Merryn's Blog

The lessons Gordon Brown should have learned from Warren Buffett

Gordon Brown ought to have been more ambitious in his banking bail-out. If he'd taken the Warren Buffett approach, he could have made a killing for the taxpayer, and we'd all be egging the banks on to make as much money as possible.

Here's an interesting comment from Tory MP Mark Feld. He notes that it has now become consensus to claim that the great bank bail-out in some way "symbolised courageous decisive government at its best". With the nation a matter of hours away from frozen cashpoints, something had to be done and Gordon Brown's government did it, providing the country with the an "essential life preserving shock".

But while it is true that something had to be done, we should still be asking to what extent Brown did the right thing. The answer? As usual with poor Mr Brown, it rather looks as if he did not. What if, instead of panicking and chucking money at the problem willy nilly, he had used the bailout as an opportunity to avoid moral hazard in the future?

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Instead of setting up a structure that suited the banks down to the ground, he might have set up one that made bail-outs and forced recapitalisation "a deeply unattractive option." He could have approached the whole thing not so much as a bail-out, but as a business transaction, asking not "Can I save the banks?" but "How much money can I make for the taxpayer by saving the banks?"

For a template of how this might have worked, we need look no further than the smarty-pants route taken by Warren Buffett. Did he go for expensive and more risky ordinary shares over preference shares when they shore up a balance sheet equally well? He did not. Instead he took preferred stock with a 10% dividend and an option to buy common stock over the following five years. The result? "That stake is now paying his company $500m a year."

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Imagine if, instead of the main ambition of our bail-out being that the tax payer should not lose money, it was that the taxpayer should make a killing in response to the risk taken on his behalf by the government. Had we been a bit more Buffett about it (and chucked in a few clauses about no departing bank chiefs taking £16m with them) there would be no bank bashing going on at the moment. Instead, we'd all be egging them on to make as much money all round as possible in the full knowledge that we'd made them pay for their idiocy already and that their recovery would be all of our gains. The bank bail-out may have kept the cashpoints going, which is good, but it did so in a remarkably unambitious way.

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