If you missed last night’s discussion on the "vote of confidence" deal from Warren Buffett, you are missing the big picture. Go read:  Berkshire to GS: "I Got $5 Billion, but Its Gonna Cost Ya."

The headline writers of both the NYT and the WSJ missed the numbers involved:

NYT: Buffett Deal at Goldman Is Seen as a Sign of Confidence

WSJ:  Move by Famed Investor’s Is Seen as a Vote of Confidence in Crisis-Stricken Banking System

Doug Kass goes last night’s analysis one better, and notes that using a Black Scholes produces a valuation of $2.8 billion dollars for the warrants. That makes the effective yield over 20% on the preferred purchase.

As we noted last night, this is terrific for Buffett, who smelled blood in the water. Its a tough deal for Goldman, who were a) obviously in a bind for capital; and 2) smart enough to learn from Lehman Brothers mistakes.

Category: Bailouts, M&A

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

50 Responses to “A Very Expensive Berkshire/Goldman Deal”

  1. Nihilism says:

    But But he also said to CNBC:

    “…But he also made it very clear that he would not have bought anything right now if he wasn’t confident Congress will do the “right thing” and approve the financial bailout proposal put forward by Treasury Secretary Henry Paulson.

    He compared the urgency of passing a bailout with American’s decision to go to war after Pearl Harbor was attacked in 1941.

    Yeh Mr. Buffett if you like betting on bailouts & Bazookas — GS is right! But if you want to invest in brains: MSFT and technology would have been a better play

  2. tulsatime says:

    Oh My! Looks like Warren pulled a Borg on GS. I’ll bet that sits real nice with SecTreas….’hmmmmm the smell of FAIL in the morning…all your chance are belonging me, be-otch’

  3. fatbear says:

    OT – but interesting take on short selling

    There’s a very large and suspicious (538′s word, not mine) imbalance in Intrade pricing on the election – shorting Obama and buying McCain plus Clinton (!) – wtf?

  4. CNBC Sucks says:

    Let’s not get too OT here, but Buffett has long been an investor in MSFT. So have I, because I remain under. MSFT trades like a utility stock these days, fairly tight trading range, no appreciation, but admittedly a pleasant little dividend.

    Back to the topic, that GS dividend for Buffett is steep! It’s a buffet for Buffett! Yeah, I suck.

  5. VC says:

    Barry,

    In an earlier post you missed IndyMac.

  6. Don says:

    If Buffett thinks a deal is going to pass and firms will be able to sell troubled assets to the govt. at marked up prices why haven’t these markets started trading? Or is everybody waiting to sell it to the Govt.? I can’t believe that some firm is not willing to bet today that the Govt. will definitely buy assets at held to maturity prices and start buying from other institutions at some percentage of HTM…
    One thing I hated about the interview is Buffett like everyone else just said that last week things were terrible “it was going to be Armageddon” without any details – I know that treasury rates went negative for a few minutes but come on..

  7. godot10 says:

    Since some form of bailout is inevitable, they should use a bit of game theory to set the price.

    Let the compnay sellilng the paper to the government price the toxic waste. But the seller has to give the government contingent warrants for equity in the company equal to the value of the paper.

    The government gets to vest the warrants equal to any loss the government takes on the toxic paper. If the government profits on the paper, the company gets to share 50% of the profits.

    So if the company sellilng the toxic paper to the government prices it incorrectly, the government will end up owning a big chunk of your company.

    This injects risk and reward into the pricing of the toxic debt.

  8. wally says:

    There is some very inconsistent stuff happening here.
    If Buffett thinks the ‘giveaway’ will pass Congress, then why would Goldman sell at so dear a price? And doesn’t Buffett plainly see that if he deserves equity – at a VERY good price – the taxpayers do, too? And does he not see that his ‘vote of confidence’ casts doubt on the Paulson -Bernanke panic and destruction claims? In fact, it probably kills all hope of congressional approval of anything short of near takeover of bailed out firms.

  9. larster says:

    So Buffet engineers a sweet deal for Berkshire and then touts the Paulson bailout, which will benefit Goldman. Sounds like the bill Gross playbook to me. Personally, I think that there is such a low level of trust of the Bush administration on both sides of the aisle that a good deal is impossible.

  10. They sure as hell did not want to “pull a Fuld.”

    You say that as if it’s a bad thing.

  11. PHB says:

    $5 billion down, $795 more to go. Good work Messrs. Paulson & Bernanke…Who is next to play the “Price is Right?” Come on Mr. Gates, you’ve gotta few bucks to spare…anyone? Beuler?

  12. Bruce in Tennessee says:

    David Merkel’s ideas on this from last night’s discussion are worth a read…

    http://alephblog.com/

    They explain why we should procede very slowly, if at all, on this massive expenditure.

  13. Amos says:

    My first reaction when I heard this is that WB spent $5B to send a political message. If GS is willing to accept these terms from him, then they will accept them from Treasury. He set the price for the bailout. Anything less is just more pillage from The Boys.

  14. matt says:

    Is this the time to buy Goldman stock? Yes–if you can get the same deal as Buffett (you can’t).

    This is neutral for financials and slightly negative for Goldman commons (in the money warrants on 40 million shares is highly dilutive, as I understand it).

  15. pmorrisonfl says:

    > the government will end up owning a big chunk of your company.

    What seems lost in this aspect of the discussion is that a big chunk of bankrupt is still bankrupt. There’s a worst case that even an equity stake won’t help with. I suspect this is more prevalent in the industry than is commonly discussed, else there’d be no perceived crisis.

  16. leftback says:

    Spot on analysis, Barry – to think I had some GS at $105 last week. Crap. It is obviously a great deal for Buffett.

    I would offer that we are unlikely to have a major equity market crash here:

    1. Buffett is buying. Buffett’s first law? Don’t lose money.
    2. The TARP will get done, one way or another.
    3. Even a rolling TARP would kick the can down the road.
    4. Once the TARP is done, Treasury holders will have to buy stocks.

    The problem that the Dems in Congress have is this:

    1. What’s under the TARP stinks, and it will be here a while.
    2. They would like to tie it to progressive taxation, but can’t.
    3. They want some heads to roll, the sooner the better.
    4. They might be in the position of fixing the world for McCain.

    The deadline here is Sept 30 debt roll-over, so you can bet that something will get done. Otherwise we really would be looking at Steve Barry and AT’s apocalyptic scenario. LIBOR is staying stubbornly high.

    I am wondering what Paulson and Bernanke told them that night when the bailout was proposed. We have not discussed Citi here lately, but their balance sheet is a cesspool at least as bad as AIG’s, so they must be insolvent. Perhaps they looked at a simultaneous WM and C failure as being imminent, and GS and MS were incidental?

  17. Jay Weinstein says:

    Buffett
    Investing
    Goldman
    Sachs
    Hits
    Increased
    Turbulence…

    I love acronyms..

  18. CNBC Sucks says:

    Have the hearing on now, and I have a question for you peeps:

    Is Schumer a master politician or a clueless clown? He keeps talking about this bailout as if some action is actually needed. I switched parties to Democratic so I do not know.

  19. Eric says:

    This morning Jim Cramer wrote a piece entitled: “Buffett Knows the Score on Goldman — He at least recognizes value when he sees it.” What a guru.

  20. Cubbie says:

    Quant Question – can you use Black Scholes to value assets in an incomplete market (ie, without shorts)? Isn’t that a requirement of the model? Just askin.

  21. Cubbie says:

    Quant Question – can you use Black Scholes to value assets in an incomplete market (ie, without shorts)? Isn’t that a requirement of the model? Just askin.

  22. Jacky says:

    The Paulson plan is an absurd idea…. everyone, please write to your congressmen and ask them to vote against it..

  23. mo says:

    I agree with Amos. My thought was… “this shows congress how it should be done – get equity, or something, in return for the risk the taxpayer is taking on”.

    If it’s good enough for the hallowed Warren Buffett, then it should be good enough for the American taxpayer.

  24. Barley says:

    Was this deal self financed – did GS kick in 50% to do the deal?

  25. Bruce in Tennessee says:

    Damn it Warren, I told you before you left the house to buy 5 billion worth of HOUSES, NOT GOLDMAN!

    Damn house sales are down 2.2% and the market fell like a rock.

    Now go back and sell that Goldman, and buy those houses like I told you.

    Mrs. Warren Buffett

  26. wally says:

    “What seems lost in this aspect of the discussion is that a big chunk of bankrupt is still bankrupt.”

    Understood. But I don’t care. It is still worth it to root out the pigs who are in there now. The alternative for the failed business need to be bad vs. bad, not bad vs. “it is OK to do this stuff”

  27. Bruce in Tennessee says:

    You are worse than that damn kid who sold the mule and came back with a handful of beans…

  28. Bud says:

    Thanks, a much better revision.

  29. Eric says:

    BR, note that Cramer’s piece just now is titled, “Ignorant Resistance to the Plan is Baffling”. Howard Simons, Thomas Au, Yourself, A. Banerji, Kass, Marcin have all expressed doubts and reservations of one form or another about the bailout plan as written. Given that lineup, it says something about Cramer’s personality that he would so cavalierly use the word “ignorant”.

  30. leftback says:

    Fear trades are on again, 3-month yield is down, TED spread is blowing out. Another great chance to sell Treasuries before the reflationary balloon goes up later in the week.

    I decided not to trade this week (except in gold) as we do not presently have free markets and investors are all responding to the nuances of the debate on Capitol Hill, which is pure theatre. Farce, actually.

    @Cubbie: Good idea. Black-Scholes always works well, ask the guys who ran LTCM how useful it was. Personally I would much prefer to have Paul Scholes on my team (he plays in midfield for Manchester United).

  31. dc says:

    So Buffet thinks the bailout is a great deal even though it screws the taxpayer – because he makes out. Buffet is one of “them” – a heartless machine concerned with only P/L. I hope he loses everything in the coming financial tsunami.

    As Newt said in “Aliens”: “it won’t matter”…

    dc

  32. pmorrisonfl says:

    > Understood. But I don’t care. It is still worth it to root out the pigs who are in there now.

    I’m in your camp. I’d be willing to have my ATM card not work for a couple of months in exchange for letting the corrupt part of the forest burn down. That’s probably more than most could stomach, and I may just be talking brave. I faxed my Representative this morning and told her how frustrated I was that we’re now talking about how best to spend 700B+ rather than why we should spend even one cent.

  33. John R. says:

    I’m not an economist, but I am a historian. And when I heard the news of Buffett’s buy being presented as a vote of confidence in the economy, I couldn’t help but think of 1929.

    Shortly after the crash, John D. Rockefeller bought a million shares of Standard Oil of NJ and announced that he and his associates were continuing to buy sound common stocks. It was a pure PR play designed to prop up the markets.

    I couldn’t help but think of that this morning.

  34. brion says:

    “.But he (Buffet) also made it very clear that he would not have bought anything right now if he wasn’t confident Congress will do the “right thing” and approve the financial bailout proposal put forward by Treasury Secretary Henry Paulson.”

    OK. if true
    I’m officially switching my vote to “fuck warren buffet”

  35. Eric says:

    dc, you are so very right. people think of Buffett as this banjo strumming, down-home friend of the people. nothing is further from the truth. while I certainly do not think he is a bad man, he is indeed looking out for himself and his investors above all else. and we should always keep that in mind when trying to interpret his actions.

  36. brion says:

    > Understood. But I don’t care. It is still worth it to root out the pigs who are in there now.
    I’m in your camp. I’d be willing to have my ATM card not work for a couple of months in exchange for letting the corrupt part of the forest burn down. That’s probably more than most could stomach, and I may just be talking brave.
    Posted by: pmorrisonfl

    me too pmorrisonfl——————

    It’s ours. Right down to the last small hinge it
    all depends for its existence
    Only and utterly upon our sufferance.

    Driving back I saw Chicago rising in its gases and I
    knew again that never will the
    Man be made to stand against this pitiless, unparallel
    monstrosity. It
    Snuffles on the beach of its Great Lake like a
    blind, red, rhinoceros.
    It’s already running us down.

    You can’t fix it. You can’t make it go away.
    I don’t know what you’re going to do about it.
    But I know what I’m going to do about it. I’m just
    going to walk away from it. Maybe
    A small part of it will die if I’m not around
    feeding it anymore.

    Chicago Poem-Lew Welch

  37. cloudy says:

    I think Amos is dead on. If Buffet can get a deal like this, why not the USA? 10%, warrants, etc. And total compensation at the executive level should not exceed a certain ratio of their rank and file employees.

  38. MensaJD says:

    Quant question – can you use Black Scholes to value assets in an incomplete market (ie, without shorts)? Isn’t that a requirement of the model? Just askin.

    The Black-Scholes model does explicitly assume that it is possible to short the underlying stock. Also, the beta number is problematic since they just changed business models and the “implied beta” based on extant derivative pricing is extremely suspect in the current environment.

  39. Monica Starr says:

    Go ahead, fix the spelling of Berkshire in the headline to this post. You know you want to! :)

  40. Blissex says:

    «So Buffet engineers a sweet deal for Berkshire and then touts the Paulson bailout, which will benefit Goldman.»

    Buffett is a genius — he is going to make a lot of safe money, and he has thrown a huge spanner in the works of the Republican MOAB plan.

    «My first reaction when I heard this is that WB spent $5B to send a political message. If GS is willing to accept these terms from him, then they will accept them from Treasury. He set the price for the bailout. Anything less is just more pillage from The Boys.»

    Indeed, not only he has not set a floor of preferred with a 16% effective minimum upside for recapitalizing, instead of buying junk at fancy prices with no upside, he has declared that paying fancy prices should is screwing the Treasury:

    http://www.cnbc.com/id/26867866

    «And the big buyer, if they — they shouldn’t pay any
    attention to the cost of these instruments to the selling institutions. They shouldn’t pay any attention to the carrying value. In fact, one thing you might do, is if someone wants to sell a hundred billion of these instruments to the Treasury, let them sell two or three billion in the market and then have the Treasury match that, for what they pay. You don’t want the Treasury to be a patsy.
    »

    Even if he bought GS preferred only after it became a regulated bank holding company with an implicit government “too big to fail” guarantee, as he has admitted.

    The Buffett terms to GS are the floor for Treasury intervention because GS is one of the companies in best shape. Others should give the Treasury substantially more for being bailed out.

  41. I’m not an economist, but I am a historian. And when I heard the news of Buffett’s buy being presented as a vote of confidence in the economy, I couldn’t help but think of 1929.

    Shortly after the crash, John D. Rockefeller bought a million shares of Standard Oil of NJ and announced that he and his associates were continuing to buy sound common stocks. It was a pure PR play designed to prop up the markets.

    I couldn’t help but think of that this morning.

    Posted by: John R. | Sep 24, 2008 10:42:20 AM

    Proving, yet again, what a fine Teacher History is.

    And, others see, clearly, ol’ WEB is just another spider.

    What he’s done to Carolina Boot, and Chippewa, is perfect example of ol’ Dude’s M.O..

    and never forget ol’ WEB on his UST investment: “If ya can make for pennies, and sell it for ‘dollars’, and its addictive, to me, That’s a Business!”

  42. randy says:

    using the word “smart” in reference to any of these asshats seems like a joke.

  43. JD says:

    It’s a good deal for Buffet because he is sure a bailout deal will get done, this is what he said on CNBC. Unfortunately they didn’t ask him if he thought it was a good deal if a bailout wasn’t done! But I guess he made it clear from his statement that it wasn’t. However he is sure a bailout will get done and I don’t doubt him. The Bush Administration is basically saying either you give us this massive bailout or the economy will collapse. Who wants to take the chance of letting that happen? Maybe its utter bs but now they’ve put it out there. The fact that they are so reluctant to add any executive compensation provisions to the bill makes me skeptical as hell. If you’re getting taxpayer money to bail you out of your mess, why should you walk home with millions of dollars? Paulson says any compensation limit will dissuade bankers from selling their assets. Good, so the bankers are putting their own self interests above those of their company and their stockholders? Frankly, if the banks aren’t going to participate in this if there is a limit to their executive compensation it tells me that they don’t really need the bailout as bad as they say in the first place. If your house is on fire and someone is coming to rescue you, do you care if they carry you away in an old Dodge versus a new Mercedes? No. But these bank executives are saying it does matter, which tells me that they don’t really need to be saved in the first place. They’d just like it if the taxpayer pays for their mess.

  44. Marc in Ottawa says:

    “And what do you want to bet me that Warren asked for — and got — a very serious promise from Bernanke & Paulson that Goldman would under no circumstances be allowed to tank like Lehman? This might even be a riskless deal for Buffett.”BR

    But in exchange for that promise, they had Buffet come out and publicly endorse the bailout plan.

    Classic!

  45. When in doubt, loot!

    By Fester: TPM has the Republican Study Committee ‘proposal’ to ‘bail-out’ the stock market. And it is a doozy as it is a complimation of supply sider masteurbatory fantasies that have no connection to any reality that is not the

  46. flingcom says:

    Its truly amazing how one benefits from the others loss. These companies make sure they the are in the news …whatever it may be.

  47. brion says:

    –”The Bush Administration is basically saying either you give us this massive bailout or the economy will collapse. Who wants to take the chance of letting that happen?”–

    So eerily (uncannily) like the Iraq War. Having “no good options”-being FORCED to choose between calamity or Catastrophe…There is a name for this process. What is it?

    The Master of Disaster speaks this evening…
    It’s a beautiful day in New York…
    Not a banker in the sky….

  48. brion says:

    “The White House has struggled to determine how best to deploy Bush during the crisis.”

    Anbar.

  49. cloudy says:

    Do you think Buffet has some material, inside, non-public information on which he is making his investment?

  50. Jack Reacher says:

    I would have thought that the readers of this blog knew SOMETHING about the investment world and economics. I was wrong.

    I notice a lot of you either don’t want the deal to go through, or actually really think it “is Bush’s fault”. Funny.

    Don’t you understand that if the banks fail, you won’t have anywhere to cash your payroll check? All the bravado of some posters—-LET ‘EM FAIL!!! only shows your ignorance. Why don’t you guys do some studying before you post next time.

    Or maybe it’s that you don’t really have jobs or money at risk here in the markets ( including money markets ), a house, or anything else…you just like posting.

    jr