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Commentary: It's not the end of capitalism

  • Story Highlights
  • Allan Sloan: To bail out the system, Treasury gave banks a sweet deal
  • Sloan: Warren Buffett got much better terms when he invested in Goldman Sachs
  • Buffett was prepared to walk away if he didn't get what he wanted, Sloan says
  • Treasury needed this deal to happen and wrote terms accordingly, he says
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By Allan Sloan
Senior Editor-at-Large, Fortune magazine
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(CNN) -- Uncle Sam is spending hundreds of billions of dollars to buy stakes in some of the country's biggest banks.

Allan Sloan says the terms of the bank bailout are so sweet, no bank would turn down the deal.

Uncle is pumping well over a trillion dollars -- that's trillion, with a t -- into the U.S. and world financial systems. Uncle is guaranteeing bank-to-bank loans, money market mutual fund accounts and virtually all bank deposits.

Is this the end of capitalism as we've known it? No, not at all.

Rather, it repeats a pattern that's drearily familiar to those of us who have watched various financial crises unfold over the past few decades. The government bails out the financial system and in the process bails out the big fish while small fry are left to fend for themselves. And, of course, the taxpayers get stuck with the tab for the rescue.

I'm not saying that the bailout plan revealed Tuesday isn't necessary. It is, because the alternative was risking a worldwide financial collapse and a possible second Great Depression. That would have been a disaster for all of us.

But if you examine the details of the bank bailout deal, you see that the terms are so sweet that no bank in its right mind would turn down the money.

Among other things, the Treasury is providing cheap capital and is going out of its way to avoid influencing the business practices of the eight banks to which it has committed a total of $125 billion.

It's obvious that the Treasury's goal is to get money into the financial system, not to take control of the banks. For a change, we taxpayers are getting a chance to make a few bucks on the bailout package, but nowhere near as many bucks as we'd stand to make if this $125 billion had been negotiated in the conventional Wall Street way.

Let me explain, by contrasting terms of the Treasury's $10 billion preferred stock investment in Goldman Sachs with the $5 billion preferred deal that super-investor Warren Buffett made with Goldman last month.

Buffett is getting a higher dividend and a much bigger potential profit than the Treasury.

Here's why I've come to that conclusion. Buffett's Berkshire Hathaway Inc. is getting a fat 10 percent annual dividend on the $5 billion of preferred stock it bought from Goldman and got the right to buy $5 billion of Goldman common stock at a price below the market price at the time. This gave Buffett an instant paper profit after news of his investment drove up Goldman's stock price.

By contrast, Treasury is getting only a 5 percent dividend on its $10 billion of Goldman preferred stock and has the right to buy only $1.5 billion of common stock. News of the Treasury's bailout plan drove up Goldman stock sharply yesterday, to $120.66 from $88.80 in Friday's panicky market. But the Treasury isn't going to get to buy stock at anything close to $88.80; it will get the right to buy for about $122, by my estimate. (The actual price hasn't been set.)

The difference is that Buffett's Berkshire Hathaway (which happens to be my biggest individual-stock investment) is trying to make as much money as possible, but the Treasury's goal is to unfreeze the financial system by offering Goldman and the seven other players a deal they can't refuse.

Uncle Sam isn't getting as good a deal as Uncle Warren did, but Sam felt that he needed to do this, and Warren was prepared to walk away unless he got what he wanted.

There are some minor controls on the banks' behavior: some sort of limits on top executives' perks and a ban on increasing the cash payout to banks' common shareholders without Treasury approval.

But those are trivial things, because I'm sure the perk limitation can be evaded in various ways, and no bank in its right mind would be increasing dividends in the current economic environment.

But the Treasury won't get voting power on any shares it buys, and it gives the banks various incentives to raise money privately in order to buy out the Treasury. The whole program is set up to be temporary and to encourage banks to buy out the Treasury reasonably quickly, not for the Treasury to hold this stock for years and years.

Does all this sound like the end of capitalism to you? If so, please send me some of whatever it is you're drinking.

The opinions expressed in this commentary are solely those of the writer.

All About Warren BuffettU.S. Department of the Treasury

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