Herbert. This is just one of many, many articles where he has shed a flashlight on issues that are going on today all over the world. He has written extensively about human trafficking and the horrors and exploitation of prostitution. I say thank God for people like Bob Herbert. I'm just sayin'...go on, folks.

[Gordon B]

Originally Posted by Pete C

Before Summers and co. and all of Gordon's heroes ...

Can you stop with these tactics? What the fuck is wrong with you?

[Pete C]

Originally Posted by Gordon B

Can you stop with these tactics?

I should switch to your preferred form of innuendo?

[rollhead]

I don't want to be rude, Gordie (What, ME rude??) but iirc you are on the record for being an admirer of Larry Summers and his coterie, which seems to put the interests of Wall Street above all.

Not that you are the only one who supports Summers and the reckless laissez-faire financial policies he helped institute under Robert Rubin and the Clinton administration. BUT you have been among the most energetic supporters hereabouts.

Those kinds of policies failed in the 1920s and they failed again, 80 years later.

As they say, "just sayin'"

[Pete C]

Originally Posted by Gordon B

This is crowd pleasing stuff but the Obama administration can't stop the top executives from quitting and going to other firms nor will the seven firms be able to compete at hiring top talent.

The policy will further weaken the seven companies, have no effect on overall executive compensation in financial companies and will not reduce the chances of a financial collapse in the future.

On the other hand,

http://www.nytimes.com/2009/10/23/business/23pay.html

[Gordon B]

Originally Posted by Pete C

I should switch to your preferred form of innuendo?

My response.

[Pete C]

Originally Posted by Gordon B

Go take a flying...

... lesson?

[Gordon B]

Originally Posted by rollhead

I don't want to be rude, Gordie (What, ME rude??) but iirc you are on the record for being an admirer of Larry Summers and his coterie, which seems to put the interests of Wall Street above all.

Not that you are the only one who supports Summers and the reckless laissez-faire financial policies he helped institute under Robert Rubin and the Clinton administration. BUT you have been among the most energetic supporters hereabouts.

Those kinds of policies failed in the 1920s and they failed again, 80 years later.

As they say, "just sayin'"

Jeff, Pete responded to a post by Pat with a gratuitous knock at me. I wasn't even involved in the Bob Herbert discussion. That's personal. Yes, I highly respect Summers as an economist (though not his personality) but what did that have to do with the Bob Herbert discussion? Summers my hero? That's stretching it by a mile.

I'd like somebody to explain why they think the financial crisis might have been avoided or at least have been much less severe if bank holding companies were still prohibited from owning other financial companies.

I don't see it. AIG, Bear, and Lehman were not bank holding companies. OK, B of A would not have bought Merrill but then Merrill might have collapsed on its own instead of bringing down B of A. Fannie and Freddie were not bank holding companies. Citicorp did not collapse due to a purchase of a financial company.

Jeff or somebody else, enlighten me.

[stonemonkts]

I love this headline...

New Jersey Pays Goldman Sachs for Swaps on Nonexistent Bonds

[Gordon B]

Very predictable.

[stonemonkts]

People abandoning the companies that have rewarded them in the past, because they want to earn more than $10,000,000/year. Fuck them up the ass with an oak limb.

[jazzfiend]

Yes, indeed! I'll drink to that.

[stonemonkts]

Frontline (worthwhile)

[Gordon B]

Originally Posted by stonemonkts

People abandoning the companies that have rewarded them in the past, because they want to earn more than $10,000,000/year. Fuck them up the ass with an oak limb.

This is a crazy, emotional statement. Do you hate athletes like CC Sabathia or Johan Santana who abandon the teams that rewarded them in the past, because they want to make more than $15,000,000/ year?

[stonemonkts]

We are talking about a fucking set of companies who mismanaged risk like monkeys on crack, then took bailouts to survive. The people who are leaving are presumably valuable to the companies they work for, and are deciding to leave when their employers need them the most. Greedy human filth.

Emotional? Hey, guess what, the world consists of people like me, and people like you, and every other asshole type between and beyond. People who disgust me inspire prurient graphic fantasies in my brain, such as the one I posted. Call me crazy, but I know all about these people. I'm related to one very high up at one of the major players. So I hear about this shit on a regular basis.

I've said all I need to say on this ridiculous "argument".

(Edited to remove insulting emotional barbs)

[jesus marion joseph]

Originally Posted by Gordon B

This is a crazy, emotional statement. Do you hate athletes like CC Sabathia or Johan Santana who abandon the teams that rewarded them in the past, because they want to make more than $15,000,000/ year?

If I don't want to support CC Sabathia I can simply refuse to buy a ticket to his games. At least I have open access to his performance.

These nameless, faceless "executives" directly and indirectly affect the course of the economy and simply walk away from the messes they create. So yes, it was an emotional response. It's easy not to get emotional when the game is rigged in your favor, no matter your actual performance. These people espouse "free markets", but only because they don't have to deal with the consequences when their decisions turn out to be colossal fuck ups.

[Pete C]

Originally Posted by Gordon B

This is a crazy, emotional statement.

You seem to have a deep contempt for emotion.

[jazzfiend]

Originally Posted by Pete C

You seem to have a deep contempt for emotion.

Yes, and that is just plain nuts. Very sad, indeed.

[Gordon B]

Originally Posted by jesus marion joseph

If I don't want to support CC Sabathia I can simply refuse to buy a ticket to his games. At least I have open access to his performance.
.

Do you think there's something wrong with Sabathia indicating he wouldn't take a home team discount to stay with the Indians?

Pat's post expressed anger at employees who abandoned lucrative deals for more lucrative deals at other companies. That would cover Sabathia and Santana.

I agree that it's unjust when somebody is responsible for huge loses and then gets rewarded. However, not every person at the seven companies was responsible for huge losses. Did you know that every division at AIG except one was profitable in 2007 and 2008?

[Gordon B]

Originally Posted by Pete C

You seem to have a deep contempt for emotion.

Contempt is not the right word. I admit to having an aversion but only in the context of discussions about politics and public policy.

[Gordon B]

Originally Posted by stonemonkts

We are talking about a fucking set of companies who mismanaged risk like monkeys on crack, then took bailouts to survive. The people who are leaving are presumably valuable to the companies they work for, and are deciding to leave when their employers need them the most. Greedy human filth.

Emotional? Hey, guess what, the world consists of people like me, and people like you, and every other asshole type between and beyond. People who disgust me inspire prurient graphic fantasies in my brain, such as the one I posted. Call me crazy, but I know all about these people. I'm related to one very high up at one of the major players. So I hear about this shit on a regular basis.

I've said all I need to say on this ridiculous "argument".

(Edited to remove insulting emotional barbs)

Short Memories at Goldman
The NY Times article I linked to above is reasonably balanced. Do you agree?

The major problem, which has not been addressed at all by the Obama Administration is that the bailouts, which were necessary to avoid a complete collapse of the world financial system, created a moral hazard that is even greater today than then.

There have to be reforms so that when a bank or other financial institution threatens to go bust, the government can let them go bust without the world falling apart due to inter-connectedness.

People should be angry at the Obama administration for trying to fool them into thinking that the pay restrictions at the seven companies would have any impact, which it doesn't while "too big to fail" and "too inter-connected to fail" give financial institutions a safety net they do not deserve.

[stonemonkts]

Originally Posted by Gordon B

Short Memories at Goldman
The NY Times article I linked to above is reasonably balanced. Do you agree?

Yes.

Originally Posted by Gordon B

The major problem, which has not been addressed at all by the Obama Administration is that the bailouts, which were necessary to avoid a complete collapse of the world financial system, created a moral hazard that is even greater today than then.

There have to be reforms so that when a bank or other financial institution threatens to go bust, the government can let them go bust without the world falling apart due to inter-connectedness.

People should be angry at the Obama administration for trying to fool them into thinking that the pay restrictions at the seven companies would have any impact, which it doesn't while "too big to fail" and "too inter-connected to fail" give financial institutions a safety net they do not deserve.

I must admit that so far I haven't felt any anger towards the Obama administration (in fact I was one of the only people supporting Obama appointee Geithner early on when people were calling for his ouster, and painting him as a jerk).

I agree with the rest of your post.

[jesus marion joseph]

Originally Posted by Gordon B

There have to be reforms so that when a bank or other financial institution threatens to go bust, the government can let them go bust without the world falling apart due to inter-connectedness.

I completely agree with this.

[baksheesh]

Absolutely! The only common sense approach to this whole fiasco IMHO

[claude]

Can someone explain to me why such a badly mismanaged company as GMAC needs to be bailed out? Also, why does it need to be what we call a "crown corporation", dunno what American's would call a government controlled corporation. Bad management needs to result in bankruptcy so that the market can be purged of the morons who fucked up.

http://www.nytimes.com/2009/10/28/bu....html?_r=1&dbk

[ran]

I've been reading Sorkin's To Big to Fail.. Usually I'd wait a while before reading something like this , given the fact it's fairly recent and we are living through it.

It seems to me that this to big to fail business is a direct result of reform gone bad. We can all point to one thing or another as to why this happened. The Glass- Stengall act , CDO's ect.

I'd like to ask a question: Is there any one buisness that's been deregulated that has been good for the average consumer ? Most of not all have caused some pretty serious damage along the way to freedom.

Airline ?

Energy ?

Telecom ?

Water ?

Banking ?

[Dr Dave]

Derivatives: They All Knew. They All Knew A Long Time Ago.

[rollhead]

Originally Posted by ran

I've been reading Sorkin's To Big to Fail..

Is it readable?

I was thinking I would borrow it from the library, but I thought I might get stuck on page vi of the introduction.

[Uli]

Berkshire Buys Burlington in Buffett’s Biggest Deal (Update4)
Share Business ExchangeTwitterFacebook| Email | Print | A A A By Andrew Frye and Hugh Son

Nov. 3 (Bloomberg) -- Warren Buffett’sBerkshire Hathaway Inc. agreed to buy railroad Burlington Northern Santa Fe Corp. in what he described as an “all-in wager on the economic future of the United States.”

The purchase, the largest ever for Berkshire, will cost the company $26 billion, or $100 a share in cash and stock, for the 77.4 percent of the railroad it doesn’t already own. Including his previous investment and debt assumption, the deal is valued at $44 billion, Omaha, Nebraska-based Berkshire said today in a statement. The railroad’s stock closed yesterday at $76.07.

Berkshire has been building a stake in the Fort Worth, Texas-based railroad since 2006 as Buffett looked for what he called an “elephant”-sized acquisition allowing him to deploy his company’s cash hoard, which was more than $24 billion at the end of June. Trains stand to become more competitive against trucks with fuel prices high, he has said.

“It is Warren being Warren, taking advantage of a market that is soft at a time when the possibility for competitive bids is relatively low,” said Tom Russo, a partner at Gardner Russo & Gardner, which holds Berkshire shares. “He looks at this as a business that has advantages against other forms of transportation.”

At $100 a share, Buffett is paying 18.2 times Burlington Northern’s estimated 2010 earnings of $5.51, according to the average analyst projection in a Bloomberg survey. That compares with the 13.4 multiple for the Standard & Poor’s 500 Index as of yesterday’s close. Shares of Burlington Northern, the largest U.S. railroad, dropped 13 percent in the 12 months through yesterday.

Union Pacific, CSX

Competing railroad Union Pacific Corp.’s ratio was 13, while Jacksonville, Florida-based CSX Corp.’s was 13.1, Bloomberg data show.

Union Pacific rose $3.74, or 6.8 percent, to $58.80 at 1:14 p.m. in New York Stock Exchange composite trading. CSX climbed 6.6 percent. Burlington Northern surged to $97.58. Berkshire Class A shares rose $1,569, or 1.6 percent, to $100,319.

The deal culminates a search by Buffett, 79, that sent him to Europe looking for possible acquisitions and lamenting in letters to shareholders that he and Vice Chairman Charles Munger couldn’t find companies they considered large enough to meaningfully add to annual earnings.

Buffett needs “elephants in order for us to use Berkshire’s flood of incoming cash,” he said in his annual letter to shareholders in 2007. “Charlie and I must therefore ignore the pursuit of mice and focus our acquisition efforts on much bigger game.”

Trains, Trucks

Burlington Northern, with pretax income of $3.37 billion on revenue of $18 billion last year, would be Berkshire’s second- largest operating unit by sales. The McLane unit, which delivers food to grocery stores and restaurants by truck, earned $276 million on revenue of $29.9 billion in 2008.

Berkshire’s largest business is insurance, with units including auto specialist Geico Corp. Buffett, who is the company’s chairman and chief executive officer, has said he likes insurance because he gets to invest the premiums paid by customers until the cash is needed to pay claims. The insurance businesses last year collectively earned $7.51 billion on revenue of $30.3 billion.

Buffett will use $16 billion in cash for the deal, half of which is being borrowed from banks and will be paid back in three annual installments, he told the CNBC. Berkshire will have more than $20 billion in consolidated cash after the purchase, he said.

Cash Hoard

“It doesn’t mean we’re out of business, but it does mean that we won’t be making any huge deals for a while,” Buffett told the network today. He said earlier this year the company needs at least $10 billion in cash to be ready for unforeseen events such as catastrophe claims at its insurance units.

Buffett built Berkshire into a $150 billion company buying firms that he deems to have durable competitive advantages. His largest purchases include the 1998 deal for General Reinsurance Corp. for more than $17 billion. Buffett expanded into power production with the purchase of MidAmerican Energy Holdings Co., and last year bought Marmon Holdings Inc., the collection of more than 100 businesses, from the Pritzker family. Marmon’s Union Tank Car unit manufactures and leases railroad cars.

He expects the economy to recover, he said in an interview in September with his company’s Business Wire unit.

“We are still tossing out 14 trillion worth of product a year,” he said. “It will return. It’s already returned with most people in most ways, but it’s not back 100 percent. It’ll get there.”

‘Simple Bet’

The U.S. economy returned to growth in the third quarter after a yearlong contraction as government incentives spurred consumers to spend more on homes and cars. The world’s largest economy expanded at a 3.5 percent pace from July through September, Commerce Department figures showed last week.

“It’s a pretty simple bet,” said Mario Gabelli, CEO of Gamco Investors Inc., which has holdings in Berkshire and Burlington Northern. “Warren knows the assets. He’s been involved in basic businesses like this for years.”

Buffett is increasing his stake in an industry that doesn’t have any competitors for certain types of freight. Federal law requires some chemicals to be moved only by rail.

Railroads burn less diesel fuel than trucks for each ton of cargo carried, giving companies such as Burlington Northern and Omaha-based Union Pacific a grip on bulk commodities such as coal. That fuel-efficiency advantage also gives railroads a share of the profits from moving goods such as Asian imports of cars and other consumer goods sent to U.S. West Coast ports.

From ships, containers are loaded onto railcars to be hauled to so-called intermodal terminals, where they’re transferred to trucks for the final leg of their journey.

Fuel Prices

Buffett said in 2007 that railroads may prosper at the expense of trucks. “As oil prices go up, higher diesel fuel raises costs for rails, but it raises costs for its competitors, truckers, roughly by a factor of four,” Buffett told shareholders in 2007 at his company’s annual meeting. “There could be a lot more business there than there was in the past.”

Berkshire’s board approved a 50-to-1 split of its Class B shares as part of the acquisition plan, the company said in a second statement. Berkshire will schedule a shareholder meeting to vote on an amendment to the company’s certificate of incorporation that’s needed to split the stock. B share typically trade for about a thirtieth of the price of A shares.

Most of the shares exchanged for Burlington Northern stock will be Class A shares, Berkshire said. Splitting the B shares is designed to accommodate the smallest holders who elect for a tax-free swap of the railroad’s stock, it said.

‘Fired Up’

Goldman Sachs Group Inc., Evercore Partners Inc., and Cravath Swaine & Moore LLP are advising Burlington. Berkshire didn’t disclose a financial adviser and said Munger Tolles & Olson LLP furnished legal advice.

Matthew Rose, the chief executive officer of Burlington Northern, said he struck the deal with Buffett after the two met in Texas. Buffett, named by Forbes as the second-richest American, was visiting because he has other business interests in the state, Rose said.

“We spent a couple hours talking about the economy and the business,” Rose told Bloomberg Television. “The next day I got a call. He asked me to meet on a Friday night down in downtown Fort Worth. It was a relatively short conversation; he told me what he wanted to do. The next day we fired up the process.”

Burlington Northern operates 32,000 miles of track, with 6,700 locomotives, according to its Web site. Most of the carrier’s network is west of the Mississippi, where it competes with Union Pacific.

Antitrust Review

The U.S. Department of Justice will conduct an antitrust review, which Burlington expects to be completed by the first quarter of next year, the company said today in a conference call with analysts and investors.

Burlington Northern said two-thirds of the shares that aren’t held by Berkshire must vote in favor of the transaction for it to proceed under Delaware law. The railroad said it anticipates a shareholder meeting in the first quarter of 2010 and the completion of the transaction “very shortly thereafter.”

To contact the reporters on this story: Andrew Frye in New York at afrye@bloomberg.net; Hugh Son in New York at hson2@bloomberg.net

Last Updated: November 3, 2009 13:39 EST