Berkshire to GS: "I Got $5 Billion, but Its Gonna Cost Ya"
Tonight's Goldman Sachs/Warren Buffett deal is a classic example of our post 2001 news: Looks good as a headline, is godawful underneath. Of course, futures popped on the announcement.
The WSJ subhead read "Move by Famed Investor Amid Crisis Seen as Vote of Confidence in Banking System."
Puh-leeze.
Vote of confidence? Hardly. Doubtful. It is merely an opportunistic deal, and probably a damn good one, for Berkshire Hathaway (BRK). On the other hand, for Goldman Sachs, it is a very expensive deal. If you delve beneath the headlines, you see that Warren is not so much making a vote of confidence as he is extracting pound of flesh (and then some).
Verily, let's look at the details to figure out just how much GS is paying for this capital:
• Goldman Sachs pays a fat dividend to Berkshire Hathaway of 10% on $5 Billion dollars -- that's $500 million per year. And, since this is a preferred, it gets paid out of net income in after tax dollars dollars. Ouch.
• Goldman gets the right to call the preferred at any time at a 10 percent premium. Ouch again.
• Buffett gets $5 billion worth of warrants with a strike price of $115, or about 43.47 million shares. The warrants are good for only 5 years.
If Buffett were to go to the Street earlier today to buy 44 million calls with a $115 strike price (circa 2010), they would have cost him about $1.5 billion dollars. With GS now trading at $135, Buffett’s $5 billion investment is more like $3.5B, in terms of net cost to him. Hence, the 10% interest is more like 14%.
Doug Kass thinks its an even better deal for Berkshire -- goes further than I do, putting an intrinsic value on the warrants of about $2 billion. That makes Buffet's net cost $3B -- so the effective yield is closer to 17%. (Ouch)
A friend points out that Goldie bought back 1.5 million shares in the quarter ending 8/31, at an average price of $180 a share. (Nice trade). I’m thinking the buyback program may be on hold for a while here.
~~~
Bottom line: This is a terribly expensive deal, but probably a necessary one. The smart boys at 85 Broad Street did not want to wait until they were too desperate to get even a mediocre deal. They sure as hell did not want to "pull a Fuld."
This also looks like a steady stream of income for Berkshire Hathaway. And what do you want to bet me that Warren asked for -- and got -- a very serious promise from Bernanke & Paulson that Goldman would under no circumstances be allowed to tank like Lehman? This might even be a riskless deal for Buffett.
Vote of Confidence my ass . . .
>
Additional sources:
Berkshire Hathaway to Invest $5 Billion in Goldman Sachs
Goldman Sachs, September 23, 2008
http://www2.goldmansachs.com/our-firm/press/press-releases/current/berkshire-hathaway-invest.html
Goldman to Raise $7.5 Billion From Berkshire, Public
Christine Harper
Bloomberg, Sept. 23 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=a0Rfcqk5UR60&
Buffett to Invest $5 Billion in Goldman
SUSANNE CRAIG, MATTHEW KARNITSCHNIG and SUSAN PULLIAM
WSJ, SEPTEMBER 24, 2008
http://online.wsj.com/article/SB122220798359168765.html
Tuesday, September 23, 2008 | 10:04 PM | Permalink
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Comments
Great analysis BR. When can we lose the verification for every comment?
Posted by: Owner Earnings | Sep 23, 2008 10:11:03 PM
As you no doubt know, BR, Cramer wrote a sarcastic piece on TSCM tonight in which he tried to mock any bear who would cast the Goldman/Buffett deal in anything other than a very bright and hopeful light. (Note: Cramer bought and told his subscribers to buy Goldman at much, much higher prices.)
~~~
BR: The 3 bullet points above are simple mathematical facts.
My two comments below those are simple deductions from those facts.
It is my opinion that this is an expensive deal for Goldman -- Cramer may have a different opinion -- but I cannot escape the fact that this was very expensive deal for GS
Posted by: Eric | Sep 23, 2008 10:11:20 PM
Eric,
will someone put his ass in jail? sooner the better....
Posted by: david | Sep 23, 2008 10:21:09 PM
Looks good as a headline, is godawful underneath.
That might be the epitaph of our generation (I'm 44).
I remember in 1971, as a very young kid, reading National Geographic magazines that talked about "farming the sea" and "harvesting the sea" and building "factories" in the sea to harvest the immense bounty of the ocean, which would be necessary to feed a "growing and hungry world."
During the 1970s, this "farming of the sea" began to happen with factory trawlers. It is still going on today.
What has happened, since I was 7 years old, is that the world ocean -- in 1970 thought to be untapped and inexhaustible -- has now collapsed and is sliding toward total extinction.
This was not supposed to happen on "our watch" because, supposedly, we are now equipped with knowledge, research and foresight.
But it is happening. Even worse than our fathers and mothers could have imagined in 1970.
Why?
That answer is what gets us out of this mess.
Cheers.
Posted by: Douglas Watts | Sep 23, 2008 10:21:31 PM
I want to know why Hank thinks that private capital can take equity, but that taxpayers cannot.
If it's one thing this Buffet deal says: There is no need for a taxpayer bailout until avenues of private capital are exhausted, and clearly those avenues are not exhausted.
Posted by: JP | Sep 23, 2008 10:22:11 PM
I don't read Cramer. I cannot figure out why anyone else does.
I get nothing out of it, cause he is wrong so often. And, I can actually feel the intelligence seep out my ears as I read him.
He has become the new Dan Dorfman
You would be much better off to delete him from your regular reading list.
Posted by: Dougie | Sep 23, 2008 10:26:39 PM
Please, Miss, I'll have what he's having.
Posted by: wally | Sep 23, 2008 10:28:24 PM
Now that is a bailout plan I could live with.
Posted by: whskyjack | Sep 23, 2008 10:30:54 PM
Seems like a pretty safe bet, Warren. Paulson is doing spade work for his cronies at GS in exchange for a nice 9 figure payout to an offshore bank account. No way GS is going down in the coming storm.
Posted by: rockitz | Sep 23, 2008 10:36:42 PM
BR, with the purchase of Constellation at a fire sale price, and the purchase of Goldman with the onerous terms, what do you think of BRK as a buy? What's Fusion think?
Posted by: Don | Sep 23, 2008 10:40:38 PM
GS have 1.1T in assets.
GS have only claimed 5b of write downs so far.
That's 0.5% of their assets.
Why didn't they sell some assets to cover?
Why do they get to keep their assets but the taxpayer has to cover the 5B loss.
WEB just bought 24% of GS. and is first in line (to get a cut of the 1.1t) if GS go under , which they won't, thx Paul.
Posted by: Bruce | Sep 23, 2008 10:44:18 PM
Nobody commented on Rick Santelli's point to Kudlow that 800 Billion in corporate paper is due for rolling over by year-end...seems like a major problem at current terms.
Posted by: Steve Barry | Sep 23, 2008 10:45:38 PM
when did the WSJ hire prostitutes to write it's articles? that is the sleeziest crap i've ever seen.
Posted by: randy | Sep 23, 2008 10:48:09 PM
Posted by: Douglas Watts | Sep 23, 2008 10:21:31 PM
Way to be thinking, way to remember, way to Light the Lamp, of the Spirit of Inquiry.
Back to the, supposed, by those that don't care to read, narrow, Finance/Trading nature of this weblog: I'll give U$D 10 000 to anyone that disproves: of this: "What has happened, since I was 7 years old, is that the world ocean -- in 1970 thought to be untapped and inexhaustible -- has now collapsed and is sliding toward total extinction", this re: our Oceans: "has now collapsed and is sliding toward total extinction"
As always, if it happens, we'll clear through BR.
Posted by: Mark E Hoffer | Sep 23, 2008 11:02:38 PM
BR: More analysis is needed. If this is a move of desperation by GS does it mean that the Paulson bailout is direly needed; or, is this deal proof that private capital is available for ddeserving companies and the taxpayer should be spared ?
Posted by: Daveb | Sep 23, 2008 11:09:34 PM
"(They) have been wrong about nearly everything since this crisis began years ago," said Barry Ritholtz, director of research at New York investment firm Fusion IQ. "Why should we trust (their) judgment on the largest bailout in American history?"
Reuters
Bailout faces delays as Goldman gets boost
http://news.yahoo.com/s/nm/20080923/ts_nm/us_financial_news
Posted by: km4 | Sep 23, 2008 11:10:42 PM
So, CNBC reported that one of the triggers for the latest crisis was the credit rates for MS was up to over 8% and GS was over 5%, which they couldn't afford because of their $1T in assets and only $45B or so in equity. But GS is happy to pay 10% plus warrants from Buffett? How does that make sense for GS... is this their insurance in case the bailout bill doesn't pass? It seems like if they could sell their troubled loans to the gov they'd get a better deal than that.
Posted by: Kent | Sep 23, 2008 11:17:28 PM
Posted by: Mark E Hoffer | Sep 23, 2008 11:02:38 PM
--
Mark, thanks for asking. The phrase would be, "don't eat the seed corn."
Hank Paulson is now asking us to give him the next 20 years of this country's seed corn so that they can grind it up into pig meal, so he and his buddies can eat the pig.
Conservatism is about conserving for the future.
Cheers.
Posted by: Douglas Watts | Sep 23, 2008 11:19:13 PM
Mark E. Hoffer,
What"s up! w// you'r punctuation?~? And for that matter, your prose?
Posted by: j-daddy | Sep 23, 2008 11:28:41 PM
It might be a costly deal but it is still a vote of confidence - that a GS share is worth something..
Posted by: AB | Sep 23, 2008 11:34:59 PM
Posted by: j-daddy | Sep 23, 2008 11:28:41 PM
j-d, those are always good Q's, hopefully, my Intent was discernible.
DW,
this: "Conservatism is about conserving for the future." has been the root of my discontent with many "Consevatives". They don't understand that "Conserve" is the Root of their, so-called, political belief structure.
Posted by: Mark E Hoffer | Sep 23, 2008 11:35:25 PM
I guess Paulson would say the buck stops at GS.
sleazy.
Posted by: cloudy | Sep 23, 2008 11:37:12 PM
I just ran the numbers. I get something very close to the Doug's $2 Billion value on the warrants. I would be very confident in publishing the 17% figure.
Buffett does not play for below average returns in his large investments, particularly in environments like this, when he has cash, and a AAA balance sheet.
Posted by: David Merkel | Sep 23, 2008 11:51:15 PM
a. Conservatism
The inclination, especially in politics, to maintain the existing or traditional order. A political philosophy or attitude emphasizing respect for traditional institutions, distrust of government activism, and opposition to sudden change in the established order. Caution or moderation, as in behavior or outlook.
http://www.answers.com/topic/conservatism
b. Conservation
The act or process of conserving.
Preservation or restoration from loss, damage, or neglect: manuscripts saved from deterioration under the program of library conservation.
The protection, preservation, management, or restoration of wildlife and of natural resources such as forests, soil, and water.
http://www.answers.com/conservation
c. Fiscal conservatism is a political phrase term used in the United States to attack government spending and advocate instead lower spending and a lower federal debt; it may also include higher taxes in order to lower the debt. It does not necessarily denote advocacy of free market economics as a whole, and is a distinct concept from that of neo-liberalism.
http://www.answers.com/fiscal%20conservative
d. none of the above.
Yeah, d. is what we have now.
Posted by: KJ Foehr | Sep 24, 2008 12:03:00 AM
David -- In your analysis of warrant value what stock price did you use? Before or after the deal? Should we assume that the Berkshire action will reduce volatility and increase the price. It certainly did the latter. What volatility did you pick?
Also, do you embrace the idea that Warren Buffett had some inside info on future government treatment of Goldman Sachs (not that we couldn't all have figured that out already)? If you agree with Barry's assertion about the inside info, then the distribution of outcomes should have a short downside tail.
On the other hand, if you agree with Barry's overall analysis this is somehow NOT an expression of confidence.
The warrant model assumes a distribution, so I am curious. These are all standard components of warrant valuation, as you know.
And finally, I am trying to figure out how this development is (yet another) negative sign.
Posted by: Jeff | Sep 24, 2008 12:15:41 AM
