Did Warren Buffett get what he deserved? Should Europe’s banks be left for dead? Are the neocons trashing Ukraine? Today, those answers and more as we dip into the mailbag...

I had a topic lined up for today that will have to wait until Tuesday. Right now I’d like to address some interesting reader comments from two earlier pieces this week: On Buffett and the Banks and Vladimir Putin and the Battle for Ukraine.

There were numerous attaboys and nuggets of praise for both pieces – and for that I am most grateful. It’s always nice to know one’s work is appreciated. Good, bad, ugly, it all gets read... so if you have something to say, keep the e-mail on file: justice@taipandaily.com.

I touch on the praise in passing because we won’t see it in today’s mailbag. As often seems to be the case, the critical comments were more “reply worthy,” so we’ll mainly focus on those. Here we go...

On Buffett’s Support of Obama

Perhaps Buffett deserves what he got; he supported Obama throughout the entire campaign! What did he expect from a socialist? He and all capitalists are now in the bottom of the barrel – the roles have been reversed. God help our country!
– TD Reader DD

I thought Warren Buffett was on Obama's economic team?? Why doesn't he go right at Obama directly?
– TD Reader MAC

Considering the headlong rush toward larger government… how do you explain Warren Buffett’s support for Obama? It is obvious that we are moving rapidly from a democracy into an oligarchy…
– TD Reader Jim R

You’re right – Buffett was a vocal supporter of Obama. In this he has “made his bed,” so to speak, and can now lie in it.

Buffett also has some eyebrow-raising personal views, on the subjects of inheritance and taxation in particular, that some would call wacky, nutty or even socialist.

But my point was not to endorse Buffett’s views outside the capitalist sphere, or even to endorse Buffett’s views at all really... I was merely pointing out how Berkshire Hathaway, a well-run, financially sound entity, was suffering at the hands of government intervention.

Whatever you think of the guy personally, Buffett's annual shareholder letters are well written, straightforward and informative. In that context, his most recent letter gave us a clear (and depressing) glimpse into the state of financial markets today.

Also, re, Buffett’s vocal Obama support: I have a hunch that even the Sage of Omaha is surprised (and keenly disappointed) at how badly the Obama administration has bungled things on the financial cleanup side.

As for massive budget expansion and higher taxes, Buffett clearly signed up for that (in endorsing Obama). But who knew the incoming Dems would be as stunningly back-handed as the outgoing Repubs in mollycoddling Wall Street, botching the bank cleanup, refusing to throw the bum CEOs out, throwing good money after bad, and altogether continuing right on (or even worsening) the Hank Paulson mess?

I mean, heck, not even socialists are afraid to fire people. Case in point: The Castro regime in Cuba (a co-production of Fidel and brother Raul) just removed two "top officials" for offenses unclear. The left is supposed to be harder on fat cats than the right, or so I’ve heard... and yet Obama's man Geithner can't bring so much as a single high-profile bank exec or board member to true account for the mess we're in?

So much for "new broom sweeps clean." If anything I imagine Buffett expected more revolutionary fervor, not less, in this area.

As for the question of explaining Buffett’s support for Obama... I won’t pretend to have a bead on the man’s thoughts. Buffett the investor has a brilliant track record, 2008 performance notwithstanding. Buffett the private citizen believes some very strange things.

Come on folks, stop drooling over Warren Buffet. He clearly deserves credit for his insight and wit but how many inner-city ghetto kids could have grown similar with a stockbroker and Congressman as father?

Not to detract from Buffet one iota, the fact is he came from a privileged background so, stop drooling.

– TD Reader A.T.

Umm, what? First, I don’t think Howard Buffett’s political life played any real role in his son’s success. Second, there are plenty of stockbrokers’ kids out there who didn’t grow up to earn sobriquets like “richest man in the world” and “greatest investor of our time.” Third, who’s drooling?

I should probably add here that Buffett is not a personal hero of mine, and I doubt he counts as a hero to you either... but that doesn't mean we can't respect the man’s accomplishments and learn from him in certain select areas.

I read both of the top-tier Buffett biographies (The Making of an American Capitalist and The Snowball) and enjoyed both immensely. There are things I like about Buffett and things I very much dislike. It just so happens my own trading and investing heroes are mostly "global macro" guys. And, come to think of it, there are things I like and dislike about those guys too. It's not a black and white world.

On Bailouts and AIG

Is it good business to borrow at low interest and invest in companies at a high rate of interest? That is what the govt. has done with AIG and the big banks. As I see it, there was no 'Bailout.' Switching from 9% preferred stock to common shares of Citi and AIG does dilute the shares, but it gives the govt. an opportunity to profit as the companies survive. The govt. has the borrowing power to see that they survive. Please comment. I have difficulty following the advice of one who doesn't understand this and rants about 'Bailout.'

– TD Reader Gerald F., MD

Okay Doc, you asked me to comment so here goes... if you really think we (as American taxpayers) are ever going to turn a profit on AIG, I would say pass me some of what you're smoking because it must be some mighty good stuff. Citigroup, a.k.a. Splitty-Group a.k.a. Sh*tty-Group, has been an unmitigated disaster for taxpayers, shareholders, and the broader markets in general. Just think about how much those bozos have cost us in collateral damage, never mind the ridiculous sums we’ve poured in.

As for AIG, even Gentle Ben (Bernanke) is livid at the AIG situation and has said as much publicly. Consider this direct quote from the Fed Chairman’s recent Senate Testimony: "If there's a single episode in this entire 18 months that has made me more angry, I can't think of one (other than) AIG."

As well he should be... AIG's business model – or at least the model for the hedge-fund side of the business, the part that’s caused so much trouble – was based on deceit, pure and simple. AIG was essentially in the practice of selling cheap asteroid insurance based on the assumption that never in a million years would an asteroid actually hit. When it did hit, they were screwed... because the whole business model relied on the assumption that an impact event would never happen!

That's fraud, plain and simple. If you or I were to operate like AIG, we could go around collecting premiums on multimillion-dollar long-shot insurance policies with no wherewithal to pay. We joke about how so-and-so should go to jail sometimes... this is a case where people really SHOULD be in jail. For white-collar fraud on a mind-blowing scale.

And U.S. taxpayers aren't getting the money back, not by a long shot. When you factor in the collateral damage of sheer economic destruction born of the whirlwind these idiots reaped, literally trillions upon trillions have been lost. And the fiasco ain’t over yet.

On the Video Explaining Various Forms of Government

The fourth-grade level video was overly simplistic and ignores a lot of issues. It's simplistic thinking like that that got us into this mess. Not up to your usual standards.

– TD Reader Nancy N.

Best 10 minute summation of history of western government I've ever seen.

– Excerpt of forwarded comment from an Assistant State Attorney General

Slight gap in opinion there... personally I found the simplicity of the presentation compelling. As it turns out, the excerpt I linked to is one part of a four-part series put out by the John Birch Society. I was made aware of this by a member of the John Birch Society who forwarded a youtube link to the full four-part series. Watch that here.

Please note: I am not endorsing the John Birch Society here. Nor am I attempting to distance myself from them in pointing out my lack of endorsement. Rather, I’m simply passing on information and ideas to you so you can come to your own conclusions. And, as previously stated, the Taipan Publishing Group has no “official” political views.

On the Situation in Ukraine

I have read many of your reports and of course the other writers within your firm with great interest... and profit. I own a small Advisory firm in Texas... and my fiancée happens to live in Simferopol, Crimea. I assure you I talk with her daily and she reports that reality there is in fact much worse than your current assumptions imply. Over the past 6 months... there have been continual shortfalls of water... electricity... bread... and other staples. Crime and general lawlessness has increased and in some districts, internet services have failed.

We have found that the only reliable way to wire transfer funds in this environment is through Western Union and her Export company banks with the country’s largest bank. If I knew of a way to buy puts on Ukraine I would... it is that bad. Currently we are discussing exports with selected wineries and soon, steel mills in an effort to help a new client convert his Ukrainian currency into dollars. Additionally, as reported by others... there is a market for imported late model cars, as they are seen as a better store of value than the currency.

If you would like to contact her directly her contact information is listed at the bottom. She finds your firm’s reports more reliable than her National Media and of course would love to see Ukraine move solidly into the West. She doubts that will ever happen sadly and is preparing to leave when possible.

– TD Reader J.S.

...yes, there is a substantial problem facing 2 Austrian banks (Die Erste and Raiffeisen), but it is not a problem that could threaten the euro or the European Union. Such outcomes exist only in the heads of U.S. analysts who would like to believe that the problem elsewhere is even bigger than in the U.S. In reality, the problems facing the U.S. are much more serious. After all, Austrian banks lent money for real property that can be sold. This cannot be said about MBSs and other so called securities peddled by U.S. institutions to naive investors around the world. If someone is gullible enough to believe that USD is safer than euro, than the person deserves exactly what is coming to them (huge devaluation of $ once the $ reserves accumulated by China are dumped to buy something of value).

– TD Reader Miroslav K.

The trouble, as always, comes back to leverage. The teetering banks in question do not need to see property values fall to zero in order to be toast. By some estimates, mark-to-market declines as small as 10% could result in default due to the banks’ habit of leveraging supposedly “safe” assets to the hilt. If you lend $100 against nothing more than the ten bucks in your pocket, a mere 10% haircut means you are broke. The same math works with larger sums, like $1 billion against $100 million and so on.

Also, re, U.S. bias as to over-exaggerating Europe’s troubles: With all due respect Miroslav, what about the multiple non-U.S. sources who are reporting the same numbers and saying much the same thing?

Consider this recent Economist cover, for example, which I came across in my mailbox after writing the Ukraine piece.

Credit: Kevin KAL Kallaugher, The Economist, www.kaltoons.com

For reference, “the bill that could break up Europe” is not a bill like a political bill, but rather a bill like a restaurant check... the tab that rich EU nations refuse to pay at their peril.

For once, reading your Eastern Europe and Ukraine comments from 3/04/2009, I was EXTREMELY disappointed by what you had to say. This is not the type of argument I have come to expect from Taipan or you, in flawed reasoning and approach.

You criticize Merkel and the other Western governments for not being willing to bail out the East (and thus the Western banks). That argument is just so much Keynesianism. If those banks fail, then let them, and we must bear the short term pain.

This also should be done in the U.S. (Jim Rogers this week put it very succinctly). As I read so much from Bill Bonner and Taipan that hews towards Austrian school economics, I can not believe that you wrote these comments on Wednesday.

That our state cohesion here in the U.S. allowing DC to force a bail out on all unwilling states is a good thing, and Europe's lack of cohesion preventing this (for now) is a bad thing, is TOTALLY reversed.

Thank goodness the lack of cohesion over there is not enabling this bail out at this time. Like us, the "rich" countries are already deep in the hole, any bail out will be just as Euro-supply inflationary, as our bail outs have been dollar-supply inflationary.

Anything PREVENTING this type of speedy response is a GOOD, not a bad thing.

As to your Ukraine comments, again very disappointing. Your analysis of the "democratic" orange revolution, along with the Russian bogeyman, sounds straight out of the Neo-Con think tank playbook.

If Russia did in Mexico and Latin America what we ARE doing in Ukraine, and the Central Asian states, how would we react?

I am saddened that here, you are supportive of the aggressive, neocon imperialistic U.S. policy aimed at encircling Russia with "democracy," whether you intend that or not.

– TD Reader Carsten S.

Hi Carsten,

Thank you for your honest and thoughtful comments. Ugh... I certainly didn't intend to portray myself as a neocon!

I agree with Jim Rogers, Marc Faber, et al. in spirit (that bailouts are awful, more often a problem than a solution etc.), but I disagree in regard to the dismissal of consequences once the damage is done. I am a student of Hayek and Von Mises at heart, so it pains me to diverge here.

The thing is, the Austrian economics solution to this mess largely required avoiding the mess altogether in the first place. Now that we are here, I fear that in certain cases it is correct that simply "letting the banks fail" would lead to systemic collapse.

The central question (which Jim Rogers never truly addresses) is how much potential damage could be inflicted by full-blown systemic financial collapse. To just assume “Europe can handle it” is dangerous... akin to driving a loaded semi tractor-trailer (or lorry for our European friends) over an unrated bridge on casual assumption the bridge will hold.

And again, this question is particularly acute for certain European countries where the bank liabilities are so large, relative to the local economy, that a bank implosion could lead to a chain reaction series of Argentina-style defaults.

Here’s the thing: Systemic financial meltdown can reach beyond the abstract land of computer screens and destroy people’s lives by the millions. When Argentina collapsed earlier this decade, the downstream economic effects were horrifying... picture desperate throngs of nomadic garbage-pickers with no other way to make a living than recycling the small bits they find.

And so the relevant question for Europe is this: Now that the mistakes have been made, how bad could things get with no remedial action taken? The frightening worst-case answer is “catastrophic.”

Also, re, Ukraine's orientation towards West versus East, the preferable thing would be leaving Ukraine's future up to Ukraine. But, sadly, the "great game" of power politics does not work that way, and it is a game that will be played whether we like it or not.

I certainly did not intend to take a “neocon” viewpoint in my analysis. I believe evidence supports my portrayal of the murky nature of Russia's actions in Ukraine... yet at the same time I agree it is disappointing and disgusting that the United States has chosen to play cat and mouse games with Russia in the region. Some months ago I wrote about the dumb gamesmanship of the proposed Poland missile shield from a Russia-sympathetic point of view... hardly a neocon stance.

In sum, I believe the time for discipline and prudence was before various European banks put their surrounding local economies at risk with hugely speculative bets on foreign-currency-denominated loans in a grossly overheated region. The seemingly universal thick-headedness of politicians is, sadly, not enough of an excuse for “no action” in this case.

I guess we’ll see how things play out...

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As Adam said to me with a smile, “Who says you can’t make money in this market?”

Other Related Topics: Bank Bailout , Banks , Eastern Europe , Government Issues , Justice Litle , Safe Haven Investor

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