Buffett Enters the Fray

We've been waiting to see two things in the financial space: (1) Warren Buffett beginning to buy distressed franchises showing he finally sees value and (2) large insider buying by CEOs - aka those in the know...

Well, we finally got Warren to buy a distressed financial... what piece of old gum stuck to the bottom of our shoes did he buy? AIG (AIG) in the $4s? Washington Mutual (WM) in the $3s? Perhaps Wachovia (WB)??

Oh... that distressed financial. So now he not only gets a 'special' share with 10% Warren Buffet dividend (must be nice), he also now owns the government via Goldman Sachs (GS). He's good. He's really good (but darn he gets some seriously great terms on his deals). The stock is up strongly in afterhours and within seconds this becomes a "winning position" for Buffett. Morgan Stanley (MS) up even more.

So effectively Goldman has created a near monopoly, wiping out nearly all competitors while keeping a few weakened ones around so as not to feel any anti-trust pressure (Intel model), has its men running Merrill, Wachovia, and the new most powerful position in the world - Secretary of U.S. Treasury, has the credit line of the Federal Reserve behind it, has the SEC protecting it, has the US government looking to buy its toxic assets, and now has Buffett backing it.

They even fooled us with the "hey our stock is falling too, we're no different than anyone else" scenario last week.

They love it when a plan comes together. Mad respect to the Masters of the Universe.

• Goldman Sachs Group Inc (NYSE:GS) on Tuesday said it will receive a $5 billion investment from Warren Buffett's Berkshire Hathaway Inc.
• Berkshire will buy $5 billion of perpetual preferred stock that carries a 10 percent dividend. It also will receive warrants to buy $5 billion of common stock at $115 per share, exercisable within five years.
• Goldman also said it plans to sell at least $2.5 billion of common stock.
• Shares of Goldman rose $12.17, or 9.7 percent, to $137.22 in after-hours trading following the announcement.

Need to get long Goldman Sachs again

Comments

[investor88:]

Looks short bullish with Warren into the fray plus the usd700 bailout fund being finalized in Congress. Go for a long trade.

2008 Sep 24 04:55 AM

[lex:]

wishful thinking. bailout will be delayed . dow will be 8k soon

2008 Sep 24 05:36 AM

[Dan Walker:]

I seem to recall Buffett bought a sizeable stake in Salomon Brothers around 15 years ago. I don't seem to have seen their name in the news on the current difficulties. What does who Goldman decided to jump in bed with tell us? Probably more dirty laundry here than at Solli....

2008 Sep 24 06:55 AM

[SA Guest:]

Deja Vu -

Feb 12, 2008 Markets Spike higher on Buffetts Offer

This morning (Feb 12) on CNBC's Squawk Box, Warren Buffett publicly revealed for the first time that he has offered to reinsure $800 billion in municipal bonds now covered by the troubled insurers MBIA, Ambac and FGIC.

www.cnbc.com/id/231261.../

2008 Sep 24 08:02 AM

[Jimmy Lathrop:]

Mr. Walker is correct in pointing out that Berkshire Hathaway's investment in Salomon Brothers did not exactly pan out the way it was envisioned to be.

I would suggest that each of you take an opportunity to re-read Berkshire Hathway's latest 10Q regarding its exposure to European style contracts as swaps, as well as its litigation with AIG which details how closely the companies work together as insurers. I don't need to get into it, but the events of the recent weeks may have touched the company in more ways than the news media has picked up.

I own BRK.B instead of owning QQQQ or DIA as diversification in my porfolio but the transaction between them and GS should not be considered as solely opportunistic but also a defensive manuever to overcome a general slowing of domestic business as a whole.

Since we have seen foreign sovereign wealth funds burned on bailing out financial institutions, the transaction contains serious risk. Berkshire is making a big bet, the horizon being stabilization of housing prices and the economy as a whole.

Mr. Buffet seems to be violating his rule of three investment choices - "yes, no or too difficult". This is an extremely difficult investment.

2008 Sep 24 08:04 AM

[GKM:]

Well at least Buffett is only up $650 million on this deal already this morning as opposed to afterhours where he was up $1 billion. I wonder if he was the one selling in afterhours yesterday. Imagine how much he'll make just selling calls against that position. He'll probably pay off his preferred stake and have the dividend and warrants for free.

2008 Sep 24 08:05 AM

[Reinko:]

Barry from the bigpicture blog has a perfect article explaining it is even far more then 10% a year.

Here is the link:
bigpicture.typepad.com...

Buffet sure knows his way around. I don't think this is a vote for confidence but a nice grab of dollars.
Read the article from Barry and if you after that would like a bit of the newly offered 2.5 billion common stock, don't complain about future haircuts...

2008 Sep 24 08:10 AM

[Jimmy Lathrop:]

Reinko

Barry's blog starts with the assumption that GS shares will no longer fall in value. Look at the deal terms, and start with the assumption that GS will lose 20 percent of its value over the next year and recalculate.

2008 Sep 24 08:42 AM

[wethereyet?:]

Hank: So I'll pencil you in for 5 Bill??
Warren: Oh, OK, OK.
Hank: For these terms, you know what this means right?
Warren: I have to do CNBC.
Hank: You bet. And Bloomberg, and CNN, and Oprah, and anyone else who will listen.....

2008 Sep 24 09:11 AM

[GKM:]

I calculate that Buffett figures the GS stock is really valued currently at less than $90. That's based on the longest dated ATM call option on GS I can find which is $25 and that is grossly understated since time is about half the time Buffett has on his warrants.

2008 Sep 24 09:20 AM

[GKM:]

Jimmy, I think that's exactly what we're all pointing out.

2008 Sep 24 10:05 AM

[investor88:]

Lex is to be commended for pointing out that whatever happens to the Paulson mother of all bailout plan, Dow 8k is the ultimate target given the world financial crisis we are in. This is of course not set in stone but the view of "pessimists" who in my view are quite realistic. We have to prepare for such an eventuality whether it materializes or not.

I was saying there might be short term bounce which may therefore merit some buy trades but even this is questionable given the tepid opening in the Dow today.

2008 Sep 24 10:09 AM

[Jason Rines...:]

What's the deal with the envy on the content of this article? Good for Warren Buffet. Are we still capatalists here or what? LOL. And if we are going to spend as a nation $700 B of taxpayers money, then we should be talking to Congressmen on the phone and booking meetings to suggest the mid and long term impact which best restores confidence and returns for the market as a whole.

2008 Sep 24 11:26 AM

[Stone Fox C...:]

Come on iThinkBig. Its a 700B investment in assets that Gross thinks the govt will make money on. Its interesting that Buffet was very clear that he only did this deal b/c he thought the govt would come through with a rescue plan. It was interesting that some Congressmen used his purchase as a sign that the govt didn't need to step in. Buffetts jumping the gun on GS to get in prior to a rescue rally may backfire on him.

2008 Sep 24 01:02 PM

[SA Guest:]

Hank: So I'll pencil you in for 5 Bill??
Warren: Oh, OK, OK.
Hank: For these terms, you know what this means right?
Warren: I have to do CNBC.
Hank: You bet. And Bloomberg, and CNN, and Oprah, and anyone else who will listen.....
______________________...
Likely a pretty close transcript of the call to WB -- (what's interesting is that on FastMoney last night as the news broke they at the very same time plugged the CNBC Buffett interview this morning - how could they have known?)

The hearings today made great use of the Buffett news and I must say the tone was far less antagonistic than yesterday.

And the CNBC commentary on the bail out is even more objective than MSBC's political reporting .

But here's my question: When the formal word goes out bail out is done - How many points on the Dow? How long will that last before the current lows are tested?

2008 Sep 24 01:06 PM

[PastTense:]

So can you can the general public buy GS preferred with a 10% dividend?

2008 Sep 24 02:56 PM

[Obama is Bu...:]

Buffet is a hypocrite.

Its fine for the taxpayer to buy $700 billion of crap mortgage securities -- but its not OK for Berkshire Hathaway to buy even $5 billion. BRK instead bought $5 billion of cumulative convertible preferred shares from Goldman Sachs... you know the sort of preferred shares that Henry Paulson adamantly rejects having the taxpayer buy.

This may be a cruel statement, but its 100% true. Given his age, Buffett will be dead long before the debt for this bailout comes due.

BRK will collect 10% dividend yield from Goldman, even if the mortgage securities continue to decline. The only risk is if Goldman itself fails, which now that it is a Fed protected bank is a very small risk.

If Buffet really believed the mortgage securities were such a great deal, he should have bought them directly. Given his (prior) reputation, such a vote of confidence would likely have brought in lots of other players and eliminated the need for a taxpayer bailout.

Buffett bought cumulative convertible preferred shares for himself while recommending the taxpayer buy all the crap.

Buffet: "Do what I say, not what I do"

2008 Sep 24 02:58 PM

[Jason Rines...:]

It may backfire but what I know about Warren Buffett is his penchant for banking and insurance businesses. Now that GS is simply going to be a 'bank' and made safe and depositers backed by Treasury, it seems a safe investment to me. Bill Gross and Pimco has his own interests on a bailout package which has yet to pass, while it seems very plain to me GS is now for all intensive purposes has become very big depositer bank. Of course the government is going to come up with a form of a rescue plan. But whether that tilts favorably toward the banking system to citizens or a combination of both, it's a safe investment as far as I am concerned (safe as can be considering the whole house of cards may still fall, but the reward justifies the risk if it doesn't).


On Sep 24 01:02 PM Stone Fox Capital wrote:

> Come on iThinkBig. Its a 700B investment in assets that Gross thinks
> the govt will make money on. Its interesting that Buffet was very
> clear that he only did this deal b/c he thought the govt would come
> through with a rescue plan. It was interesting that some Congressmen
> used his purchase as a sign that the govt didn't need to step in.
> Buffetts jumping the gun on GS to get in prior to a rescue rally
> may backfire on him.

2008 Sep 24 03:56 PM

[Jason Rines...:]

Gramps, the taxpayer has been getting shit on for several years now. I am not an advocate of this government, just the opposite in fact. I am also not an advocate of Warren Buffet or own any BRK. But I still don't know why you would be resentful or any other person here. If you have a few million, go to a struggling local bank and structure a deal with management for preffered shares. The debt will not be too long to hit taxpayers, it will be in inflation and letting the Bush tax cuts expire in 2011. If Buffett hung onto his dough for the right time and decided to not buy SIV's which he properly identified as WMD's of finance, what is the issue Gramps? Buffett rolls his dices and takes his chances and has done so his whole life. I see a lot of resentment here for someone that made decent calls his whole life based on fundamentals. He had a good economy and country to invest in. But Buffett is not government and nor do I believe he approves of where our country is headed (otherwise, I wouldn't see him with David Walker and Peter Peterson so much). Nor if I was Buffett would I come here and defend my investment decisions. I hope he gives this entire lot the silent treatment in that regard but does come here and suggest how conservatives can unite and reclaim our rights by a government that has mistreated it's people and sold them down the river to foreign nations.


On Sep 24 02:58 PM gramps2 wrote:

> Buffet is a hypocrite.
>
> Its fine for the taxpayer to buy $700 billion of crap mortgage securities
> -- but its not OK for Berkshire Hathaway to buy even $5 billion.
> BRK instead bought $5 billion of cumulative convertible preferred
> shares from Goldman Sachs... you know the sort of preferred shares
> that Henry Paulson adamantly rejects having the taxpayer buy.
>
> This may be a cruel statement, but its 100% true. Given his age,
> Buffett will be dead long before the debt for this bailout comes
> due.
>
> BRK will collect 10% dividend yield from Goldman, even if the mortgage
> securities continue to decline. The only risk is if Goldman itself
> fails, which now that it is a Fed protected bank is a very small
> risk.
>
> If Buffet really believed the mortgage securities were such a great
> deal, he should have bought them directly. Given his (prior) reputation,
> such a vote of confidence would likely have brought in lots of other
> players and eliminated the need for a taxpayer bailout.
>
> Buffett bought cumulative convertible preferred shares for himself
> while recommending the taxpayer buy all the crap.
>
> Buffet: "Do what I say, not what I do"

2008 Sep 24 04:10 PM

[User 265729:]

I agree with lex, but 8k is where it should be and money should be $$$costly. I say right-on Buffet! This is the way it works in a market system. Let Buffet and other investors bail them out. If they think places like Goldman are worth it, then they will survive, if not, it's the shark pool.

Long live the market system. Down with whiny bureaucrats like Paulson!

2008 Sep 24 04:50 PM

[poet1:]

buffet buying GS is like the mayor in 'jaws' going for a swim when no one else would. whats 5 billion compared to the # of zeros in teh us economy? heh, that 5 billion of buffets, might not even of chnaged hands...who would ever know? he liscensed out his name!

2008 Sep 26 03:07 AM