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Warren Buffett Rapes Goldman Sachs

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17

September 23, 2008 – Comments (29) | RELATED TICKERS: GS , SKF

The Man Who Would Be King, Hank Paulson with an estimated $800
 Million in Goldmen Sachs stock just got his first glance into his future behind bars.

As Warren Buffett steps forward to finacially Rape troubled Enron look alike Goldman Sachs.

Buffett to Invest $5 Billion in Goldman

 
The deal is structured in two parts, giving Berkshire a stream of cash and potential ownership of roughly 10% of Goldman. Berkshire will spend $5 billion on "perpetual" preferred shares of Goldman. These are not convertible into equity but pay a fat 10% dividend.

Berkshire also will get warrants granting it the right to buy $5 billion of Goldman common stock at $115 a share, which is 8% below the 4 p.m. closing share price Tuesday of $125.05. At Goldman's roughly $50 billion market value, based on that closing price, exercising those warrants would give Berkshire about a 10% stake in Goldman.

Goldman also will go to the public to raise at least a further $2.5 billion by selling common shares. Once it does, Berkshire's stake -- if it has exercised the warrants -- would fall to about 7%. Goldman will have the right to repurchase the preferred shares at any time for a 10% premium.

THE BIG PICTURE has a better re-cap:

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 . . .

MY COMMENT

Buffett stepping forward to rob these scum bags is great. Fools better recognize how bad the situation is when the "Top Investment Bank" has to pay a 10% dividend +++ in order to attract Capitial.

You should also recognize the premium you should expect if you are investing in this madness. Buffett wants 10%, Prefered Shares plus other guarantees, a net investment of $2-3 billion with a possible 17% return to buy into this ENRON look alike..  

 

29 Comments – Post Your Own

#1) On September 24, 2008 at 12:04 AM, TheGarcipian (57.59) wrote:

Ha, that is great! Bank on ever-patient Buffett to swoop in at the right time and get a decent business at such good rates.

Excellent post. Thanks for the news.

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#2) On September 24, 2008 at 12:06 AM, abitare (31.66) wrote:

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#3) On September 24, 2008 at 12:09 AM, abitare (31.66) wrote:

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#4) On September 24, 2008 at 12:21 AM, abitare (31.66) wrote:

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#5) On September 24, 2008 at 12:26 AM, abitare (31.66) wrote:

New ... new Paulson Plan

 

Sounds familiar? Nixon was a disaster, price controls and the end of the exchange of the the dollar for gold..

Of note: Nixons Economic Advisor was Ben Stein's father, who set up price controls in the US under Nixon. 

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#6) On September 24, 2008 at 12:48 AM, zygnoda (27.11) wrote:

You're abitarecatania?  If that's the case.. well I must be very slow..    On second thought I knew that but forgot it.  What's up with the change?

The guy in Paris was great.  Backed by Bananas     That has to be one of the funniest comments I've heard in a long time.

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#7) On September 24, 2008 at 12:53 AM, lquadland10 (< 20) wrote:

Oh and It just gets better and better.   Help me sort through the chatter.

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#8) On September 24, 2008 at 12:55 AM, lquadland10 (< 20) wrote:

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#9) On September 24, 2008 at 12:59 AM, FleaBagger (29.28) wrote:

Good post, but some of your reasoning is circular. You base the $1.5B price of the calls on market prices, which are based on the share price, which you are (admit it) arguing is way too high. Well, if the share price goes down from here, $115 calls are going to be worth less, especially in mid-to-late 2009, if the share price has been flat or downwardly mobile. That $1.5B in calls would be worth a few hundred million at most.

Basically, GS is a good bet, because there's no way Paulson is going to let his boys go down.

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#10) On September 24, 2008 at 8:19 AM, AnomaLee (28.52) wrote:

WOW! This video makes me want to puke!

Possibly cruel.... but the only positive about Nixon is the fact we don't have to worry about him anymore

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#11) On September 24, 2008 at 8:43 AM, EverydayInvestor (< 20) wrote:

great post, but Paulson doesn't still own Goldman stock.

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#12) On September 24, 2008 at 10:54 AM, lquadland10 (< 20) wrote:

Bush Chaney paulson rumsfeld and others all served under nixon that is why this all sounds familar.

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#13) On September 24, 2008 at 11:46 AM, abitare (31.66) wrote:

EverydayInvestor,

Actually, Paulson is cashing out and protecting his exit:

"More importantly however, Paulson’s acceptance of the Treasury Secretary position is likely to have involved money, and a lot of it. As Forbes reports, Paulson can sell his entire stake in Goldman Sachs and put off all capital gains taxes as long as he invests in government bonds or certain equity index mutual funds. With over $700 mln in Goldman shares, Mr. Paulson would face a large capital gains bill if he were to sell his shares and have to pay taxes on the gains. Furthermore, since he has to sell the stock, no eyebrows will be raised that an insider is cashing out of all his Goldman holdings.

So while the press keeps wondering why Hank Paulson is making such a bad trade in terms of compensation, perhaps he is making the trade of his life."

Paulson's 700 Million Reasons to Accept the Treasury Secretary Role (GS) by: TickerSense posted on: June 05, 2006 | about stocks: GS    Report this comment
#14) On September 24, 2008 at 12:39 PM, abitare (31.66) wrote:

Bernanke, Paulson's Own Words on Subprime a Year Ago

 

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#15) On September 24, 2008 at 12:52 PM, abitare (31.66) wrote:

FYI- 


"China's made it clear it won't listen to these snake-oil salesmen who come from Wall Street, even if they're wearing suits issued by the Treasury Department," he said. "It's strengthened the hands of all the people who are very skeptical about financial liberalization in China."

China Shuns Paulson's Free Market Push as Meltdown Burns U.S.

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#16) On September 24, 2008 at 1:34 PM, abitare (31.66) wrote:

FYI -

The Buffet deal is not something the average investor could ever get. It is a great example of how the more capital you have, the greater returns you can make. It also highlights how the U.S government is instrumental in both creating and maintaining wealth for favored corporations and individuals. Buffet is merely taking advantage of the banking bailout in the works. While it may be the most blatant example ever of cronyism and corporate socialism in our history, it's not the first time that 'too rich to fail' has been U.S. policy.

http://investing.meetup.com/21/
 

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#17) On September 24, 2008 at 1:51 PM, abitare (31.66) wrote:

EverydayInvestor,

Another source: 

Monday, September 22, 2008

Bailing Out Henry Paulson - and Wall Street Too
When Henry Paulson became Treasury Secretary, his net worth was estimated at $700 million. As the former CEO of Goldman Sachs, much of his fortune is in Goldman Sachs securities and depends on the continued health of the company. If Goldman Sachs went under, Paulson would go from being one of the richest men in the United States, to someone with little wealth. By Wednesday, September 17th, Goldman stock had fallen into the 80s (the high was well over 200) and the stock looked like it might be starting the same death spiral that Lehman and Bear Strearns followed. Paulson's net worth was plummeting. Coincidentally, that was the day the Paulson realised that there was a need for an urgent and massive Wall Street bailout that had to be financed by U.S. taxpayers.

 

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#18) On September 24, 2008 at 3:37 PM, masokotanga (99.63) wrote:

Simply not true. He had to sell all of his stake but paid no capital gains taxes.

http://www.marketwatch.com/News/Story/43xRFhd1RRlnqg1H1BkmTP4?siteid=google&dist=TNMostMailed

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#19) On September 24, 2008 at 3:56 PM, abitare (31.66) wrote:

masokotanga,

Like Cheneys Haliburton, do you think Cheney will not be rewarded for his "work"?

Believe what you want...but you sound like a good cannidate for some Nigerian Spam. 

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#20) On September 24, 2008 at 4:30 PM, abitare (31.66) wrote:

lol, TPMtv: Dollars and Nonsense

Get the sense these guys have no idea, what they are saying? 

 

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#21) On September 24, 2008 at 5:00 PM, abitare (31.66) wrote:

We Need This Money By The End Of The Week! King Henry Paulson

 

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#22) On September 24, 2008 at 6:02 PM, undesirabull (36.14) wrote:

   you guys have lost your minds, Paulson needs this like he needs a hole in his head. I can't think of anyone better qualified to try to fix this mess!

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#23) On September 24, 2008 at 6:17 PM, undesirabull (36.14) wrote:

   you guys have lost your minds, Paulson needs this like he needs a hole in his head. I can't think of anyone better qualified to try to fix this mess!

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#24) On September 24, 2008 at 6:36 PM, abitare (31.66) wrote:

undesirabull,

Can we agree the FED, the SEC and Wall Street created the problem?

Wall Street reeped the reward. But now Mainstreet is to pay off the  losses?

R U OUT OF YOUR MIND?

THE FED should be abolished GS is going Bankrupt.  

Go ahead and send them a check. It is average to $2000 per person. Go ahead and cover me too. Make your check out to GOLDMAN SACH, they are the ones needing a rescue. 

No doubt sometimes the arsonist knows how to extenguish the fire. But it is better an outsider become involve and throw the criminal in jail. 

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#25) On September 24, 2008 at 7:49 PM, lquadland10 (< 20) wrote:

Mr. Paulson would face a large capital gains bill if he were to sell his shares and have to pay taxes on the gains.    unles....What happens if he doe's this and then Ron Paul get in then after the irs is gone then how does he make out then?

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#26) On September 24, 2008 at 7:59 PM, lquadland10 (< 20) wrote:

I Love Ron

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#27) On September 24, 2008 at 8:37 PM, abitare (31.66) wrote:

lquadland10,

Great video.

 

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#28) On September 24, 2008 at 9:39 PM, lquadland10 (< 20) wrote:

Oct 1 more redemption's and mortgage re stets. We Have 5 more years of these
loans. What are they going to do for the next 30 rounds?

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#29) On September 24, 2008 at 10:17 PM, lquadland10 (< 20) wrote:

Thanks Ares. I am done. I will vote if elections are still held. I have been lied to just 1 too many times. The sad thing about all of this is that I see children all day long at work and they laugh and smile. Then my mind flashes to all the children around the world and all the pain and death and hunger they are going through.Then my mind sees Where in the show Indiana Jones is tied to the post and the Germans open the arc and the faces melt off and the skeleton remain. That is what I see with the children at work. It is so hard to act normal and not cry. Then there is the pregnant mother who comes in for books on Autism who had just found out the reasons for autism because of her first child and the terror in her eyes trying to remain calm. Trying so hard to forgive and remembering what happen to my son in the 80's when we did not have this information. I don't care anymore if I live on the street I don't care if the whole world blows its self up. I am mad as hel and I am making the call tomorrow to block this bill and somehow I will make it to election day and write in Ron Paul. I will give them the same mercy they gave me. Thanks for walking be through this mess.My friends try to understand but they just can't comprehend this madness. Sometimes I wish I didn't but I do.  Thank you again for walking me through this. Now all I need is some divine intervention and why has it not happened yet I do not know. Well time to wash some dishes. Fool On.

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