Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Commentary

Buffett gets in; Goldman Sachs is the bet

Warren Buffett is now officially in. The grand old man of value investing has just pumped in $5 billion into Goldman Sachs. Obviously this is viewed on the street as a sign of “confidence” in the system. Big Picture begs to differ.

Vote of confidence? Hardly. Doubtful. It is merely an opportunistic deal, and probably a damn good one, for Berkshire Hathaway (BRK). On the other hand, for Goldman Sachs, it is a very expensive deal. If you delve beneath the headlines, you see that Warren is not so much making a vote of confidence as he is extracting pound of flesh (and then some).

Read the whole thing. In effect, Berkshire gets $5 billion worth preferred shares – with a 10% payout on them, which is $500 million a year. He can ask for it back at 10% premium whenever he wants. Goldman can ditch Buffett at a 10% premium (changed, thanks Dheeraj), a perpetual 10% cost. Then he gets warrants (call options) for $5 billion worth GS stock at $115 per share. For no extra money down.

Obviously if Paulson doesn’t rescue the banks GS may not have that kind of upside, and this kind of liability might take it down further. Uhm, Buffett kinda expects it: (Via Calculated Risk)

“If I didn’t think the government was going to act I wouldn’t have done anything,” Bufett said Wednesday during a wide-ranging interview with CNBC Television.

Not quite the vote of confidence in Goldman Sachs, you’d think. But Buffett is going to need to put more capital in. He has big investments in housing (interiors etc.), financial services, rating agencies and insurance – the future of which aren’t looking very good. If he doesn’t participate now, there will be other repercussions – especially when some of these industries are going to face severe regulation.

But this is a smart cookie deal. He loses only if the U.S. economy tanks. What are the chances of that? Why don’t I hear a loud “NONE”?

Like our content? Join Capitalmind Premium.

  • Equity, fixed income, macro and personal finance research
  • Model equity and fixed-income portfolios
  • Exclusive apps, tutorials, and member community
Subscribe Now Or start with a free-trial