Plan B, as in Buffett

Plan A is Treasury Secretary Henry Paulson’s plan to spend about $50 billion a month buying distressed assets for resale later. With current law and the Paulson bill as written, we can increase the odds of success by simultaneously executing a Plan B that tracks the recent moves of America’s most respected investor, Warren Buffett:

Government could inject $200 billion into American financial institutions by purchasing preferred stock as Buffett did, receiving a 5 percent dividend (half of Buffett’s) and risk-free warrants to buy common stock, slightly below current prices, for five years.

Unlike Buffett’s deal, the government would never buy the stock, but would auction the warrants to private investors, reaping a potentially huge profit for taxpayers if markets ultimately rise, which markets ultimately do.

In this Buffett-like plan, major liquidity would be promptly injected to credit markets, under terms attractive to companies. The principal would be largely protected. The dividend would create a taxpayer bonus. The warrants would create a potentially huge taxpayer gain.

If Congress passes the current bill, including Paulson’s Plan A, this Plan B could be executed simultaneously in a two-pronged attack that would inject far more liquidity into the system than Plan A alone.

A program moving $50 billion a month alone is grossly inadequate to the task. Adding Plan B offers far greater support to the economy, very quickly, with less downside risk and greater upside potential than Plan A alone.

A Buffett-like move would provide fast benefit to credit markets, consumer confidence and taxpayer support because it would be clearly understood and tracks the moves of the world’s smartest investor.

Time for truth. If Secretary Paulson sought venture capital financing in the private sector with his current proposal, the deciders would say: “Nice concept, come back with a business plan.” If he then fell to his knees and pleaded for money, saying he would go bankrupt within 72 hours, they would suggest counseling, not financing.

This is a ridiculous way to push a proposal of such momentous risk, danger and cost. Paulson waited far too long, then dumped on the Congress and markets a plan he could not cogently explain, seeking powers that would have made Leonid Brezhnev proud, using fear rhetoric that is grossly inappropriate for any Treasury secretary and extremely destructive to market psychology, consumer confidence and public support.

No Democratic, progressive or conservative alternative was seriously prepared or considered. Soviet elections under Brezhnev involved one candidate. Our debate involves only one highly speculative and incompetently explained plan that alarms and confuses markets, depositors and voters.

My advice to members: Vote for the plan. Let Paulson begin work but demand that he be flexible and receptive to also executing Plan B or Plan C.

Let Federal Deposit Insurance Corporation changes reassure depositors while mark-to-market accounting changes allow some distressed assets to be properly revalued upwards, some write-downs to be written back up, and credit rating agencies to withdraw some recent downgrades to ease credit conditions as the plan begins and global central banks cut rates.

The Treasury secretary and all public officials should stop rhetoric that wrongly promotes panic. Cable television hosts who throw chairs on shows named “Mad Money” and yell about Great Depressions should shut up.

We will get through this, calmly.


Budowsky was an aide to former Sen. Lloyd Bentsen and Bill Alexander, then chief deputy majority whip of the House. He can be reached at brentbbl@webtv.net and read on The Hill Pundits Blog .