Ideas Lost to History II

Here's another idea you don't hear too much about any more: privatizing Social Security.

Back in the halcyon days of 2004-5, a then-newly re-elected President Bush claimed that he would spend his political capital to expand the "ownership society" to allow people to invest some, or perhaps all, of their Social Security accounts into the stock market.

As we know, Social Security is currently underfunded, but even with no reforms it would remain solvent through 2041 (with recipients receiving 78% of scheduled benefits that year.)

Today's stock market would have much more damaging effects for a hypothetical private Social Security account.

Of course, with the US Government's ownership of stakes in AIG and now, perhaps investing equity into a number of US banks, one might argue that the privatization of 'Social Security' (which after all is a US Government obligation like any other one, notwithstanding the theoretical Social Security 'Trust Fund,') has been effected with lightning speed.

Ideas Lost to History

In light of almost daily financial news that borders on the cataclysmic, one can't help but notice that you don't hear too many people talking about the dangers of "moral hazard" anymore.

If you think back to the fall of Bear Stearns, many observers noted that by saving Bear (it ended up being purchased -- with US Government backstops -- by JP Morgan Chase), we risked allowing those who took enormous risks to walk away from the consequences of their actions.

At the time, the mortgage market was already frozen, but it was not until this fall -- with the collapse of Lehman Brothers and Freddie-and-Fannie -- that the true extent of the financial damage has been seen. And the worries about 'moral hazard' have been superseded; because of the interlocking counterparty risk of countless derivatives, the fall-out from the failure of many financial institutions is not limited to those who were at that entity, taking the risk. We are all part of the "moral hazard."

Just Wondering...

Has there every been a worse 5-day stock chart than Bear Stearns (above)?

1987: Yes, 1998: No, 2007: ???

Warren Buffett has a wonderful reputation as an investor. His accumulated stakes in Coca-Cola, Gillette, and the Washington Post are all good examples of "sticking to what you know" as an investment philosophy.

But his investment opportunities in the securities and funds industries are certainly not the ones about which he is the most convicted.

In 1987, the Sage of Omaha came in as a white knight to take a stake in Salomon Brothers, who had a hostile bid from corporate raider Ron Perelman on the table. Eleven years later, after a painful government bond scandal among other things, Sandy Weill took him out (of his misery???) with a tidy profit.

Then in 1998, he was asked to help stave off a global liquidity crisis by rescuing Long-Term Capital Management. Perhaps remembering his Solly experience (John Meriwether being a common denominator), he conveniently went on an Alaskan vacation with his new best friend and bungled the mechanics of his bid, which forced a consortium of banks (not including Bear Stearns) to come to the rescue.

Today, there are reports of Buffett taking a stake in Bear Stearns, perhaps to keep it independent as Wachovia and Bank of America are looking to expand their securities businesses through acquisition. Supposedly on vacation, just like in 1998 (what is it with these post-Labor Day retreats?), Buffett may change his tune on derivatives if the price is right.