Buffett To The Rescue - Five Billion Dollar Poker?
September 24, 2008
By Simon Maierhofer
It’s a good news, bad news kind of a scenario. The good news; Warren Buffett gives Goldman Sachs a lift. The bad news; Congress, Paulson and Bernanke are still arguing over the bailout terms.
Putting money where the mouth is
Goldman Sachs (NYSE: GS) received an enormous vote of confidence from one of the brightest investors ever to walk Wall Street. Warren Buffett is a man of principles, a man who puts his money where his mouth is. Last week Buffett’s MidAmerican Energy bought struggling Constellation Energy (NYSEarca: CEG) for $4.7 billion. Now it’s time to turn his attention to Goldman Sachs (you can't but wonder if Buffett feels like a kid in the candy store).
Berkshire Hathaway (NYSE: BRK-A), Buffett’s investment conglomerate, committed to buying at least $5 billion in Goldman Sachs’ preferred stock. In addition, Berkshire retains the option to buy another $5 billion in Goldman’s common stock at $115/share any time over the next five years (GS opened at $128 on Monday). Goldman expects to raise an additional $2.5 billion via its own public offering.
$7.5 billion of liquid funds would go a long way to reduce Goldman’s leverage. Leverage is the ratio of potential liabilities to the underlying assets. Unproportionally high leverage caused the instability in the credit markets and eventual demise of Bear Stearns and Lehman Brothers.
Taking the wind out of Paulson’s sales-pitch
Buffett’s confidence in Goldman Sachs carries the big-picture implication that the state of financials in general might not be as gloomy after all. Wall Street is likely to view this as a much needed vote of confidence from a trusted outside source and could lift financials, at least for a few days.
Ironically, Buffett’s offer comes within a few hours of Secretary Paulson’s “sales-pitch” to approve the $700+ billion bailout ASAP to avoid more damage. You might be interested to know that Mr. Paulson used to be the Chairman and CEO of Goldman Sachs. His very own compensation package (for 2005) is said to have been around $37 million.
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Warren Buffett was quoted as follows earlier in April: “My general feeling is that the recession will be longer and deeper than most people think. This will not be short and shallow”. In his x-ray-vision-like investment wisdom, Mr. Buffett must see tremendous value in Goldman Sachs to take such a risky bet.
Can Goldman be an island, a pocket of strength in a long and deep recession? We’ll see.
In closing, I’d like to ask Mr. Buffett, "can you spare a few bucks to help out Bernanke with his $700 billion problem or better yet, the tax payer"?