Buffett's Goldman Steal: Lessons Learned

Warren Buffett has secured another great deal during this major financial turbulence by investing $5 billion in Goldman (GS) preferred shares, which have 10% dividend yield. On top of that, Berkshire (BRK.A) 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.

So, what are the important lessons that we could learn from Buffett:

1. WSJ summarized Buffett's technique accurately, "Characteristically, Mr. Buffett's investment gives him an attractive income stream, downside protection and the strong chance of big gains."
2. Avoid excessive leverage. If you have significant leverage like Goldman Sachs, Morgan Stanley (MS), Lehman Brothers (LEH) and other financial institutions, when liquidity disappears either you go bankrupt like Lehman, or you might need to pay extremely high interest on loans to stay in the game.

Happy Learning!

Comments

[Overland Pa...:]

What an amazing business man. 2 years ago you kept hearing the talking heads say how Warren lost his touch because he is sitting on all this cash, not using enough leverage, and not making any "deals". Look who is making deals (I mean steals) now, when no one else can.

2008 Sep 24 09:42 AM

[bbzz24:]

Goldman's leverage on their balance sheet (2007) was at 26 times. If the Fed is forced to impose max 12 times on all bank holding companies, their balance sheet either has to shrink in those inopportune times for asset sales or they have to acquire more equity and/or deposits. That would certainly hurt their profitability margins.

2008 Sep 24 09:53 AM