Rich Charlie's Almanack: "Suck it in and cope" & "thank God" for bank bailouts

The author of Poor Charlie’s Almanack is more famous for being Warren Buffett’s business partner. Charlie Munger aimed harsh words at Americans suffering unemployment and foreclosure and at everyone complaining about trillions of dollars handed to big, bankrupt banks by the Fed and the Treasury:

Charles Munger, the billionaire vice chairman of Berkshire Hathaway Inc., defended the U.S. financial-company rescues of 2008 and told students that people in economic distress should “suck it in and cope.”

“You should thank God” for bank bailouts, Munger said in a discussion at the University of Michigan on Sept. 14, according to a video posted on the Internet. “Now, if you talk about bailouts for everybody else, there comes a place where if you just start bailing out all the individuals instead of telling them to adapt, the culture dies.”

Bank rescues allowed the U.S. to avoid what could have been an “awful” downturn and will help the country as it deals with the housing slump, Munger, 86, said…

“Hit the economy with enough misery and enough disruption, destroy the currency, and God knows what happens,” Munger said. “So I think when you have troubles like that you shouldn’t be bitching about a little bailout. You should have been thinking it should have been bigger.”

Munger’s heartlessness and lack of compassion for ordinary Americans isn’t even the biggest problem with his words. Far worse, Munger — a hard-core Republican, not coincidentally — presents a false dichotomy. If the Treasury and Fed hadn’t handed trillions of dollars to Bank of America, J.P. Morgan Chase, and other pigs-at-the-trough megabanks, Munger claims, the economy would have plunged far more than it did, so we didn’t have any choice.

But we had a far superior third alternative. In fact, the third alternative is the way capitalism is SUPPOSED to work. If a bank (like any other business) goes bankrupt — meaning the value of its liabilities exceeds the value of its assets — then the bank is supposed to fail. Failed banks are “restructured”: seized by the government’s banking experts, re-capitalized if necessary, and sold off to new owners (often to a solvent bank). Stock holders of bankrupt banks should be wiped out, and executives who led the banks into bankruptcy should be fired. Failed banks create opportunities for new banks to rise up and compete, and failure acts as a disciplining force that restrains risky behavior.

Failed banks should have been restructured, sold to new owners, and run by new leadership. Instead, government taxpayers gave them trillions of dollars to escape the consequences of their horrible, horrible actions.

Worse still, those banks have hogged the cash we gave them, rather than lend it out to businesses that might have expanded and created new jobs for the tens of millions of unemployed Americans.

The trillions given to bail out failed banks could, and should, have instead gone to new banks and to financially sound banks that managed their depositors' deposits responsibly. New banks unencumbered by bad debts would have far more eagerly lent out that money.

Charlie Munger is dead wrong for many reasons. Were he not Warren Buffett’s business partner, I might forgive him for not considering this third option. But if Munger truly is ignorant of this third option, then he certainly SHOULD have known about it. Many, including Paul Krugman, Joe Stiglitz and Simon Johnson (the first two of whom won economics Nobel Prizes), argued loudly and persuasively for restructuring failed banks. Even I, with about 1% of Charlie Munger’s knowledge of business, argued for it repeatedly here on my blog 19 months ago. The bailouts were anti-capitalistic, esp. since they were pure gifts to bankrupt firms, with no strings attached.

Munger probably does know what should have happened to failed banks. He’s defending the bailouts because his Berkshire Hathaway profited so handsomely. Berkshire Hathaway is the largest shareholder of Wells Fargo. Berkshire owns more than 6% of Wells Fargo, 4.5% of M&T Bank and 3.6% of U.S. Bancorp. Berkshire also bought $5 billion of Goldman Sachs perpetual preferred shares at the nadir of the financial crisis. Berkshire also received “warrants granting it the right to buy $5 billion of Goldman common stock at $115 a share, which is 8% below [its value at the time]. At Goldman’s roughly $50 billion market value, based on that closing price, exercising those warrants would give Berkshire about a 10% stake in Goldman.”

With so much Berkshire Hathaway money invested in giant banks, it’s hardly surprising to see Warren Buffett defend Goldman Sachs or Charlie Munger defend the bailouts.

But don’t be intellectually dishonest and insult our intelligence (or delusional… if you really do believe bailouts were in Main Street’s best interest). We know your support of big bank bailouts is about maximizing your financial investments, “poor” billionaire Charlie Munger.

Posted by James on Tuesday, September 21, 2010