Tonight’s Goldman Sachs/Warren Buffett deal is a classic example of our post 2001 news: Looks good as a headline, is godawful underneath. Of course, futures popped on the announcement.

The WSJ subhead read "Move by Famed Investor Amid Crisis Seen as Vote of Confidence in Banking System."

Puh-leeze.

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).

Verily, let’s look at the details to figure out just how much GS is paying for this capital:

• Goldman Sachs pays a fat dividend to Berkshire Hathaway of 10% on $5 Billion dollars — that’s $500 million per year. And, since this is a preferred, it gets paid out of net income in after tax dollars dollars. Ouch.

• Goldman gets the right to call the preferred at any time at a 10 percent premium. Ouch again.

• Buffett gets $5 billion worth of warrants with a strike price of $115, or about 43.47 million shares. The warrants are good for only 5 years.

If Buffett were to go to the Street earlier today to buy 44 million calls with a $115 strike price (circa 2010), they would have cost him about $1.5 billion dollars. With GS now trading at $135, Buffett’s $5 billion investment is more like $3.5B, in terms of net cost to him. Hence, the 10% interest is more like 14%. 

Doug Kass thinks its an even better deal for Berkshire –  goes further than I do, putting an intrinsic value on the warrants of about $2 billion. That makes Buffet’s net cost $3B — so the effective yield is closer to 17%.  (Ouch)

A friend points out that Goldie bought back 1.5 million shares in the quarter ending 8/31, at an average price of $180 a share.  (Nice trade). I’m thinking the buyback program may be on hold for a while here.

~~~

Bottom line: This is a terribly expensive deal, but probably a necessary one. The smart boys at 85 Broad Street did not want to wait until they were too desperate to get even a mediocre deal. They sure as hell  did not want to "pull a Fuld."

This also looks like a steady stream of income for Berkshire Hathaway. 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.

Vote of Confidence my ass . . .


>

Additional sources:
Berkshire Hathaway to Invest $5 Billion in Goldman Sachs
Goldman Sachs, September 23, 2008   
http://www2.goldmansachs.com/our-firm/press/press-releases/current/berkshire-hathaway-invest.html

Goldman to Raise $7.5 Billion From Berkshire, Public
Christine Harper
Bloomberg, Sept. 23 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=a0Rfcqk5UR60&


Buffett to Invest $5 Billion in Goldman

SUSANNE CRAIG, MATTHEW KARNITSCHNIG and SUSAN PULLIAM
WSJ, SEPTEMBER 24, 2008

http://online.wsj.com/article/SB122220798359168765.html

Category: Corporate Management, Credit, Finance, M&A, Psychology

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.

94 Responses to “Berkshire to GS: “I Got $5 Billion, but Its Gonna Cost Ya”

  1. Great analysis BR. When can we lose the verification for every comment?

  2. Eric says:

    As you no doubt know, BR, Cramer wrote a sarcastic piece on TSCM tonight in which he tried to mock any bear who would cast the Goldman/Buffett deal in anything other than a very bright and hopeful light. (Note: Cramer bought and told his subscribers to buy Goldman at much, much higher prices.)

    ~~~

    BR: The 3 bullet points above are simple mathematical facts.

    My two comments below those are simple deductions from those facts.

    It is my opinion that this is an expensive deal for Goldman — Cramer may have a different opinion — but I cannot escape the fact that this was very expensive deal for GS

  3. david says:

    Eric,
    will someone put his ass in jail? sooner the better….

  4. Looks good as a headline, is godawful underneath.

    That might be the epitaph of our generation (I’m 44).

    I remember in 1971, as a very young kid, reading National Geographic magazines that talked about “farming the sea” and “harvesting the sea” and building “factories” in the sea to harvest the immense bounty of the ocean, which would be necessary to feed a “growing and hungry world.”

    During the 1970s, this “farming of the sea” began to happen with factory trawlers. It is still going on today.

    What has happened, since I was 7 years old, is that the world ocean — in 1970 thought to be untapped and inexhaustible — has now collapsed and is sliding toward total extinction.

    This was not supposed to happen on “our watch” because, supposedly, we are now equipped with knowledge, research and foresight.

    But it is happening. Even worse than our fathers and mothers could have imagined in 1970.

    Why?

    That answer is what gets us out of this mess.

    Cheers.

  5. JP says:

    I want to know why Hank thinks that private capital can take equity, but that taxpayers cannot.

    If it’s one thing this Buffet deal says: There is no need for a taxpayer bailout until avenues of private capital are exhausted, and clearly those avenues are not exhausted.

  6. Dougie says:

    I don’t read Cramer. I cannot figure out why anyone else does.

    I get nothing out of it, cause he is wrong so often. And, I can actually feel the intelligence seep out my ears as I read him.

    He has become the new Dan Dorfman

    You would be much better off to delete him from your regular reading list.

  7. wally says:

    Please, Miss, I’ll have what he’s having.

  8. whskyjack says:

    Now that is a bailout plan I could live with.

  9. rockitz says:

    Seems like a pretty safe bet, Warren. Paulson is doing spade work for his cronies at GS in exchange for a nice 9 figure payout to an offshore bank account. No way GS is going down in the coming storm.

  10. Don says:

    BR, with the purchase of Constellation at a fire sale price, and the purchase of Goldman with the onerous terms, what do you think of BRK as a buy? What’s Fusion think?

  11. Bruce says:

    GS have 1.1T in assets.
    GS have only claimed 5b of write downs so far.
    That’s 0.5% of their assets.
    Why didn’t they sell some assets to cover?
    Why do they get to keep their assets but the taxpayer has to cover the 5B loss.

    WEB just bought 24% of GS. and is first in line (to get a cut of the 1.1t) if GS go under , which they won’t, thx Paul.

  12. Steve Barry says:

    Nobody commented on Rick Santelli’s point to Kudlow that 800 Billion in corporate paper is due for rolling over by year-end…seems like a major problem at current terms.

  13. randy says:

    when did the WSJ hire prostitutes to write it’s articles? that is the sleeziest crap i’ve ever seen.

  14. Posted by: Douglas Watts | Sep 23, 2008 10:21:31 PM

    Way to be thinking, way to remember, way to Light the Lamp, of the Spirit of Inquiry.

    Back to the, supposed, by those that don’t care to read, narrow, Finance/Trading nature of this weblog: I’ll give U$D 10 000 to anyone that disproves: of this: “What has happened, since I was 7 years old, is that the world ocean — in 1970 thought to be untapped and inexhaustible — has now collapsed and is sliding toward total extinction”, this re: our Oceans: “has now collapsed and is sliding toward total extinction”

    As always, if it happens, we’ll clear through BR.

  15. Daveb says:

    BR: More analysis is needed. If this is a move of desperation by GS does it mean that the Paulson bailout is direly needed; or, is this deal proof that private capital is available for ddeserving companies and the taxpayer should be spared ?

  16. km4 says:

    “(They) have been wrong about nearly everything since this crisis began years ago,” said Barry Ritholtz, director of research at New York investment firm Fusion IQ. “Why should we trust (their) judgment on the largest bailout in American history?”

    Reuters
    Bailout faces delays as Goldman gets boost
    http://news.yahoo.com/s/nm/20080923/ts_nm/us_financial_news

  17. Kent says:

    So, CNBC reported that one of the triggers for the latest crisis was the credit rates for MS was up to over 8% and GS was over 5%, which they couldn’t afford because of their $1T in assets and only $45B or so in equity. But GS is happy to pay 10% plus warrants from Buffett? How does that make sense for GS… is this their insurance in case the bailout bill doesn’t pass? It seems like if they could sell their troubled loans to the gov they’d get a better deal than that.

  18. Posted by: Mark E Hoffer | Sep 23, 2008 11:02:38 PM

    Mark, thanks for asking. The phrase would be, “don’t eat the seed corn.”

    Hank Paulson is now asking us to give him the next 20 years of this country’s seed corn so that they can grind it up into pig meal, so he and his buddies can eat the pig.

    Conservatism is about conserving for the future.

    Cheers.

  19. j-daddy says:

    Mark E. Hoffer,
    What”s up! w// you’r punctuation?~? And for that matter, your prose?

  20. AB says:

    It might be a costly deal but it is still a vote of confidence – that a GS share is worth something..

  21. Posted by: j-daddy | Sep 23, 2008 11:28:41 PM

    j-d, those are always good Q’s, hopefully, my Intent was discernible.

    DW,

    this: “Conservatism is about conserving for the future.” has been the root of my discontent with many “Consevatives”. They don’t understand that “Conserve” is the Root of their, so-called, political belief structure.

  22. cloudy says:

    I guess Paulson would say the buck stops at GS.
    sleazy.

  23. David Merkel says:

    I just ran the numbers. I get something very close to the Doug’s $2 Billion value on the warrants. I would be very confident in publishing the 17% figure.

    Buffett does not play for below average returns in his large investments, particularly in environments like this, when he has cash, and a AAA balance sheet.

  24. KJ Foehr says:

    a. Conservatism
    The inclination, especially in politics, to maintain the existing or traditional order. A political philosophy or attitude emphasizing respect for traditional institutions, distrust of government activism, and opposition to sudden change in the established order. Caution or moderation, as in behavior or outlook.
    http://www.answers.com/topic/conservatism

    b. Conservation
    The act or process of conserving.
    Preservation or restoration from loss, damage, or neglect: manuscripts saved from deterioration under the program of library conservation.
    The protection, preservation, management, or restoration of wildlife and of natural resources such as forests, soil, and water.
    http://www.answers.com/conservation

    c. Fiscal conservatism is a political phrase term used in the United States to attack government spending and advocate instead lower spending and a lower federal debt; it may also include higher taxes in order to lower the debt. It does not necessarily denote advocacy of free market economics as a whole, and is a distinct concept from that of neo-liberalism.
    http://www.answers.com/fiscal%20conservative

    d. none of the above.

    Yeah, d. is what we have now.

  25. Jeff says:

    David — In your analysis of warrant value what stock price did you use? Before or after the deal? Should we assume that the Berkshire action will reduce volatility and increase the price. It certainly did the latter. What volatility did you pick?

    Also, do you embrace the idea that Warren Buffett had some inside info on future government treatment of Goldman Sachs (not that we couldn’t all have figured that out already)? If you agree with Barry’s assertion about the inside info, then the distribution of outcomes should have a short downside tail.

    On the other hand, if you agree with Barry’s overall analysis this is somehow NOT an expression of confidence.

    The warrant model assumes a distribution, so I am curious. These are all standard components of warrant valuation, as you know.

    And finally, I am trying to figure out how this development is (yet another) negative sign.

  26. John Wellman says:

    The sublime beauty of the truth caresses my heart.

    Buffett should take advantage of GS and squeeze every ounce of yield out of the firm.

    Warren spotted the naked swimmer that he wants to take home. Kudos to the flyover state boy for snagging the sophisticated, ivy leage educated, well connected financial bride on the rebound.

    All persons affilliated (former employment, current employment, political donations, personal connections,etc)with the big five IBs should be automatically excluded from having any voice in the bailout issue.

    Later Homies,

    John Wellman

  27. Rudolph Reindeer says:

    Of course it’s fucking riskless. Buffet knows this is guaranteed now by the US Government.

    WTF. Tell those fuckers in Washington we want to take care of ourselves, not have faggit nannies like Bernanke and Paulson balancing our checkbooks and reviewing our mortgages.

  28. Philippe says:

    Are 5 BL dollars enough to cover a liquidity coupled with a credit issue problems?

    When investment banking revenues declined by 40 % y t y and trading revenues declined by 68 % y to y,
    92 Billlion USD in level 3.
    A difficult book of of CDS and counterparts
    Though a discretionary purchase of assets by the Fed may shore up the assets GS,its dependency on liquidity and the cost of theses liquidities is a reminder of LH late capital increase of 4 Billion USD.
    As a commercial bank and in order to access the « households savings » it will need to increase its capital as its leverage 18 + does not qualify under BIS ratios.

  29. Joe D. says:

    Barry Ritholtz – you’ve certainly been very critical of everything that the government has been doing to try to deal with the financial issues of the day. I’m ready for an editorial. What do you recommend doing anyway. If it’s nothing – just let the system crash and we’ll ultimately be better off. Tell us so, and tell us why.

    I’ll be the first to admit that I don’t know what should be done right now. I don’t know if any of the bailouts have been good ideas (that is, better than the alternative of letting them fail). Even though I visit this site daily, I still don’t really know what you want the government to do in this situation.

    ~~~

    BR: If you visit daily, how did you miss this?

    Fixing Housing & Finance: 30/20/10 Proposal

    http://bigpicture.typepad.com/comments/2008/09/fixing-housing.html

  30. John Wellman & others:
    Does Goldman really need the bailout? During his show today, Cramer said GS was in great shape. Why would Buffett want the Government to bailout firms that don’t need it? It doesn’t fit into his capitalist credo.

  31. cindy says:

    How much private capital sitting on the sidelines was made off the “funny money” real estate business model the last 8 years? This is where main street should be focusing their outrage..

    For the last year I had to listen to Maria B. and Erin on CNBC remind us how much money was sitting on the sidelines.

    Now would be a good time for this “money” to step up to the plate for the good of the country..

    I know some people who have made a lot of easy money the last 10 years off this ponzi scam and is now sitting in insured money market accounts looking for it’s next quick return..

  32. m3 says:

    i always thought 10% was crazy. i don’t even pay that much for my credit card balances; so i’m a lesser credit risk that GS? wow.

    it’s even crazier considering they can borrow at ~2% from the discount window.

    oh, how the mighty have fallen.

  33. AGG says:

    I’ve noticed that Buffett has a thing for preferred stock which nothing more than a fairly high quality bond since it doesn’t afford voting rights like common stock. I wonder if it’s convertible preferred so Berkshire has the option to go to common stock when or if GS gets out of the woods. I’m sure the old guy at Berkshire knows what he is doing but remember that preferred stock is NOT guaranteed dollar for dollar in bankruptcy even though it comes before common stock holders as a creditor. Warren may have bitten off more than he can chew.

  34. David Merkel says:

    Jeff,

    I’m not giving this a negative spin. Buffett is clever. I used the following parameters:

    stock price: $120 (4PM close)

    implied volatility: 35% — lower than the options 3 years out, accounting for the volatility smirk.

    American Call

    Bloomberg’s trinomial model (default, but it is a good model)

    It gets me to a value of $1.9 billion for the warrants, leading to a 16%+ yield.

    On net, this is good for Goldman and Berky, though I can see Buffett musing about his experiences with Salomon Brothers and Gen Re… it took a lot to get Buffett over the hump on this one.

  35. JTS says:

    Well Well Well, Goldman is finally taking some hits

  36. shayre says:

    And those 10% after-tax profit dividends are paid before the holders of the $135 a share commoners even come close to sniffing a dividend.

  37. MarkTX says:

    When Buffet buys anything/any amount of a stock/company – preferred or common
    (1 share or a Million)

    he OWNS EVERYONE AND EVERYTHING no matter what you think is the amount or purchase price or the market cap of the company.

    Dumb asses, do you get anything that is going on right now??????

  38. Bruce in Tennessee says:

    Late, but a few things:

    Zadari is going to come to us for help so that Pakistan doesn’t default on their debt…am I the only one who sees the irony in this?

    Buffett’s deal is not available to me…I might buy a few shares of GM, if a new Caddy was thrown in every few years…

    Posters smarter than me have been posting about their countries problems when the debt/GDP ratios got out of hand. Have you seen the debt/GDP ration for Uncle Same when this is over? Very, very sobering…and rapidly increasing.

  39. Anonymous says:

    Kent — Even if GS were to sell assets to Treasury, they still would need capital to bring their leverage down. Berkshire’s preferred investment gives GS a lot of capital. GS wouldn’t be paying after tax dividends unless they knew they had to do so. They *needed* this capital, and there was surely no better offer out there.

  40. LooksLikeItIsTooLateToWakeUpAmerica says:

    I am not american but I watched the Senate hearing…

    …saw how CNBC skipped most of the critical initial Senate member interventions and concentrated on Paulson and Bernanke…

    …saw how Paulson avoided very clearly formulated questions from Mr. Shelby…for instance, about whether money would be used to purchase credit card or consumer debt…saying that MOST of the money would be used to purchase mortgage assets…but that they wanted flexibility…

    …saw when Bernanke hinted they would pay close to hold-to-maturity for toxic debt, which guarantees the taxpayer will lose most of the money…turning this plan into no more than a transfer of wealth from the taxpayer to financial firms…

    …saw how very reasoned points justifying the american taxpayer to get equity in the companies benefiting from the bailout were hastily dismissed because of a supposed urgency

    …saw how fear was instilled in the members of congress and senate in a blunt way applying brutal psychological pressure…

    …saw Mr. Paulson saying this was by far the best plan possible and that it protected taxpayer’s interests…and knew he was lying…

    …saw how nobody mentioned that under the proposed wording of Paulson’s plan the amount of money that can be spent is not 700 billion but unlimited…

    …saw history being made and i did not like it…i felt disgust and my conviction that America is being run by a criminal financial mafia was reinforced…

    …please americans fight for your once great country…with this bill you are being robbed and enslaved to a degree not seen in modern age…it is not only bad or criminal…it is PERVERSE it is EVIL…

    …i think we are entering a Dark Age led by the suicide of America

  41. Josh says:

    Why is it that nobody mentions that Buffett, through his ownership/control of Moody’s is as much to blame for this mess as FRE/FNM etc. The ratings agencies are a fraud. Buffett controls one of them and so he’s in on the mess just like everyone. He won’t speak publicly about the European ratings “computer glitches” and the only one in the investing community that has called him out is Jim Chanos. I think Buffett, like all of the jokers, needs to be held accountable for the fraud that took place in his name.

  42. Blackhalo says:

    “it’s even crazier considering they can borrow at ~2% from the discount window.”

    Not if they don’t have the assets to back it up. NOW, they can borrow 25 Billion at 2% (12 to one leverage), loan it out and at anything over 6%, they are covering the vig on Buffet’s bailout.

    Most likely they are just trying to avoid having to sell assets, or report losses on CDSs. 5 years might buy them enough time.

  43. VennData says:

    On the other hand, with a market cap of $53B up 10% in after hours, means GS has already increased the market value by $5B making the deal… free. Call it the Buffett effect.

    The ten percent premium call should be thought of as a year’s pre-paid dividend on the preferred – which they “get back” in equity when he exercises – keeping their leverage ratio (and only then changing their float) giving them flexibility when they buy commercial bank assets with commercial bank ratios (which they’ll do soon.)

    The gap to the strike complicates the calc, but the additional $2.5B raise at the new post-Buffett price pays half of the preferred, at $250B.

    This complex deal hinges on 1) the upcoming moves GS makes to effectively de-leverage via acquisitions 2) the knowledge that the Congressional show is just about over and it’s time for the “perpetually preferred” incumbents to vote.

  44. John Wellman says:

    Joe Klein…

    Buffett/Berkshire is receiving huge yield no matter how this deal is sliced or diced. That would indicate to me GS needs the liquidity to hedge against the possibility of a bailout delay and/or bailout failure.

    The most likely bailout scenario will amount to a number 1/3 to 1/2 the amount demanded by Paulson/Bernanke. Politicians will save the greatest amount of face by playing “hardball” while not making an actual decision.

    If the bailout is less than the current demand, GS has likely calculated the optimum loan size and cost they need to stay solvent until they can be bought or work(demand gov’t help…lol) through the issue(attempting to preserve their significant political influence by minimizing/eliminating use of Federal funds).

    Buffett has become the lender of last resort. GS picked itself up, went down to the check cashing joint and paid up to survive. Buffett can add to his political clout by bailing out the most politically connected IB in the world.

    GS is preparing itself to be the next JP Morgan. Find a way to survive and have history, reputation, respect congeal into legend years down the road.

    I did not see Cramer today. I was working on one of my fuel cells until 10pm pacific.

    Cheers,

    John Wellman

  45. tom a taxpayer says:

    Buffet has gone over to the Dark Side. Buffet now is bankrolling the ringleaders of the Wall Street gang that raped and pillaged the mortgage industry, ruined the housing market, destroyed the credit system, endangered municipal financing, pension funds, and the banking system, sent the economy into a downward spiral, endangered the world financial system, and blackmailed the U.S. and the world to pay them billions in ransom or face the destruction of the world financial system and economy.
    Buffet had been mentioned as a possible member of an oversight board for the Paulson/Pelosi bailout plan. However, Buffet’s bankrolling of Goldman Sachs creates a conflict of interest that should throw chances of Bufftet’s membership on an oversight board down the toilet, along with Buffet’s “good guy” reputation.

  46. Blackhalo says:

    “2) the knowledge that the Congressional show is just about over and it’s time for the “perpetually preferred” incumbents to vote.”

    Doesn’t the Berkshire deal submarine the bailout? I would think that the taxpayer should expect to get an equivalent deal for our money.

  47. brion says:

    WB is like some kind of weird Rashoman Rorschach type….dude.
    Love him or hate him (hi neo-con trolls!) he did it again. Literally. This is ALOT like his Salomen deal in the 80′s…structured very similarly too….GS was desperate, what else can you say? Now Uncle Warren has his hands on the detonator and a front row seat on the gov.’s machinations.

    Only question i have is, is this a straight no lose deal for Buffet or is politics involved? Specifically, Do our dense congresscritters now have something to reference besides Paulsen’s fearmongering, taxpayer pillage proposal. (“You NEED to OVERPAY for these shitbaskets! Don’t you SEE THAT!? OR THE WORRRRLD WILL EEEEEENNNDDD)

  48. Paul Jones says:

    This is why they want the bailout. So they don’t have to pay market rates of interest.

    Oh yeah, by the way, isn’t 3.3% GDP BOOMING growth?

    Shouldn’t the Fed be raising interest rates on a number like that?

    Or is that number another bald faced lie?

    I’d say it a lie. How about you?

  49. LooksLikeItIsTooLateToWakeUpAmerica says:

    I agree, Warren Buffett has sold his soul. He had no need to endorse Paulson’s fascist plan, no need to bankroll Goldman Sachs (although I admit the deal is sweet for him), but he has done it. As far as I am concerned his behaviour in this historic time has permanently tarnished his reputation.

  50. christofay says:

    Mark Hoffer: Commercial catches are way down. There are no fishes. New England fishermen are restricted to port. No one is giving them bail-outs. One industry after another has left New England. In Massachusetts we have the higher education industry, and we have some finance in Boston. That’s it for big employers.

  51. Simon says:

    http://www.youtube.com/watch?v=S27yitK32ds

    Senator Marcy Kaptur is awsome. This video deserves to be widely distributed

  52. JustinTheSkeptic says:

    “800 Billion in corporate paper is due to roll-over by year end.”

  53. eh says:

    Regarding the spinning of the news and investor reaction, it’s just more of the same. Reality will sink in later. In particular, with Goldman’s earnings in steady decline — and no sign of that letting up — that $500m off the top will take a pretty big bite out of the common dividend for the forseeable future. And with falling revenue that can’t be a good thing, or a reason to bid the price up, can it?

  54. brasil says:

    Mark Hoffer..

    Sorry I did not get to your comment sooner..anyway..regarding Paulsen and Bernanke plan..my thoughts of course it is repugnant…outrageous …makes me angry ..wanna cry..ect…but as we hurtle to the Earth at 300 miles per hour I think the debate on the properties of gravity…and the need for a parachute or a therapy session on the state of emotions are not helpful…especially by the guys who helped crash the plane..the Senate Banking committee..I would much prefer my shoot a Senator a week plan …but somehow that is being ignored..anyway ..I have seen first hand crisis ..Russia/Ukraine ..Argentina and Brazil …in general the citizens suffer the most..I am thankful we have one of the worlds foremost authorities on the depression and a consummate deal maker assessing and leading the efforts to solve the problem..I believe what they see and know is coming can’t be said in public forums..and believe we gave him a bazooka ..he used it for AIG..and made a pretty tough deal for them ..and profitable deal for the taxpayer..I don’t get it ..what are the options? ..

  55. Steve Barry says:

    I posted awhile back that Buffett jumped the shark when he started appearing on CNBC all the time and publicizing what he was going to invest in. He is nothing more than a mid-western Michael Holland.

  56. AL says:

    Enough (well too much) already .
    What is the urgency of all this ? . ‘Seems to me that this just a quick grab by the exiting bunch ( BushCheneyco ) . It can certainly wait until after the elections when we have an administration that will be around to bear the responsibility .

    From Angry Bear – http://angrybear.blogspot.com/2008/09/david-leonhardt-needs-to-retire-having.html

    “Let’s be clear: the government (meaning here the Executive Branch and the Federal Reserve, controlled and run by Republicans) has already committed billions of dollars over the past six months. Maybe $900,000,000,000. During the entire time of which, Mr. Paulson was (1) certain the crisis was over and (2) working on the idiocy plan that he presented.”

  57. brasil says:

    Al..think so…take a look at $IRX and the two year..

  58. LooksLikeItIsTooLateToWakeUpAmerica says:

    brasil,

    what do you smoke? A pure nationalization of banks would be 10 times better than this plan. Not that it would solve the problem, but at least it would not reward the criminals that have created this mess

  59. Bruce in Tennessee says:

    Well, finally got to bed but back to the salt mines early. I do have some thoughts here about the bailout.

    Actually the cost of the debt is analgous to the credit bust. Many of those affected tried to live a lifestyle they couldn’t afford. Ergo bought a house too big for their pocketbook, and are now paying the consequences.

    The USA is like that. If the costs to the taxpayer are anywhere like that, we are in trouble. I read somewhere that this would put our debt/GDP to 70%…someone can correct me about that. Yet the defenders of this mess point to Italy with 104% debt/GDP as muddling through.

    Well, we are not Italy. We respect, they couldn’t even control Libya in WWII. Their system of government after the war makes for a weak coalition central base, and they are one of the weak men of Europe.

    You are considering the fate of the USA. Not to put too jinoistic a tone to it, we’ve rescued the bacon of the free world twice in the last 100 years. Deep ocean navy, and all that jazz.

    I can give you three maxims for the present and future.

    Today: Persistent deficits will be the ruin of the United States.

    Our children: Persistent deficits are the ruin of the United States.

    Our grandchildren: Persistent deficits were the ruin of the United States.

    It seems to me we were headed for deflation. If Hank and the boys get all they want, maybe, maybe we reflate, but if we don’t pay for it, in reality we are just pushing on a string. We can’t afford the country we now live in, and the landlord, the rest of the world, sees that in reality we are becoming deadbeats.

    We need a balanced budget amendment. And we need it yesterday.

  60. brasil says:

    I don’t smoke..thanks ..however let me weigh my options..Bernanke/Paulsen plan…or LooksLikeItsItsTooLateToWakeUpAmerica opinion…though I am sure your credibility and opinion is renowned at home with the wife and kids ..All things being equal ..I’d have to go with these two guys…based on the fact they probably have way more information education and experience..just my thoughts

  61. Michael says:

    If Buffett gets 10% on his $5b for Goldman, what rate of return
    do the US Taxpayers deserve on their $700b+ that’s going to go
    to lesser quality banks?

    And come to think about it, with the DOW up over 100 points
    on the news last night, and with Asian banks up today, with
    everyone from Buffett to Asian Banks now saying they’re willing
    to invest in US Banks, why do we need to be bailing out anyone?

    Let the Banks pay higher FDIC insurance rates… and let THEM
    fund the FDIC pay out… instead of a US Taxpayer bail out.

    Goldman & Morgan Stanley now have the Fed window, Buffet,
    and Asian Banks willing to give them billions.

    This bailout plan is like taking out a 125% LTV 2nd Mortgage
    on America’s economic future.

    Did we not learn anything about debt from this crisis?

    Buffett gets to go to the head of the line and gets a 10% return
    on GS, along with warrants to buy $5 billion of common stock
    at $115 (8% below the close).

    What “terms” do you think Congress is going to negotiate for
    you and I?

    And why do fat cat insiders like Buffett get these sweetheart
    private deals right before you and I get forced to pump hundreds
    of billions of dollars in behind him, giving him an instant
    windfall?

    We’re not just bailing out the likes of Goldman, were making the
    rich insiders who just got to “cut in line” – richer.

    …Buffet just made $700 million over night!

    Get ready to bend over and assume the Governmental position.

    – SliderOnTheBlack

    PS: What we need right now is a one million man march
    on Washington D.C….

    a million angry God fearing, Gold loving, Gun toting, pissed off,
    and not going to take in any more Americans.

    They will not fear, respect, or act upon anything less.

    http://www.sliderontheblack.com/politics-money-and-markets/did-warren-buffett-just-cut-in-line-ahead-of-us-taxpayers/

  62. br549 says:

    It would seem that some of this bad paper was being written on Paulson’s watch as CEO of GS.. I think he should be asked to leave.

  63. LooksLikeItIsTooLateToWakeUpAmerica says:

    brasil,

    I am sorry for having been unpolite. My fault. I am not american and all this does not affect me beyond seeing a once great country go down and feeling in my country the inflation created by the debasement of the US Dollar.

    As far as the plan, you have your right to prefer Paulson & Ben’s diagnosis and solution just because they are who they are.

  64. Andy Tabbo says:

    Isn’t WB heavily short extremely long dated Puts on the S&P500? I think it’s one of his biggest derivative exposures. An SP500 collapse would certainly hurt WB in many ways.

    If this market craters today with a “vote of confidence” from WB, then you can see all hope fading for anyone bullish the market.

    - AT

  65. Georgia on my mind says:

    Mark Hoffner, the man who gets more posts addressed to than the blogmaster, industrial use of the oceans has already started. It was written up in Wired way back when, it is large net harvesting of food staple species like salmon. It probably has the hazards of all industrial farming, limited variety, small space, open to viruses. I haven’t seen anything in the press about where we stand. I have eaten farm raised fish. The chefs tell me it’s inferior.

    Now that we’re on industrial policy, industrial farming, let’s bring it up. We do have fed govt subsidy of industry in the form of cash crop price support, unless you want to call it income insurance. A main reason to slow a widespread bail-out now is that in the next year we will probably be forced to fund government subsidies to industry. How can we say no to Detroit after we have already given “Maybe $900,000,000,000″ (thanks, AL) to one industry with hope now for another trillion or two. Fifty billion sounds to me a lot lower number than a trillion. Replacing army trucks is a compromise spending proposal.

    I know that the finance industry is in danger of freezing, but who made finance the economy, stupid, you, me? A portfolio of healthy sectors make a secure economy. Where’s the counter-cyclical segment? I don’t understand why we are spending all our money where our allies are at. With allies like ours who needs enemies…

  66. VennData says:

    Warren Buffett calls the current credit problems that we are “in an economic Pearl Harbor” this morning.

  67. Greg0658 says:

    best wishes Warren
    I remember what you all said when there were 19 – why the Bear was slayed
    King Hank has no rules to save the greater economy

  68. hpov2000 says:

    Looks like Buffett is taking a page out of Bill Gross’s playbook. Look at the headlines regarding bailout after he got GS deal. (http://www.cnbc.com/id/26866865)
    At least he acknowledges it.

    —————————-

    “Buffett told us the financial system was on the brink of collapse last week before Paulson and Bernanke went to Congress with their plan. And he warns that last week will “look like Nirvana” if a bailout plan isn’t passed by Congress.

    He calls the current crisis everyone’s problem, not just Wall Street’s, with the markets in a “very, very difficult situation.”

    While “no one likes to write” a $700 billion check, Buffett thinks the government could make a profit when it eventually sells the now-toxic debt it would be acquiring in a bailout. “They could make money on this,” he predicts, if it’s handled properly.

    “If I didn’t think the government was going to act I wouldn’t have done anything”

  69. christofay says:

    Buffett is performing a Morgan operation. He is stepping into the market. As Big Pix says, it looks like a good deal. His investment is sorely needed, and in his portfolio the amount is not huge. There is still ammunition there, but his patient capital has a price. He’s been saying so for years. His investment should be cheered, but I don’t want to be a cheerleader.

    So I don’t agree with the sentiment that Omaha of Nebraska has joined the players. And I wonder about specific information such as shorting a put, that might be one step too far for his style.

  70. John(2) says:

    Uncle Warren has pulled off another enormous coup and looks like a public hero in the bargain. This guy is good… really good. Why on earth is he supporting Obama? Sorry couldn’t help slipping that one in. BR got all the essentials of the deal correct and Christofay above covers the philosophical angle perfectly.

    “Buffett is performing a Morgan operation. He is stepping into the market. As Big Pix says, it looks like a good deal. His investment is sorely needed, and in his portfolio the amount is not huge. There is still ammunition there, but his patient capital has a price. He’s been saying so for years. His investment should be cheered, but I don’t want to be a cheerleader.

    So I don’t agree with the sentiment that Omaha of Nebraska has joined the players. And I wonder about specific information such as shorting a put, that might be one step too far for his style.

    Posted by: christofay | Sep 24, 2008 8:53:07 AM”

  71. DJ says:

    I think Buffet has given Congress a blueprint for what a bailout should consist of. Buffet acting on behalf of his shareholders bargained for the best deal he could get – it looks like he got one heck of a good deal to me.

    If congress acting on behalf of the American tax payer and with the full weight of the government behind it can’t negotiate a equal deal we should vote them all out of office.

  72. man from nantucket says:

    may not be a bad deal for warren, he gets 500m in divs annually and a 250m kicker if the the shares are called….and the warrants are worth 1-2B. Those are crap terms for Goldilocks. Remember though, didn’t Buffeet make a crap investment in Salomon Brothers years ago? How did that end up?

  73. jj says:

    so many opinions

    opinions

    opinions

  74. Tradertim says:

    Didn’t anyone notice GS’s stock ticker the last ten minutes of the day? Up about $6 as S&P futures were tanking. We thought a huge stock buy-in was coming. Then the news came out. Little did we know what we were watching was just some good old fashioned insider trading. With all the screaming about shorts, is it now OK to cheat on the upside?

  75. Bud says:

    Barry, geez at this point it appears that the only event that will make you happy is a total global market collapse. I don’t see it above but maybe you should consider buying a copy of The Secret.

  76. Andy Tabbo says:

    I love the way david faber usually gets to the real crux of the story. He essentially alleges that GS brought in Warren B. to juice the stock in order to do a common offering.

    Which is exactly what happened. GS bought the Warren B. name…and Warren happily sold his name for a few billion. Now we know what price Warren B. will sell himself out for…

    - AT.

  77. Alex Sebastian says:

    I agree with Tradertim Barry. You definitely have your bear goggles on. Granted, the 10% dividend is high, but I’d say the call provision is not a bad thing for GS. This allows them to repay the debt with an interest payment on top. When the crisis dissipates, and I assure you, at some point it will, GS will be able to end this deal with Buffett at a reasonable premium. It’s called a call provision, ever heard of that? Pretty standard. Until then, they have some extra cash to go bank shopping with, and also get to shut up the shorts with.

  78. Mattie says:

    Buffett is not stupid… but he’s old.

    He’s the best America Cheerleader… he’s signalling to the market that he believes in America. He has interest in America doing well… why… his other businesses requires regular american taxpayers to buy stuff. His empire he’s built over the last 50 decades will collapse just as easily as the rest of America if economy goes into the depression as presented by Paulson and Bernanke. Just because he’s got money doesn’t mean that it won’t burn with the rest of Rome… when everything else burns.

    So hence, he’s out putting his money out there in advance to help build confidence. And we all know that this market needs confidence…

    I can see why some think that Omaha Messiah… is screwing us… but I rather believe that he’s on Wall Street telling the world to give us: a C, gimme a O… gimme a N,… gimme a F, gimme a I, gimme a D, gimme a E… etc…

  79. 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.

  80. 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.

  81. Georgia Pig says:

    I second DJ’s comment. Buffett thinks a bailout is necessary, but he’s hinting that it won’t work unless Congress drives a hard bargain to prevent profiteering by the guys that screwed it up and to kill off the business practices that led to this. My guess is that the goal is to save GS, but neuter it in the process so it evolves into a regulated bank with a lot of government control. Sanity returns without a lasting hit to the Treasury. This would be akin to the Swedish Solution and consistent with his backing of Obama. Will it work here? I work with a lot of Swedes, and if we were Swedes, I would feel a lot more comfortable. One thing is favor of this is that the mantra of the Obama campaign is “no drama,” which is somewhat swede-like. If Buffett makes some money for himself in the process, who cares? He will have earned it by correctly reading the economics and the politics.

  82. 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.

  83. 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.

  84. Ed says:

    Quoting: http://www.SliderOnTheBlack.com

    “PS: What we need right now is a one
    million man march on Washington D.C.

    A million angry, God fearing, Gold loving,
    Gun toting, pissed off, and not going to
    take in any more Americans.

    They will not fear, respect, or act upon
    anything less.”

    AMEN Brother!

    And Ditto on the comments about Buffett’s
    insider-like trade on GS. 10% + warrants,
    what deal will the US Taxpayers get in
    comparison?

    Goldman Sachs now a subprime borrower @ 10%!

    Whodathunkit?!?

    Ed

  85. brion says:

    “Well, we are not Italy. We (sic) respect, they couldn’t even control Libya in WWII…”
    (and pre WWIII WE can’t even control Iraq.)

    It seems to me we were headed for deflation. If Hank and the boys get all they want, maybe, maybe we reflate.
    (No. Definitely we crash MINUS 700+ BILLION)

  86. Transor Z says:

    Christofay,

    The Boston area also has a “modest” number of hospitals and biotech/pharma employers in addition to the famed fishing, whaling, and sea chantey composing industries…

  87. Bill says:

    How is the value established for distressed assets? Obviously, the sellers will endeavor to inflate the value. BUYER BEWARE!

  88. Joe D. says:

    Sorry Barry, (see my previous post that you responded to). I don’t know why I missed the posting you sited.

  89. John Wellman & others:
    Does Goldman really need the bailout? During his show today, Cramer said GS was in great shape. Why would Buffett want the Government to bailout firms that don’t need it? It doesn’t fit into his capitalist credo.

  90. Hu Nasiadka says:

    I would like to see the article by Mr.Kass on his analysis of the warrants. Is this posted anywhere?

  91. a guy called john says:

    Japanese Monetary Policy: A Case of Self-Induced Paralysis?
    http://www.princeton.edu/svensson/und/522/Readings/Bernanke.pdf

    Needed: Rooseveltian Resolve
    Franklin D. Roosevelt was elected President of the United States in 1932 with the mandate to get the country out of the Depression. In the end, the most effective actions he took were the same that Japan needs to take—-namely, rehabilitation of the banking system and devaluation of the currency to promote monetary easing. But Roosevelt’s specific policy actions were, I think, less important than his willingness to be aggressive and to experiment—-in short, to do whatever was necessary to get the country moving again. Many of his policies did not work as intended, but in the end FDR deserves great credit for having the courage to abandon failed paradigms and to do what needed to be done. Japan is not in a Great Depression by any means, but its economy has
    operated below potential for nearly a decade. Nor is it by any means clear that recovery is imminent. Policy options exist that could greatly reduce these losses. Why isn’t more happening? To this outsider, at least, Japanese monetary policy seems paralyzed, with a paralysis that is largely self-induced. Most striking is the apparent unwillingness of the monetary authorities to experiment, to try anything that isn’t absolutely guaranteed to work. Perhaps it’s time for some Rooseveltian resolve in Japan.

  92. to the above, that responded to this: “I’ll give U$D 10 000 to anyone that disproves: of this: “What has happened, since I was 7 years old, is that the world ocean — in 1970 thought to be untapped and inexhaustible — has now collapsed and is sliding toward total extinction”, this re: our Oceans: “has now collapsed and is sliding toward total extinction”

    to anyone that disproves: this re: our Oceans: “has now collapsed and is sliding toward total extinction”

    DW’s context was the Ocean’s natural bounty, (they are/it is going to Zero.) to those that would like to discuss factory-fish farming, please see: http://www.salmonnation.com/ and http://www.centerforfoodsafety.org/AquaculturePR4_30_07.cfm as starting points.

    Simply, under current conditions, as it reigns, it rains serious degradation in, and on, the seas that host those operations.

    Wanna guess another Technology, well proven, that has been kept tamped-down?
    Yep, indoor, closed-system Aquaculture.
    Truly UFR.

  93. Esteemed victims of the credit crunch

    Things are getting so strange in this world, I can’t help myself but to point some things out today in light-hearted fashion – sorry to contaminate the mailboxes of those that don’t care.

    This is ridiculous and look at how much this guy could make in the next 5 years.. Warren Buffett and the Berky Bunch are going to be bigger than the Beatles. We need to put our thinking caps on as these deals are very simple, and no reason the same can’t be done with our dire property clients if we think outside the square – but hang on, my name isn’t Warren Buffett admittedly.

    GS:
    Bought $5 billion preferred stock at largely discounted price – around $115 with 10% coupon paying annually for 3 years
    Bought $5 billion in warrants, exercisable at $115 anytime within the next 5 years.
    If Goldman recovers and returns to its peak, which was only back in October 31 2007 at $247, on the preferred stock he will far more than double his money and on the warrant the same will be the case, plus earning $500 million per year in the mean time. So, let’s say the stock doubles in price over the next 5 years (would think it should, and could increase very quickly if the bail-out finally gets approved), then he will make circa:
    Preferred – $5 billion
    Warrant – $5 billion but safety here in that he doesn’t have to exercise if goes down – these were a gift mind you (awww shucks), at no cost which warrants would normally have
    Interest coupons – $1.5 billion
    TOTAL – $11.5 billion

    GE:
    Same structure in his funding of the company but different values
    Bought $3 billion in preferred stock – at $22.25
    10% coupon for 3 years
    $3 billion in warrants exercisable within 5 years at $22.25
    GE peaked at $41.77 at almost the same time last year – October 5.

    So, again potential here to earn double money and more in next few years:
    Preferred – $3 billion
    Warrant – $3 billion
    Interest coupons – $900 million
    TOTAL – $6.9 billion

    Total over 5 years for both deals looking at this conservative outlook on two absolute killer companies:

    $18.4 billion profit, plus a substantial ownership stake in both superpowers

    Let’s look at the day of Deal Completions now:
    Now, on the day of each deal completion, share prices actually closed at
    GS – $125.05 (remember deal done on pref shares and warrants at $115) then rose to $134.75 after close trading on news of Buffett’s deal – HEAR THAT, Buffett struck exercise price deal above spot price –CHRIST
    GE – $24.50 (down 3.9% and remember pref’s and warrants are $22.50) – again, the guy got an exercise price lower than the god damn spot price – that is what is meant to happen with put option prices, not call options which warrants are.
    In the single day of both of these deals, including after hours trading – had he bought, immediately exercised all warrants, foregone the interest in coupons, existed in a utopian society (or dystopia may be more accurate in this case) and gave a right royal stabbing of both firms in the back or in the lower nether regions, he could have made approx:
    GS – (134.75/115) x 5 billion x 2 – 10 billion = 11.71739 billion – 10 billion = $1.72 billion
    GE – (24.5/22.5) x 3 billion x 2 – 6 billion = 6.53333 billion – 6 billion = $533.3 million
    Yeah he really screwed up the GE deal let’s face it – ouch that hurts in the nether regions regardless of that stab hitting them in the back – but hey, it did give the superpower firms a few cheeky billions to play with at a teenee weenie cost

    From now on, I think we should be calling these Warrants a new name – Warren Buffetts, or Warrens, because they ain’t making sense in the conventional English economic language.

    And the last semantic observation – The shares are both G’s, GE and GS and sound uncannily similar as they roll off the tongue
    Sounds like history is repeating itself with Buffett and the Berky Bunch , and the economic Gods are having a good laugh. I can just imagine Warren Buffet sitting in a room with his cronies and Omaha homeboys, with a line of capital raising chiefs from top blue-chip companies who are on their shaky knees at his door.
    Buffett says to his homies, ‘yo yo yo- fellas, how bout we deal with the G’s this week’. Homey 1 replies, ‘Word Warren’
    Buffett calls in GS, “Wassup G. Now come to uncle Warren. Uncle Warren is going to help you today, but nothing comes cheap so please bend over while I give you a good smack, and come back every day for the next 5 years so I can smack you some more until it feels good”
    Out walks GS
    Repeat Homey GE a few days later, though this time Buffett’s arm is a bit tired from smacking Homey GS the last few days, plus his mind a little tired, plus he likes GS a little more so won’t get so smart with GE hence not being so aggressive, and the story no doubt will continue on with other letters of the alphabet in the coming weeks as the knee trembling capital raisers continue to wait at his door.

  94. Simon says:

    October 7th, 2008 at 4:21 pm edit

    Ya, I agree with Mark.
    These are the type of perks you can negotiate when you are the richest and wisest investor on the planet. Interesting thing is… we can all benefit from his great negotiating skills… by becoming a berkshire shareholder.