‘Too big to fail’ is alive and well

The Washington Times Weekly - - Editorials -

War­ren Buf­fet is a savvy in­vestor. The CEO of Berk­shire Hathaway put $5 bil­lion into Bank of Amer­ica, which owns Coun­try­wide and a large port­fo­lio of trou­bled mort­gaged-backed as­sets. The Obama ad­min­is­tra­tion wants us to be­lieve this is a sign that the ail­ing U.S. fi­nan­cial sec­tor is on the path to re­cov­ery. It’s not.

Mr. Buffett’s 50,000 pre­ferred shares in the coun­try’s largest bank will pay an amaz­ing 6 per­cent an­nual div­i­dend.

It’s a great deal for the bil­lion­aire in­vestor, but not for ev­ery­one else.

Mr. Buffett will re­ceive his money be­fore any com­mon stock­hold­ers get paid. With the rest of the mar­ket see­ing in­ter­est rates that are ef­fec­tively at zero per­cent, it’s worth ask­ing why Bank of Amer­ica was will­ing to pay Mr. Buf­fet such a hand­some pre­mium.

If it’s be­cause no one else was will­ing to pro­vide funds, that’s a sign the bank is in serous trou­ble, not that it’s turn­ing the cor­ner.

Mr. Buffett’s in­vest­ment will yield at least $300 mil­lion in cash ev­ery year. In ad­di­tion, the “Or­a­cle of Omaha” se­cured the right to buy an ad­di­tional 700 mil­lion shares over the next 10 years, which, if ex­er­cised im­me­di­ately, could have yielded Mr. Buffett and his com­pany an­other $1 bil­lion in profit. Great re­turns for Berk­shire Hathaway are bad news for Bank of Amer­ica — and for Amer­i­can tax­pay­ers.

Bank of Amer­ica, like Cit­i­group, is con­sid­ered “sys­tem­i­cally important” as well as “too big to fail.” In de­cid­ing to wa­ger his money on a fi­nan­cial giant that holds bil­lions in toxic as­sets, it’s likely Mr. Buffett cal­cu­lated the like­li­hood that tax­pay­ers would kick in bailout funds, if needed. Sim­i­lar thoughts were likely be­hind his in­vest­ment of $5 bil­lion in Gold­man Sachs and $3 bil­lion in Gen­eral Elec­tric in 2008.

The past three years of dump­ing bil­lions in fed­eral dol­lars into the bank­ing sec­tor has done lit­tle to address the in­dus­try’s most fun­da­men­tal prob­lems. There are still too many toxic as­sets on the books.

In fact, the new Dodd-Frank Wall Street reg­u­la­tions will make it harder for banks to clean up their act. Banks re­main over­lever­aged, and the gov­ern­ment con­tin­ues to in­ter­vene in all the wrong ways.

That’s be­cause the idea that some firms are “too big to fail” has not gone away, and nei­ther has the im­plicit prom­ise of bailouts.

Gov­ern­ment bailouts mean hap­less tax­pay­ers get soaked, while the truly rich, like Mr. Buffett, reap the ben­e­fits. Bank of Amer­ica still plans to shed some 10,000 jobs. UBS has an­nounced 3,500 lay­offs. Other big fi­nan­cial play­ers such as Bar­clays, Gold­man Sachs, HSBC, Lloyds and Wells Fargo are likely to do the same, de­spite an in­crease in this quar­ter’s prof­its. The bailout poli­cies aren’t cre­at­ing any new jobs. That’s be­cause hav­ing tax­pay­ers sub­si­dize risk isn’t go­ing to heal the bank­ing sec­tor. The true cure would be a re­turn to the dis­ci­pline of the mar­ket, where those who earn the re­wards also bear the risk.

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