Too Big to Fail - Andrew Ross Sorkin [276]
To address those problems, Buffett proposed something he called the “Public-Private Partnership Fund,” or PPPF. It would act as a quasi-private investment fund backed by the U.S. government, with the sole objective of buying up whole loans and residential mortgage–backed securities, but it would avoid the most toxic CDOs. Instead of the government doing this on its own, however, he suggested that it put up $40 billion for every $10 billion provided by the private sector. That way the government would be able to leverage its own capital. All proceeds “would first go to pay off Treasury, until it had recovered its entire investment along with interest. That having been accomplished, the private shareholders would be entitled to recoup both the $10 billion and a rate of interest equal to that received by Treasury.” After that, he said, profits would be split three fourths to investors, one fourth to Treasury. His idea also had a unique way to protect taxpayers from losing money: Put the investors’ money first in line to be lost.
Buffett said he was so excited about this structure that he had already spoken to Bill Gross and Mohamed El-Erian at PIMCO, who had offered to run the fund pro bono. He had also been in touch with Lloyd Blankfein, who had likewise offered to raise the investor money on a pro bono basis. Finally, Buffett added, “I would be willing to personally buy $100 million of stock in this public offering,” which, he explained, “constitutes about 20 percent of my net worth outside of my Berkshire holdings.”
After reading the letter, Paulson was intrigued. He was still starting to lean in favor of injecting capital directly into the banks, but he thought maybe a program modeled after portions of Buffett’s proposal could be feasible as well. Paulson called Kashkari into his office; he had just named him interim assistant secretary for financial stability that morning, putting him in charge of the TARP plan. The appointment was already generating a firestorm, with accusations that Paulson was once again favoring his former Goldman Sachs employees. (At Goldman, meanwhile, none of the senior management seemed to know who Kashkari was, and some of them asked their assistants that morning to look though the computer system to find out.)
Paulson handed Kashkari Buffett’s letter. “Call him.”
“It is clearly a panic, and it’s a panic around the world,” John Mack, having flown to London, was telling his employees at their headquarters on Canary Wharf the morning of Wednesday, October 8. “So you think back how the regulators have done and what they have done—could they get ahead of this—you know it’s pretty hard because you really didn’t know how bad it was until it got worse….”
The stock market was cratering yet again amid renewed panic that the banking system—and the economy as a whole—were about to suffer further setbacks. Mack, who had gone to London in part to have dinner with his newest investors from Mitsubishi, was under perhaps the most pressure. He was exhausted, having spent much of the past week living on airplanes. In the wake of China Investment Corp.’s hasty departure from Morgan Stanley’s building after Gao found out the firm was about to do a deal with the Japanese, Mack flew to Beijing to try to repair relations. It was a diplomatic mission, intended to calm frayed nerves and to avoid what seemed as if it might turn into a minor international incident, given that Paulson had quietly gotten involved in the talks with the Chinese government originally. Just as important, CIC was still a large investor in Morgan Stanley, and Mack wanted to placate his foreign partners.
But for now, Mack wasn’t interested in anyone’s hurt feelings. He was glued to his stock price, which had fallen 17 percent the day before, as investors grew nervous that Mitsubishi might renege on its deal. After a week and a half of diligence and regulatory