Buffett and Bailouts

I always pay attention when Warren Buffett makes a move.  The "Oracle of Omaha" is the world's greatest investor and a stand up guy to boot.  He has been sitting on the sidelines during this crisis, refusing to have any part of AIG even though parts of it would mesh perfectly with Berkshire's insurance operations.  I suspect he is waiting to buy pieces in the fire sale.  Even more interesting to me, is last night's news.

It was announced yesterday that Buffett has bought a $5 billion stake in Goldman Sachs in the form of preferred shares and warrants.  As usual, Buffett got a sweet deal which includes a 10% dividend on the preferred shares and rights to buy more regular common shares at $115 (last trade: $130).  All of which is wonderful for Buffett and Berkshire holders.

Pondering this deal made me wonder why the government doesn't insist on buying equity in the nation's financial institutions instead of this bailout plan.  After all, the bailout is nearly criminal for everyone involved.  Taxpayers will be on the hook, companies and execs who made terrible decisions get bailed out, homeowners who also did wrong will probably get some amount of bailout (how will you feel when your neighbor who mortgaged the house to finish the basement and buy a boat, gets some measure relief on the loan he now can't pay? It is likely to happen.). 

Yet one alternative would be to feed capital to the banks in exchange for equity.  Isn't the bailout socialism anyway?  So why not recapitalize financial institutions and extract some dilution so they don't simply benefit from all this?  The shares could be sold in five or so years with any profit going back to the taxpayer.

Honestly, this isn't a clear solution and it is not a foregone conclusion it would work.  I am brainstorming outloud, so don't hold it against me. But when Buffett acts, people ought to take notice. The Oracle is buying equity stakes, not bad assets.  That should at least cause one to pause and think about it.