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Buffett to the rescue

Updated: May 3, 2013 12:14PM

The stock market received a vote of confidence late Tuesday, when Warren Buffett's Berkshire Hathaway said it would invest $5 billion in Goldman Sachs, the investment banking firm that has just agreed to be regulated as a commercial bank.

Buffett's company will receive preferred shares that carry a 10 percent dividend, and he also gets warrants -- future rights -- to invest another $5 billion at a price of $115 a share. In after-market hours the stock of Goldman Sachs jumped to $125 a share, and stock index futures moved higher.

Buffett's announcement came after the Dow industrials closed down 161 points Tuesday.

The Buffett news was a welcome respite after Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke spent long hours Tuesday in front of Congress, painting a dire scenario of recession and more bank failures if the bailout is delayed.

Their plan would create a huge agency that could collect the bad mortgages and perhaps restructure them -- allowing homeowners to remain in place. The strategy is designed to alleviate pressure on housing prices and stem the spiral of fear that has paralyzed consumer spending and bank lending.

Global markets are closely watching, concerned that a $1 trillion bailout could result in more U.S. borrowing, as well as money creation that would lead to inflation. The world's central banks hold huge dollar reserves. Still, 10-year Treasury notes are yielding only 3.8 percent, and short term T-bills carry a yield of only .30 percent, amid a general flight to the perceived safety of U.S. obligations.

Investors had more sobering after-hours news when the FBI revealed it would investigate firms that had received Federal bailouts, including Fannie Mae, Freddie Mac, and AIG. Lehman was also on the list of companies being investigated for mortgage fraud, along with 22 other firms and at least 1,400 real estate lenders, mortgage brokers and appraisers.

It was a reminder that this huge subprime lending mess will not be completely settled, even if the government does purchase the bad loans and revise the terms. And that even if the bailout is agreed upon, the shock to the entire economy will not be easily reversed. That's the Savage Truth.

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