The Buffett Buffer

Robert Waldmann

Major financial crisis news.

Goldman Sachs Group Inc. said it will get a $5 billion investment from billionaire Warren Buffett’s company, marking one of the biggest expressions of confidence in the financial system since the credit crisis intensified early this month.

Look $5 billion is not just a vote of confidence.
Goldman Sachs is in good shape *now*. Goldman’s balance sheet just improved, because they have $5 billion more in assets and no more debt (Buffett bought equity).

update: I should have noted that $ 5 billion increases G-S total equity by about 10% as you can guess from the details of the deal.

Goldman Sachs
47,563.75 Market Cap(Mil)

That would be about 0.5% of total assets.
hardly just a pat on the back.

Via Kevin Drum

Rabid Buffett envy below the fold. I did say there was a killing to be made saving banks.

My guess is that he will make a killing (again) as G-S equity was already underpriced (panic you know) and is now worth more, because of him.

And what a deal he drove

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.

Wow 10% plus warrants. Now G-S won’t go bankrupt, as they have no legal obligation to pay a dividend on the preferred shares, but they can’t pay a dividend on common stock until Buffet gets his $500,000,000 a year.

OK so now Morgan Stanley. They are probably in worse shape than G-S but I’m sure a deal can be made. Problem is that there is no one with as much free cash as Buffett and as much brains (maybe or not and). Still I think he might tell his friends Bill and Melinda that there is money to be made saving Morgan Stanley from itself.

If there not interested Morgan Stanley’s hopes of independent survival are Slim.

My guess is that he looked at the killer deal Ben and Hank made with AIG and said to himself “I can do that too”.

This also relieves Paulson’s conflict of interest. I wonder if his attitude will change.