Warren Buffett on Goldman Sachs and the Financial Bailout Package

Yesterday, Warren Buffett invested in Goldman Sachs (GS) (charts). His Berkshire Hathaway (BRK.A) (charts) holding company bought five billion dollars of preferred stock plus warrants to buy another five billion dollars in common stock.

Buffett got a very sweet deal that I wish was available to small investors like myself. Of course, you could buy stock in BRKA where you would benefit from this deal.

Chart of GS and BRKA courtesy of stockcharts.com

Details:

• Goldman Sachs plans to offer 40.65 million common shares at $123 per share to raise $5 billion.
• Goldman said Tuesday it will sell $5 billion of perpetual preferred stock to Buffett's Berkshire in a private offering.
• The preferred stock has a dividend of 10% and is callable at any time at a 10% premium.
• Berkshire will also receive warrants to buy $5 billion of common stock with a strike price of $115 a share, exercisable at any time for five years.

Warren Buffett is effectively making about 10% above what others can make in exchange for endorsing this deal and Goldman Sachs as a good, long term investment. (See BRK.A graphs.) It worked, as he was on CNBC this morning speaking highly of Goldman.

CNBC Interview

These are edited comments from Warren Buffett interview by Joe Kernen, Becky Quick and Carl Quintanilla on today's CNBC TV's Squawk Box.

Becky Quick: Why is this the right deal at the right time?

Warren Buffett: I don't try to time things but I do try to price things. I got a formula that says bet on brains when it is the the right type of deal. The price was right. The terms were right. The people were right. I decided to write a check.

Becky Quick: Does the government bailout plan have anything to do with this deal?

Warren Buffett: If I didn't think the government was going to act, then I would not be doing anything this week. I might be trying to undo things this week. It would be a mistake to buy ANYTHING now if the government were going to walk away from the Paulson proposal.

Becky Quick: Why?

Warren Buffett: There is no telling what would happen. Last week we were at the brink to going over the precipice into something that would take the economy many years to recover from.

Carl Quintanilla: Was this the most frightening experience in your financial career at evaluating where this economy stands?

Warren Buffett: Yes. The economy and Wall Street are joined at the hip. The market could not have taken another week like was developing last week.

Becky Quick: What does this mean to the tax payer at who who asks "why is this my problem?"

Warren Buffett: It is everyone's problem. Unfortunately, the economy is like a bath tub where you can't have cold water in the front and hot water in the back. Wall Street was going to immerse the tub very quickly. A collapse of the firms in trouble last week would have caused industry and retail to grind close to a halt. It is still very, very dangerous but thank heavens Paulson had the imagination to step up with ideas that I like. I did not think of backing money funds but once I heard it I knew it was a great plan to keep them from tumbling.

Joe Kernen: When many in Congress started to question Paulson and gave hints they might not approve the plan yesterday. As a result, the short term treasury yield tumbled as people again pulled money out of money funds to buy treasuries with tiny yields. Can the market get in trouble again if they don't go through with this plan?

Warren Buffett: It will get worse. Last week will look like Nirvana if they don't go through with a plan to get the country back on the right track. Huge institutions in the World all want to deleverage at the same time. We need someone large, like the US government, to step up and provide liquidity. If they do it right, and I think they will, then the US Government will make a lot of money. People who are buying these instruments in the market expect to make 15 to 20% a year. I would like to buy these if I had the liquidity. It should be a lead pipe cinch to make 10% minimum after fees at the prices today.

I think the CEOs and directors should be punished for what they did, but I would not write this into the legislation.

Becky Quick: Would you administer the plan or offer any suggestions?

Warren Buffett: [Laughing] "I'd love to administer it for nothing." One thing you might do. If someone wants to sell $100 billion of these instruments to the treasury, let them first sell $2 or $3 billion first in the open market and then let the Treasury match that price for the remainder. With Hank Paulson on top of it, you couldn't have a better guy.

Carl Quintanilla: Separate from the Bailout. People are pointing to you as the canary in the coal mine with the Goldman deal. Is this OK?

Warren Buffett: [Laughing] As long as the canary lives, it is fine. We've got a lot of cash and we are seeing ways to use the cash sensibly. This is one of them and we plan to buy another $5 billion.

Joe Kernen: How much do you know about AIG?

Warren Buffett: I think I know a fair amount, but I don't think anybody knew what they needed to know including the management. The hole was so deep they were not able to work it out. We would be interested in a couple of assets when they sell them.

Becky Quick: You haven't put any money into an investment bank since Soloman in 1987. I am shocked to see you do it now since you had to run the company in 1991. Why do it?

Warren Buffett: That was a very unfortunate experience caused by a few people (rogue traders that nearly brought Solomon down.) I don't expect this to happen with Goldman which is extremely well run.

Joe Kernen: Could you tell by the way the assets were priced that Lehman was not facing reality?

Warren Buffett: Yes. I feel good about the way Goldman is marking to market which is one reason for the deal. I really think the Treasury will make a considerable amount of money if they price the assets by having the firms sell 5% into the open market to see what people think they are worth so they get a fair price that would net a positive return.

Carl Quintanilla: Is the current stock market price based in reality?

Warren Buffett: Long term, this is going to look like a very good time to buy but people should not use leverage. Leverage lets other people dictate to you and lower prices can take you out of a good position.

Becky Quick: Did Charlie Munger like the deal?

Warren Buffett: I didn't tell him about it until after it was done since his wife had a fall and he was away. Charlie is all for it.

Becky Quick: You've spent about $24 billion in the last 9 months.

Warren Buffett: We had a lot of money but at some point you have to use it. Otherwise, it is like saving up sex for your old age.

Becky Quick: How much cash do you have left?

Warren Buffett: We have enough.

Joe Kernan: How are we going to deal with the other $50 trillion in credit default swaps?

Warren Buffett: Getting regulation around the entire derivative market is important. AIG would be doing fine now if they never heard the word derivative.

Becky Quick: Is your purchase of Goldman a vote of confidence in banking institutions across the globe?

Warren Buffett: It is a vote of confidence in Goldman and a vote of confidence that congress will do the right thing.

Carl Quintanilla: Are you doing this as a philanthropist to help get this package passed?

Warren Buffett: No, I am doing it to make money and betting on congress doing the right thing.

Carl Quintanilla: What is the absolute deadline that this package needs to happen?

Warren Buffett: Anything that ads doubt that they will pass a package will be detrimental to the markets.

Joe Kernen: Do they get it?

Warren Buffett: Yes. This is an "economic Pearl Harbor" we are going through. I believe they will do what is right for the country after they vent their spleen against those who got us into this mess.

Becky Quick: How long were you talking to Goldman Sachs

Warren Buffett: Almost every financial institution has been talking to me. Yesterday they came to us with serious terms we liked and we got the deal done.

Joe Kernen: Did our prodding about when will you step in have anything to do with it?

Warren Buffett: [Laughing]. "This was a cheap way to get you off my back."

• He would ask Hank Paulson to stay on.
• He would be happy to help with the financial deal but he has too many conflicts of interest to take a significant position in the new administration. [If this is Pearl Harbor, then he could let Charlie run BRKA while he helped for a few years like Bill and Dave Packard did in WWII when one went into government to help while the other ran HP.]
• I think a "market price" will allow people to deleverage and get cash which will really help them.

Joe Kernen: This is important to get it out that the government could make money on this deal. Most think it is a bailout that will raise their taxes long term.

Warren Buffett: I would do this myself if I could get the terms the government is probably going to get and had the liquidity.

Becky Quick: Michael Bloomberg is against giving the government a blank check.

Warren Buffett: I admire him but sometimes if it makes sense you need to act and not attach unnecessary conditions. It would be nice to have 3 months or 3 weeks to think about it but we don't have that luxury.

Comments

[phdinsuntan...:]

5 billion dollars of paper in exchange of being the partner of a guy with 700 billion paycheck looks good to me, but the checks will go to the owners of the prefered stocks, and you will hold the bag once again!

2008 Sep 24 06:01 PM

[sickofthehype:]

Everyone is bent out of shape about the plan, but not passing it, as Buffett proclaims, will send us into a world of hurt. MUCH more than not having it passed. It's easy for people to complain, as nobody wants to bail out greedy Wall Street thugs, however, it's a necessity in keeping CAPITAL in CAPITALISM.

2008 Sep 24 07:08 PM

[The Rookie:]

My Opinion, I'm definitly not an expert. I think buffet is making a big mistake. The knarly, decimated ears of corn ate the fat ones and they remained knarly and decimated. Im parapharasing of course. He's throwing away good money after bad. What do you all think?
Dave

2008 Sep 24 07:54 PM

[vodka_tonic:]

Buffetts' the man. Pass the bailout for crying out loud.

2008 Sep 24 10:04 PM

[anarchist:]

Dave, Warren is only human a capable of being wrong. I think he may be correct in thinking that the Government needs to somehow step up to the plate but I think it needs to be looked at by the GAO and then Congress. I do believe in the need to legislate punishment and compensation for Bank CEOs as it plain that many banks are dysfunctional and is not able to pick good leader, matter of fact it might not be a bad idea to nationalize the banks in so much trouble that they need bailouts.

2008 Sep 24 10:17 PM

[1 of 4:]

If there is anyone who understands markets and why buying assets in a distress situation can lead to great profits, it's Warren Buffet. As he said "I would do this myself if I could get the terms the government is probably going to get and had the liquidity." If for one believe that. When the storm clouds are darkest is when Warren Buffet is out on a shopping spree. Stand back and watch.

2008 Sep 24 10:45 PM

[helplessobs...:]

Wow, Constellation Energy for 25 cents on the dollar and now a big piece of GS the Cadillac of the investment world. Soar with the Eagle, be careful you don't become Buffet's road kill meal.

2008 Sep 24 10:58 PM

[HARM:]

Wow, I just lost a great deal of respect for Buffett after reading that. At the end of the day, he's just another ruthless corporate merc, *demanding* (not asking) for his bailout windfall profits from taxpayers. Reverse Robin Hood --with Dr. Evil-style economic blackmail thrown in for good measure ("Bail us out right now or we'll destroy the economy for everyone!").

At the end of the day, he's just another narcissistic, greedy thug with zero concept of kinship with or loyalty to regular, working-class Americans. Just like every other Wall Street greedbag. Sad.

2008 Sep 25 12:01 AM

[HARM:]

Oh, wait --I forgot. Buffett and his shareholders will earn gazzillions with his cynical (yet, like, totally shrewd) deal by inciting panic and economically blackmailing people like me. That excuses everything --he's totally a totally cool "alpha" male. My bad...

2008 Sep 25 12:05 AM

[sickofthehype:]

I'm sure Buffett could personally care less about scaring you. The fact of the matter is that the inciting panic isn't being made up - it's the fact that you better panic if this plan isn't put in motion. I hate Wall Street crooks as much as the next guy, but in the reality of our situation without the bailout and no capital to run this country things will get much, much worse than any of us can imagine. This bailout is bailing US out, not just a few scumbags from Wall Street. And if a Buffett needs to infuse cash and ultimately make a profit, so be it. Unless you have 5 billion to throw around? Not to mention, Buffett's the one sticking his neck out there taking the risk - who else is doing this?

The bailout plan is our only hope at this point. We're backed into a corner and like it or not, this MUST be passed - or see you in the bread line..

2008 Sep 25 01:01 AM

[HARM:]

johndough110,

Wow, thanks for the reality check. I had no idea that you had the gift of flawless prescience --which you obviously possess, or you could in *no way* be 100% sure that Paulson's naked bailout for his rich buddies will "save" the economy. Or be 100% sure that *not* passing it will result in "bread lines" and consequences "much worse than any of us can imagine" (no fear-mongering going on here!).

I mean, it would obviously be the End of the World if reckless greedbags actually had to suffer the consequences of their own bad decisions, right? I mean that's soooo capitalistic (vs. the reverse-socialism, a.k.a. feudalism, so in vogue these days).

And thanks for reminding me that --more than anything else-- what Americans need right now is *more leverage*. God forbid Bernie & Hank's endless cheap-money spigot ever get turned off and debt-addicted spendthrifts have to start (*gasp*) living witin their means! No HELOC-bought plasma, matching his'n'her gov't subsidized Hummers, $0-down neg-am NINJAs (The horror...).

Oh, and you are *so* right about Buffett. The world's richest man is really "sticking his neck out" risking... basically pocket change for him. Foolish of me to take umbrage at the fact he's trying to profit by basically blackmailing and then raping the U.S. taxpayer.

Shame on me, I guess.

2008 Sep 25 01:38 AM

[Invizi:]

I would like to point out that the scumbags who most deserve to get choked to death have allready been fired and are now laughing in their pile of cash. If there is no money to borrow things will get very bleak indeed. It needs to pass in some form or the costs will get larger and the unwinding will take longer.

2008 Sep 26 04:18 AM