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October 23, 2008 01:00 AM

Buffett biographer backs bailout

Says plan has "reasonable" chance of stopping the credit crisis vortex

Barry B. Burr
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    This financial market crisis is the kind of emergency that evokes the need for a National Guard-type response. In this case, call in the federal government — and Warren E. Buffett’s money and reputation — said Alice Schroeder, erstwhile insurance industry analyst and now known for her recently published biography of the world’s richest investor.

    Generally supportive of the financial market rescue package, Ms. Schroeder is, however, concerned about new mark-to-market accounting standards and stock market volatility.

    The bailout was necessary because the market was in “a situation of picking off one company a day,” she said in an interview. “You can’t have an economy function where every day around the world several major financial institutions are taken over by the government or forced into a merger.”

    The financial crisis “is of a magnitude that could cause widespread economic hardship to millions of people,” said Ms. Schroeder, author of “The Snowball: Warren Buffet and the Business of Life,” published by Bantam, a division of Random House, a unit of Bertelsmann AG.

    “This is a national emergency. We can’t call out the National Guard to fix the financial market.”

    If the government hadn’t stepped in and done something along the lines of the $700 billion bailout package, “business (would) be gridlocked and the economy (would) grind to a halt,” she said. A rescue package is necessary to “restore faith with institutions' ability to do business with each other.”

    “There are people who are saying it isn’t the most optimal solution. But there is a fuse burning and in the time allowed it is only the viable solution. … It has a reasonable chance of stopping the vortex from spiraling down further,” Ms. Schroeder said.

    It's not the Buffett money, it's the message

    As for Mr. Buffett, his actions can be seen as giving the markets a huge boost of confidence, she said.

    “There are certainly (many) people who have the money” to put into the markets to try to bolster confidence, Ms. Schroeder said. “But it isn’t (just) the money. It is (Mr. Buffett’s) reputation for being right. I can’t think of anyone else who is as trusted, whose judgment is as trusted.”

    Goldman Sachs Group Inc. and General Electric Co. called in Mr. Buffett to help shore up their capital, investing, respectively, $5 billion and $3 billion with each.

    “GE is one of the largest companies in the world and (was) having trouble rolling over their commercial paper. Warren Buffett came in, essentially assisted them in raising capital …”

    Mr. Buffett “has been a business mentor to Jeffrey Immelt (GE’s chairman and CEO). He’s comfortable with Jeff’s management style. … Financially the $3 billion doesn’t mean much to GE,” Ms. Schroeder said. “What is really means is Warren’s vote of confidence.”

    Mr. Buffett is moving his entire non-Berkshire Hathaway Inc. money into U.S. equities, he announced in a commentary Oct. 17 in The New York Times. . It had been all in U.S. government bonds, he wrote.

    A ?break-glass-in-case-of-fire? scenario

    As for the issue of the Financial Accounting Standards Board’s Statement 157 on marking to market, Ms. Schroeder said, “It is common in times of stock market volatility to blame accounting for the volatility.”

    “Fair-value accounting is conceptually quite appropriate when there is a determinable value for an asset.” She said it could make sense for the Securities and Exchange Commission to suspend the rule to provide guidance in a disorderly market.

    “I think that is sort of like giving the SEC a ‘break-glass-in-case-of-fire’ scenario.” Ms. Schroeder said of a suspension. “It is not really the way you want to solve problems in the long term. But it can be useful in a emergency.”

    “Fair-value accounting was adopted because the current value of a financial instrument, even if estimated, was more informative to investors than any other measure, such as its historical cost. Proponents of eliminating fair-value accounting argue that this would reduce stock market volatility. But why would investors feel more confident if they were totally ignorant of an asset's value? The problem, in my view, is how fair value is calculated, not whether it is reported to investors.”

    Contact Barry B. Burr at [email protected]

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