Bush Reassures, Buffett Buys American, Germans Think Big (and Act Fast)

Speaking at the U.S. Chamber of Commerce building near the White House this morning, President Bush tried to reassure investors and the public that although the ongoing financial/credit crisis won’t be over soon, the federal government’s programs now under way are “big enough and bold enough to work.” Bush noted that under ordinary circumstances, he would have opposed moves such as the recent commitment to inject $250 billion directly into nine major banks in return for equity stakes, “but these are not ordinary circumstances.” It’s sort of a private bailout, but it’s also a call for the nation to bail itself out. In an op-ed piece in today’s New York Times, giga-investor Warren Buffett reported that he’s been buying stocks of U.S. companies with his personal account, which heretofore, he wrote, has been entirely in U.S. government bonds. “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful,” Buffett wrote. “… To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense…. most major companies will be setting new profit records five, 10 and 20 years from now…. [I]f you wait for the robins, spring will be over.” Tracing a quick history of the 20th-century U.S. economy, Buffett wrote, “In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.” In Germany today, a rare same-day vote by both houses of parliament ushered through a 500 billion euro ($672 billion) bank rescue plan, according to Bloomberg. The lower house, the Bundestag, passed the measure 476-99, and the upper house, the Bundesrat, pass it unanimously. The upper house, which consists of representatives of the 16 federal states, was a key win. Arm-twisting by Chancellor Angela Merkel was needed to get the German states to agree to a take a 35 percent share of the risk entailed by the plan. In the end, the German government agreed to cap the states’ losses at 7.7 billion euros and to spread the risk should any of the state-owned banks, called Landesbanken, be forced to take writedowns. The rescue package, originally announced Oct. 13, consists of a pledge of 400 billion euros in loan guarantees, up to 80 billion euros to recapitalize struggling banks and 20 billion euros to cover potential losses from loans. Meanwhile, following similar moves by Hong Kong and Singapore, according to the Associated Press, Malaysia’s government said late yesterday that it will guarantee all bank deposits for the next two years. And in Australia, Prime Minister Kevin Rudd said he’ll be announcing a proposal for responding to the financial crisis, one that will include a review of executive compensation at financial institutions. In an exclusive interview with CPN, Harvey E. Green, president & CEO of Marcus & Millichap Real Estate Investment Services, emphasized a balanced view of the current situation. Noting that the foreclosure rate in commercial real estate is still below 0.5 percent, he added that the sector is being pulled down mostly through secondary effects, such as the retail slowdown and overall job losses, though these are nowhere near “RTC level,” referring to the Resolution Trust Corp. that cleaned up the savings-and-loan mess of the 1980s. Looking especially at the volatility in the stock markets, Green (pictured) said that stabilizing the markets is going to be crucial. He also estimates that the bailout is likely to cost $2 trillion to $3 trillion in the long run. “CMBS as we know it is probably gone,” Green said, though other forms of debt will emerge, which could be important, because he sees a glut of commercial real estate refinancing coming in about 2012–2014. “If you’re deleveraged,” he said, “I don’t think it’s an issue,” but added that the commercial real estate foreclosure rate could well climb, depending on what happens with properties that remain highly leveraged. Moving forward, he expects that the CRE market will likely return to historical levels of 65–70 percent debt. And even though interest rates are currently stabilizing and even dropping, Green commented, “There are a lot of issues remaining.”