Buffett or Buffet?

Warren Buffett spent US$5bn in Goldman Sachs, which some say it should help to bolster market confidence. Some even say that this is more important than any of the interventions contemplated today in Congress.

One, however, should not mix up between confidence restoring and Buffett’s decision in investing into Goldman Sachs. He only invests in businesses he understands, and at prices so cheap that there's plenty of margin for safety if things go wrong.

US banks have US$1.2 trillion of capital and the proposal bad mortgage-related assets states clearly ‘at deep discount’.

The root of the problem currently afflicting everyone of us lies in the uncertainty over financial institutions insolvency arising from complexities of falling home prices, overextended debt, falling jobs and income and no one really knows for sure what ultimately losses to banks and non-banks holding those mortgages will result.

What we are seeing today is simply a plan to postpone recognition of the insolvency problem. It does not solve it. The uncertainty in the value of the equity is not removed, it is merely postponed.

Until recently, US real estate troubles were largely confined to the residential sector. But commercial lenders have been making high risk mortgages too. Commercial building have been ‘flipped’ in recent months just like Miami condos once were. And commercial values have been stretched to the max. In another word, we could see a similar speculative blow-off and downturn in commercial real estate like the one we have already seen in residential.