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Warren Buffett is wrong
Baltimore Sun ^ | August 24, 2011 | Brian H. Murphy

Posted on 08/27/2011 5:25:35 PM PDT by CutePuppy

The United States tax code is so backward that billionaire investor Warren Buffett pays only 17 percent in income taxes, a rate even lower than that of his secretary. Or so he claims. While I have great respect for Mr. Buffett, and while I agree that our tax code could benefit from major adjustments, Mr. Buffett's statement is misleading. And he knows it.

Even worse, when Mr. Buffett implies that wealthier Americans are under-taxed, it gives public officials cover to pursue disastrous policies such as Maryland's failed millionaire's tax, and the pending sales tax on interstate Internet purchases known as the "Amazon tax." Taxing the rich and protectionism may poll well, but these policies demonstrably hurt the same middle class and lower-income citizens they purport to protect.

Throughout his career, Mr. Buffett has been influential in creating hundreds of thousands of jobs and billions of dollars in wealth, and he has directly and indirectly paid billions of dollars in taxes. But Mr. Buffett is an equity owner in the companies he has created. As such, Mr. Buffett takes all of the risks and gets paid last: after his employees, after his creditors, after every form of government. While he is partially correct that his "income" is only taxed at 17 percent, Mr. Buffett is also guilty of some sleight of hand. ..... < snip >

..... Let's pretend one of Mr. Buffett's companies is in Baltimore. Assuming his secretary makes $36,000 per year, excluding payroll taxes (which are ostensibly reserved for the employee's direct benefit), and after certain standard deductions and personal exemptions, the secretary's combined state, local and federal tax rate would be about 19 percent.

Unlike Mr. Buffett's secretary, the capital representing Mr. Buffett's "income" would have already been taxed ... before it ever reaches Mr. Buffett.

.....

(Excerpt) Read more at mobile.baltimoresun.com ...


TOPICS: Business/Economy; Editorial; Government
KEYWORDS: bastardized; bastardizedlanguage; buffett; classenvy; classwarfare; doubletax; doubletaxed; economy; euphemism; hypocrite; incometax; investspend; language; libertycurve; spendinvest; taxedenoughalready; taxes; warrenbuffett
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Buffett knows that with the Republican House (and, soon, entire Congress) he and other liberal M&Bs (Millionaires and Billionaires) are in no danger to be subjected to more taxes (particularly on previously already taxed capital), so it's a freebie - he can with impunity support and join Obama and Democrats in the politics of class envy which appeal to traditional Democrats' constituent groups.

It's easy to be a hypocrite when you are a Democrat, and easy to be a Democrat if you are a hypocrite.

1 posted on 08/27/2011 5:25:41 PM PDT by CutePuppy
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To: CutePuppy
he's prolly wrong on BAC, too.

But what a gutsy move! Announcing that you're going to put money into a TARP bank when the stock is hovering near zero.

2 posted on 08/27/2011 5:28:36 PM PDT by the invisib1e hand
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To: CutePuppy

My memorable economic lesson: “Give a poor man a dollar and he’ll spend it. Give a rich man a dollar and he’ll turn it into $2.


3 posted on 08/27/2011 5:29:01 PM PDT by Sacajaweau
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To: CutePuppy

Buffett doesn’t support higher taxes because he wants to pay higher taxes. He supports higher taxes because he wants you to pay higher taxes.


4 posted on 08/27/2011 5:29:20 PM PDT by Brilliant
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To: theBuckwheat
LibertyCurve ping.
5 posted on 08/27/2011 5:30:18 PM PDT by CutePuppy (If you don't ask the right questions you may not get the right answers)
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To: the invisib1e hand

Gutsy...It drove the stock up. If he sold it, he would have made a ton of money.


6 posted on 08/27/2011 5:30:51 PM PDT by Sacajaweau
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To: CutePuppy
Buffett will say whatever he needs to to suck off obama. "Windbag Warren" is in the railroad business, specifically the coal carrying business, and he needs slack from the One to keep his freight business alive and prosperous.

Buffett gives new meaning to the old quid pro quo.

7 posted on 08/27/2011 5:31:27 PM PDT by hinckley buzzard
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To: Sacajaweau
Gutsy? No....he KNEW by his BUYING that it would drive the stock price up!

He's ACTUALLY what Dems say they HATE....but they know he's a HUGE DEM, so they close ther eyes to his HYPOCRISY and PRICE MANIPULATION.

8 posted on 08/27/2011 5:36:44 PM PDT by Ann Archy (Abortion is the Human Sacrifice to the god of Convenience.)
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To: CutePuppy
Warren Buffett is a hardened, militant atheist. That is why he is supporting Obama - atheists flock towards one another for self-affirmation. Obama is no Christian. Christ said we would be known by our fruits.

Buffett is a fool.

"1The fool hath said in his heart, There is no God. They are corrupt, they have done abominable works, there is none that doeth good."

Psalm 14:1

When Buffett dies (and we all die), only then will he know the waste his life has been. Without God, all of our efforts are but a vapor, and without meaning.

Perhaps he will come to God before he does die, but the odds are against it. His heart is stone cold, and there is no love for his Creator in him.

9 posted on 08/27/2011 5:37:36 PM PDT by SkyPilot
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To: the invisib1e hand

hummmm....Buffet’s BOA purchase is about as gutsy as my stopping at McDonalds for a Rolo McFlurry... proportionally speaking. Maybe less as he has gained some serious chits with Obama.


10 posted on 08/27/2011 5:38:26 PM PDT by reflecting
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To: Sacajaweau
“Give a poor man a dollar and he'll spend it. Give a rich man a dollar and he'll turn it into $2."

Spending vs investing...

Another pair of words that Democrats / politicians completely bastardized by turning the meaning of them 180°. They always talk about pure "pork" government spending as an "investment" (in infrastructure, education, environment etc. etc.)

11 posted on 08/27/2011 5:38:42 PM PDT by CutePuppy (If you don't ask the right questions you may not get the right answers)
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To: Sacajaweau

doubt he could have cashed out that fast. Anyway, he’s getting a 6% div on it —it’s preferred stock.


12 posted on 08/27/2011 5:38:42 PM PDT by the invisib1e hand
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To: CutePuppy

It is only the want to be billionaires that pay these taxes ... they have their business that they are building and at the same time they have to carry this old fool on their back.


13 posted on 08/27/2011 5:40:28 PM PDT by dila813
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To: Sacajaweau
My memorable economic lesson: “Give a poor man a dollar and he’ll spend it. Give a rich man a dollar and he’ll turn it into $2.

I love shit like this.

the poor man HAS to spend it. The rich man doesn't pay late fees, never paid full price for anything, and has people bending over backwards to give him deals for his money.

Did they tell you THAT in your economics lesson?

Didn't think so.

14 posted on 08/27/2011 5:41:01 PM PDT by the invisib1e hand
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To: CutePuppy

Anyone who’s been through Accounting 101 knows that Warren lied. Why did he think something this would pass over our heads?


15 posted on 08/27/2011 5:42:02 PM PDT by Traveler59 ( Truth is a journey, not a destination.)
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To: CutePuppy

Wonder what Berkshire Hathaway has got.. AND ... will be getting out of all of Buffetts political gambits??..

No doubt Buffett has his eye on Soros..


16 posted on 08/27/2011 5:43:38 PM PDT by hosepipe (This propaganda has been edited to include some fully orbed hyperbole...)
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To: Brilliant
He supports higher taxes because he wants you to pay higher taxes.

Partially right, but please follow me here:

WB and his company BH basically make money 3 ways.

1. They buy large companies at what they consider a value price.
2. They buy and own insurance companies to collect premiums that provide cash.
3. They buy smaller family-owned middle market businesses at fire-sale prices.

Now this is where it gets interesting.

When a family business owner dies a huge tax obligation is created if it is passed to the family. To prepare for this, expensive life insurance policies are purchased in advance (guess who sells them) to provide the cash for the tax obligation. The insurance payout is not taxable.

If the business owner doesn't buy the policy, then the tax obligation may force the family to sell the business quickly, sometimes at fire-sale prices. Can you guess who is ready with the cash to make the purchase and "help" the family?

So higher taxes on these business owners allow WB and BH to make money using methods 2 and 3 above.

How do you spell C-O-N-F-L-I-C-T?

Can anyone get this to Rush or Mark for more in-depth research?

17 posted on 08/27/2011 5:46:47 PM PDT by bankwalker (In the land of the blind, the one-eyed man is king.)
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To: Brilliant

Bingo!


18 posted on 08/27/2011 5:50:10 PM PDT by RowdyFFC
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To: the invisib1e hand
he's prolly wrong on BAC, too.

Doubt it. The only danger to BoA is from the government itself as they see it as "deep pocket" defendant from which money can be safely extorted (shareholders and/or customers pay for that eventually).

But what a gutsy move!

Don't see that either. The structure of the loan/preferred/warrants id very similar to what he did with Goldman Sachs, only not as lucrative (interest rate is lower) and GS was in more dire straights then, at the height of liquidity crisis.

BoA is being bled by the feds and states' AGs, but it should have more than enough reserves. Buffett's investment is safe and is something that only few investors could structure. BoA also wanted the "halo effect" of Buffett to shine on this capital infusion.

Doug Kass: Brian Moynihan Got Fleeced By Buffett's BofA Bet - CNBC, by Drew Sandholm, 2011 August 25

19 posted on 08/27/2011 5:52:00 PM PDT by CutePuppy (If you don't ask the right questions you may not get the right answers)
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To: hinckley buzzard
Buffett will say whatever he needs to to suck off obama.

It's a tag team.

Obama uses Buffet's name to create the illusion that he understands business.

Buffet gets the inside track on deals.

Remember that earlier in the week Obama had been talking up a mortgage refi program.. No details yet, but BAC did purchase and now owns countrywide.

Something is up, we just don't know what it is quite yet, but Buffet does.

20 posted on 08/27/2011 5:55:08 PM PDT by bankwalker (In the land of the blind, the one-eyed man is king.)
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To: CutePuppy

next time I’ll post instruction just for you.


21 posted on 08/27/2011 5:57:43 PM PDT by the invisib1e hand
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To: bankwalker
That's why Warren is all for estate/death taxes, even though the majority of his own estate is going to the "charity" Bill and Melinda Gates Foundation, and therefore will not be taxed.

Spending Cuts, Not Tax Hikes, Best for Deficit: NABE - FR / CNBC, 2011 August 22

22 posted on 08/27/2011 5:58:57 PM PDT by CutePuppy (If you don't ask the right questions you may not get the right answers)
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To: Brilliant; CutePuppy
So write a frigging check Buffet a quit your bellyaching.
23 posted on 08/27/2011 6:03:52 PM PDT by SandRat (Duty - Honor - Country! What else needs said?)
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To: CutePuppy

A point that too many overlook: Warren Buffett makes billions. If this cheap SOB only pays his secretary 36 grand a year he should be ashamed of himself. Greed has played a huge factor in todays economic crisis as well. And big government, through central control and planning, has made greed an easy thing. There is hardly a chance for decent competition. Too many regulations, controls, laws, lawyers, subsidies and you name it; to allow for fair competition in the free market. This a$$hole has made it this big primarily through greed. No matter how smart of an investor and manipulator...greed through power and advantage got him there.


24 posted on 08/27/2011 6:06:44 PM PDT by ThomasMore (Islam is the Whore of Babylon!)
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To: CutePuppy
Mr. Buffet is talking through his $3,000. hat. If Buffet says anything publicly about money it's because it's a ploy to make of the stuff for himself.

Everything Mr. Buffet says has been filtered through his wealth centered, self serving, money making brain, and he is not the kind of man who really gives a damn about you, me, or anyone else but himself. We all know the Biblical truth about...."the love of money.....". You cannot amass so much money that you can stack it halfway up to Heaven as Buffet has done without a deep love for the stuff. So why would anything this man says be taken seriously by the general public. The general public are, after all, the ones who earn, work, build, and generate the money that Buffet worships so deeply and lives just to gather that money into his barns.

If Buffet feels he's not paying enough in taxes, then why doesn't he simply pay more than his share, perhaps fund our troops in Afghanistan with creature comforts that the military doesn't give them. Like tooth brushes, soap, cigarettes, matches, etc. People like Buffet are so self absorbed and self decieved by their infatuation and addiction to money that they live insulated from the "commoners" and can't even concieve of any realistic thought process of the kind that the rest of us must live by to survive.

25 posted on 08/27/2011 6:06:57 PM PDT by jiminycricket000
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To: hosepipe

Buffett is atheist and a liberal Democrat, so he is just being in his element.

Also, BH owns several insurance businesses (Geico, General Re, National Indemnity) and invested in banks (Wells Fargo) which are heavily regulated on federal and state levels. Being a liberal Democrat helps a lot from being harassed.

Another very “progressive” rich Democrat - who donates a lot of money to Dems at all levels but is reclusive and keeps a very low profile - is Peter B. Lewis (son of the founder) who is the largest shareholder of Progressive Corporation, (owner of Progressive Insurance) which is slightly larger than Buffett’s Geico (which started as Government Employees Insurance Company).


26 posted on 08/27/2011 6:16:36 PM PDT by CutePuppy (If you don't ask the right questions you may not get the right answers)
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To: Sacajaweau
Buffet purchased warrants and rights to buy at a particular price. Shareholders in Goldman and GE (other than Buffet) have suffered muli-percentage price declines since the Buffet investments made in the Fall of 2008.
27 posted on 08/27/2011 6:16:58 PM PDT by sefarkas (Why vote Democrat Lite?)
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To: the invisib1e hand
what a gutsy move! Announcing that you're going to put money into a TARP bank when the stock is hovering near zero.

They were preferred shares, and the yield is higher than anyone else can get anywhere. In addition he gets warrents which he can exercise and dilute the common stock, thereby further robbing the ordinary shareholders.

Not quite so gutsy. Just the best deal that BAC could get.

28 posted on 08/27/2011 6:18:14 PM PDT by AndyJackson
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To: CutePuppy

I have a proposal for Warren Buffett. Instead of a higher income tax rate, which he’ll avoid with his clever accountants, I will take his personal fortune and give it to the government, and he gets to keep, say, $1 Billion. Most people could scratch by on $1 Billion, so I don’t think he could really complain. I’d like to make the same proposal to all of the Dem billionaires, such as Eric Schmidt, Jeffrey Immelt, and Lloyd Blankfein. I’m sure there are others. Let’s see how many go for it.


29 posted on 08/27/2011 6:18:46 PM PDT by Batrachian (Barack Obama is the Lily Tomlin of presidents.)
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To: Traveler59
Anyone who's been through Accounting 101 knows that Warren lied. Why did he think something this would pass over our heads?

Unfortunately, because not too many people in the U.S. have taken or understood Accounting 101. That's precisely the audience the Democrats aim at, to provide majority of their votes - they are very susceptible to the class envy and "fair share" arguments.

30 posted on 08/27/2011 6:21:34 PM PDT by CutePuppy (If you don't ask the right questions you may not get the right answers)
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To: ThomasMore
While I am in strong agreement, I am sure that you are aware that such sentiments here on FR will get you painted as a Marxists. Hell you are probably staffer for Bawney /s.

Of course even that great paragon of free-market theory - Adam Smith - understood that government action was necessary to keep free markets free. But you are still a socialist plant /s/

31 posted on 08/27/2011 6:22:03 PM PDT by AndyJackson
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To: Batrachian
I have a proposal for Warren Buffett. Instead of a higher income tax rate, which he'll avoid with his clever accountants, I will take his personal fortune and give it to the government, and he gets to keep, say, $1 Billion.

He was actually called on that, with a similar proposal, by none other than Arthur Laffer:
Buffett a Hypocrite for Seeking Tax on Ultra-Rich: Laffer - FR / CNBC, , by Margo D. Beller, 2011 August 18


32 posted on 08/27/2011 6:29:37 PM PDT by CutePuppy (If you don't ask the right questions you may not get the right answers)
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To: CutePuppy

And beside that, Buffet does not need to know any economic facts anymore. He hires the intellectual talent he needs to run his empire. That way, he has more time to play in the liberal cocktail circuit; getting boozed up and smoking pot and crack.


33 posted on 08/27/2011 6:31:30 PM PDT by jonrick46 (2012 can't come soon enough.)
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To: ThomasMore
This a$$hole has made it this big primarily through greed. No matter how smart of an investor and manipulator...greed through power and advantage got him there.

Greed I wouldn't mind. "Greed, for the lack of a better word, is good"

But using the power and resources of the government to gain unfair advantage in the market place through taxes, laws and regulations, is... not good. Buffett and his ilk practice crony socialism where the power of the government is used to disadvantage competitors.

34 posted on 08/27/2011 6:38:18 PM PDT by CutePuppy (If you don't ask the right questions you may not get the right answers)
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To: jonrick46

Dont you get to deduct charitable contributions, thus making it look as your tax burden is less. I think they should include how much he dontated to charity as well as how much he paid in taxes and see what % he is paying


35 posted on 08/27/2011 6:42:40 PM PDT by mriguy67
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To: CutePuppy

Dear Mr. Buffett:

Shuffett.


36 posted on 08/27/2011 7:12:50 PM PDT by Arthur McGowan (In Edward Kennedy's America, federal funding of brothels is a right, not a privilege.)
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To: ThomasMore; mriguy67; All
If this cheap SOB only pays his secretary 36 grand a year he should be ashamed of himself.

Actually, this was an assumption by the author to make the example (and actually, to minimize the secretary's tax rate, lest cheat Buffett of his favourable comparison). Yet the example itself actually destroys Buffett's argument og tax disparity even more:

BTW, in recent years, the Berkshire Hathaway's effective corporate "income" tax rate was around 30% - not low, but not the maximum 35% tax rate. Maybe he should instruct BH accountants to pay top rate of 35%; after all, shareholders shouldn't mind.

For comparison, the top corporate tax rate in China was lowered in 2008 to 25% (personal = 45%, VAT = 17%) and average corporate rate is around 17%.

37 posted on 08/27/2011 7:16:06 PM PDT by CutePuppy (If you don't ask the right questions you may not get the right answers)
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To: Sacajaweau

Yeah, the poor man will have to spend the $1 to pay his bills, the rich guy will indeed invest the $1 to make $2 and will use the tax rules and legal shelters to claim only 25 cents of the $2 as taxable income and will pay 1.5 cents in taxes. The poor guy trying to build his business doesn’t have the assets, connections or lawyers to “adjust” his taxable income in the same way so he spends his dollar, or at least the 15 cents he has left after taxes.

Piss off Warren.


38 posted on 08/27/2011 7:16:48 PM PDT by RJS1950 (The democrats are the "enemies foreign and domestic" cited in the federal oath)
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To: the invisib1e hand

LOL, you’re what we call “bitter.”


39 posted on 08/27/2011 7:19:34 PM PDT by Rammer
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To: CutePuppy; All

IMHO...

BAC accepting his offer implies that they really needed the cash infusion, since it will cost them hundreds of millions per year in dividend to him. BAC, if healthy, could certainly borrow at a lower rate. IMHO, only to the masses does this look like a “vote of confidence” from Buffett. When you think about it, this deal helps the PR image of both BAC and the White House. It’s a way of providing a small bailout using Buffett’s capital and simultaneously providing the “oracle of omaha” seal of approval for BAC, which was the unison media chorus the morning the deal was made public. No one in the press that morning asked “why would BAC need this capital if their assets were rock solid ?”

He has the warrants to purchase common just in case the bank somehow does very well and the price of Common goes way up. That’s an upside potential.

The phone call “from” Obama could have been backchannel initiated from Buffett; it very well could have been really about confirming that Treasury would bail out BAC if necessary, but I’m just speculating.

This would be the only possible downside to Buffet; if BAC fails. His Preferred shares would come before the suckers who own it’s Common stock, but behind creditors and bondholders, in the bankruptcy line.

But because of the size of BAC, undoubtedly, Obama would not want them to fail on his watch and would do something to keep them afloat through the end of 2012. This would, of course, ensure that Buffett continues to receive his $300 million a year in dividends.

Considering that if BAC goes belly up before Buffett exits his Preferred holding he would be in a real pickle, and given that he’s reliant on BAC working out and getting help from the government if necessary, his deal may be subject to political winds.

IMHO, Buffett must have received some tremendous assurances. The administration certainly would want to give those assurances in exchange for the good PR from Buffett’s deal. It would be noted in the administration’s files that Buffett was doing a “good citizen” thing with $5 billion dollars - so one would think that any assurances given to Buffett by this administration were intended to carry weight with the government beyond 2012.

Sounds perhaps a little precarious were it not for Buffett’s and the administration’s history.


40 posted on 08/27/2011 7:33:27 PM PDT by PieterCasparzen (We need to fix things ourselves)
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To: CutePuppy
While I have great respect for Mr. Buffett,

I don't. He has more money than I'll ever see in many lifetimes. His stupid ideas of raising taxes on the rich will do nothing more than raise taxes on the middle class a few percentage points. The rich will still get their loop holes--regardless of a rate increase-- and the working individual will get stuck with less of a refund or end up paying.

Write a check to the gov't if you don't think you pay enough you greedy bastard.

41 posted on 08/27/2011 7:33:35 PM PDT by CommieCutter (Promote Liberal Extinction: Support gay marriage and abortion!)
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To: Batrachian

Barry Half-White is the PeeWee Herman of childish democrats..


42 posted on 08/27/2011 7:36:07 PM PDT by hosepipe (This propaganda has been edited to include some fully orbed hyperbole...)
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To: CutePuppy
"While I have great respect for Mr. Buffett,"

So, YOU'RE the one!

Buffett deserves no respect. 1. he says he feels guilty about not paying more. Yet, he doesn't do it.
2. He uses the tax breaks he complains about to donate the bulk of his fortune to the Gates foundation which goes to prove that he knows damn well private citizens know better how to put money to good use than the government does.

43 posted on 08/27/2011 7:55:59 PM PDT by Baynative (If the government was in charge of the desert , we'd soon have a shortage of sand.)
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To: Rammer
LOL, you’re what we call “bitter.”

is that what they call people who tell it like it is?

44 posted on 08/27/2011 8:52:40 PM PDT by the invisib1e hand
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To: CutePuppy; the invisib1e hand; Whenifhow; RipSawyer; M. Espinola; Quix; Joya; stephenjohnbanker; ...
Market Crash 'Could Hit Within Weeks', Warn Bankers

Excerpt:

A more severe crash than the one triggered by the collapse of Lehman Brothers could be on the way, according to alarm signals in the credit markets. * * *

Insurance on the debt of several major European banks has now hit historic levels, higher even than those recorded during financial crisis caused by the US financial group's implosion nearly three years ago.

Credit default swaps on the bonds of Royal Bank of Scotland, BNP Paribas, Deutsche Bank and Intesa Sanpaolo, among others, flashed warning signals on Wednesday. Credit default swaps (CDS) on RBS were trading at 343.54 basis points, meaning the annual cost to insure £10m of the state-backed lender's bonds against default is now £343,540. * * *

"I think we are heading for a market shock in September or October that will match anything we have ever seen before," said a senior credit banker at a major European bank.

There be a violent wind coming ashore very soon carrying odors of foul shi'ite with it. All caused by international bankers who only desire more insane profits.

LOL . . . LOL !

45 posted on 08/27/2011 11:07:48 PM PDT by ex-Texan (Ecclesiastes 5:10 - 20)
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To: PieterCasparzen
When you think about it, this deal helps the PR image of both BAC and the White House. It's a way of providing a small bailout using Buffett's capital...

I don't see how White House benefits or even fits into the PR picture here. If this WH could destroy a major TBTF bank like BoA (all the Dem states AGs are working hard to do it) and create a phony "crisis" they would do it in a second and nationalize it (and/or allow Buffett consortium to take over BAC, the way Soros et al took over IndyMac / OneWest) rather than "bail out" BoA. This would still go into "Bush's fault" column and would provide Obama administration with much-needed opportunity for "heroics" and demands for more "stimulus" and more "financial oversight" laws from what would become practically paralyzed crisis-driven Congress.

This definitely helps BoA's PR, which is one big reason why they are doing the deal. They were getting killed in the press and in the market on perceptions of reserves for Countrywide potential legal liabilities and problems with "foreclosures".

... and simultaneously providing the “oracle of omaha” seal of approval for BAC, which was the unison media chorus the morning the deal was made public.

Exactly, it's a win-win deal for both - "Oracle of Omaha" gets the handsome low-risk profit, and BAC gets the "seal of approval" which takes care of perception (and short-selling) issues and worries in the market. That's what they are really buying and paying up for - the Buffet's "halo effect" - even if their capital reserves currently do not require it. The jump in BAC market value on that one day alone makes the price of the deal pale in comparison. I know it's not a one day issue and market price goes up and down with the news and rumours, but that's a real consideration for the future behind the deal. SI in BAC is huge, and BAC dropped much more this year than most other bank stocks (about 33% for average stock in XLF sector on European sovereign defaults fears) mostly due to its exposure to Countrywide and mortgage foreclosure mess. It trades at huge discount in P/B compared to even other banks.

IMHO, only to the masses does this look like a “vote of confidence” from Buffett.

How it looks to the "masses" is not really a consideration for either party; it's the market and business perceptions about reserves that needed to be shored up, and this (along with the expected sale of its stake in HK-listed China Construction Bank) should about do it. That also puts BAC into a much stronger negotiation position for settlement or legal fight, if the opposition can no longer hope and rely on the "market" or short-sellers to put pressure / force BAC into an unfavourable deal. Now the pressure to deal may well be on the other side of the table, which could more than pay for this capital infusion. In issues like this, capital matters and capital counts.

BAC, if healthy, could certainly borrow at a lower rate.

Certainly, but it would be useless for at least two reasons. Borrowing doesn't make or turn someone "unhealthy" into "healthy," it's usually used for working capital or investment.

One, the borrowing doesn't change the balance sheet - it adds assets but it also adds the same amount of liabilities, so it nets zero. It does add temporary liquidity (which is exactly what the banks and the financial system needed during the liquidity crisis in 2008 and what the Fed and the Treasury delivered, i.e., TARP) but BoA has no need for liquidity - it needs to change the false perception that it doesn't have enough reserves for potential adverse legal or administrative resolutions of mortgage-related events.

Two, today any "inexpensive" borrowing that could be done on this scale - that doesn't involve M&A activity - would be only for relatively short term duration, so it would only add to the perception that BoA needs quick liquidity injection and is in trouble, i.e. "unhealthy". This would only make matters worse and the stock weaker - exactly opposite of desired outcome.

Moynihan and the board are not idiots. They must have considered and discarded this option almost immediately, since it doesn't solve any of the problems and, if anything, would be counterproductive and add to the perception that BoA is "unhealthy" and in trouble. Though both deals are structured similarly, the main difference between Buffett's GS deal in 2008 and this deal with BAC is that GS needed liquidity at the time, and BAC needs actual capital now (which may become just a liquidity deal later on, depending on how Countrywide legal issues get resolved).

No one in the press that morning asked “why would BAC need this capital if their assets were rock solid ?”

Probably because they were afraid to ask for risk of looking ignorant or offending Buffett, or it was explained to them beforehand why BAC was willing to pay for more capital reserves, and because in the world of politics and finances the perception often trumps reality. When Bear Stearns lost the Street's confidence they also lost a lot of BD business and, with it, liquidity and access to capital.

IMHO, Buffett must have received some tremendous assurances. The administration certainly would want to give those assurances in exchange for the good PR from Buffett's deal

There is no government backstop because BoA is in no danger of going belly up (U.S. banks are in much better shape now than they were in 2008-2009 or than most European banks now with the heavy exposure to PIIGS bonds). There is practically no risk to Buffett's investment with this structure - at worst, he might end up with the larger share of a smaller bank. And Buffett is too good an investor to rely on any Obama's assurances if TBTF bank he invested in would actually fail; we can be sure that he examined BoA books carefully before making an investment, just like he did with GS, and long time ago with his "success story" AXP (he did fail but eventually broke about even on his Citi investment).

Buffett is an "opportunistic" investor, and this seems just like a good opportunity (i.e., the fundamentals of the company are not broken) in a financial sector which is what Buffett knows and does best. Sometimes things really are what they seem and the Occam's Razor explanation really works.

46 posted on 08/28/2011 2:26:39 AM PDT by CutePuppy (If you don't ask the right questions you may not get the right answers)
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To: ex-Texan

When the lofty ones deliberately destructively play

tiddledeee winks with millions of lives

pretending they are doing good . . .

run for the hills.


47 posted on 08/28/2011 2:40:18 AM PDT by Quix (Times are a changin' INSURE you have believed in your heart & confessed Jesus as Lord Come NtheFlesh)
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To: ex-Texan

One doesn’t have to to check the CDS on the European banks to know they are in trouble, loaded with PIIGS sovereign debt bonds; their capital reserves are currently about half or less than those of the U.S. banks.

Two of Greece’s largest lending banks (EFG Eurobank Ergasias and Alpha) are merging, I’d expect the similar action repeating itself in other European countries - they may have too many weak financial institutions...

But that doesn’t really solve the main problem with Europe - runaway government spending and sovereign debt accumulation. Bank troubles (and/or failures, if they occur) are the symptoms, not the cause of what ails much of Europe. The question is whether the governments there can reverse the course and whether the people there will understand and allow it to happen.

It’s been a no-brainer to call for a market “shock” (or “crash”) in September or October - that’s pretty much a given almost every year, even in “good” years... and this year has been far from “good” for global financial / banking sector (and markets in general).

There will be several new financial or economic Cassandras “born” every year around September-October period.


48 posted on 08/28/2011 3:28:17 AM PDT by CutePuppy (If you don't ask the right questions you may not get the right answers)
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To: CutePuppy

Buffet often ays one thing to mislead everyone then does another. Sorry, but anyone following his words is gullible.


49 posted on 08/28/2011 6:55:48 AM PDT by CodeToad (Islam needs to be banned in the US and treated as a criminal enterprise.)
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To: AndyJackson

Paint me as you wish (not that you personally paint me bad)...read “Road to Serfdom”. Hayak himself proposed this before me.


50 posted on 08/28/2011 7:30:55 AM PDT by ThomasMore (Islam is the Whore of Babylon!)
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