FatPat

Does Warren Buffett Think Goldman Is More Creditworthy Than GE?

You are all dead wrong. Its the other way around. Not Buffett wanted the USD 3 B. I am sure he wanted more. GE wanted the Buffett name tag at the cheapest price possible. If they have to overpay, they rather overpay on USD 3 B than on USD 5 B. This comes at the price of the callability.

Anybody who claims that Buffett has not done a great deal should go back to school and study Black&Scholes option pricing. Given an implied 5 year volatility on the GE stock of roughly 35% and the fact that they are in the money already by USD 2, gives these Calls a market value of almost USD 1.5 B. This means Bufett only paid 3-1.5= USD 1.5 B for a 10% dividend with the face value of 3 B. This leaves him with a real interest rate of 20% plus the capital gain of 120% on the preferred (3Billion +10%of 3B). All in all he earns 3 dividends at USD 900 M and is redeemed at 3.3B = USD 4.2 B.
This means he gains (4.2-1.5)/1.5 = 180% in 3 years = 60% p.a. under the assumption that the options have a fair value of USD 1.5 B. If a certain pay-off of 60% p.a. is not a good deal on preffered stocks that are more senior than normal stocks, then what is a good deal???