Thursday, October 21, 2010

Goldman Sachs Paying Warren Buffett $15 per Second (After government bailout)

During the height of the financial crisis, Goldman Sachs rushed to billionaire Warren Buffett for money. Through the company he controls, Berkshire Hathaway, Buffett gave Goldman $5 billion.

Since then, Buffett has been a cheerleader for the Treasury and Federal Reserve bailouts that saved Goldman's butt. What was in it for Buffett. According to WSJ, the terms Buffett set on the Berkshire money invested in Goldman wasn't cheap:

Before deciding to invest in Goldman, Mr. Buffett turned away other Wall Street firms that came looking for help. But he drove a hard bargain with Goldman, including big dividends and curbs on the sale of Goldman shares by company executives...Hefty dividend payments of 10% a year on Berkshire's "perpetual" preferred shares have cost Goldman about $1 billion so far. The payout is equivalent to more than $1.3 million a day—or $15 a second...

As part of the deal, Berkshire also got warrants to purchase as many as 43.5 million Goldman common shares at about $115 apiece before Oct. 1, 2013. Goldman shares were trading near that level at the time of the infusion, but have rebounded sharply since then. On Wednesday, Goldman shares rose $2.88, or 1.8%, to $159.60 in New York Stock Exchange trading.

Since the warrants themselves have significant value, some analysts have predicted that Mr. Buffett would exercise them only close to the 2013 expiration date in order to maximize his returns.
Here's the kicker, of which Buffett was a major cheerleader. WSJ again:
Berkshire's investment in Goldman came shortly before the U.S. government launched the Troubled Asset Relief Program in a move to pump capital into banks and other financial institutions, including Goldman, mostly through the purchase of preferred shares by the Treasury Department.
An interesting question: When did Buffett learn about a TARP type vehicle coming, before or after his investment?


  1. The stories at the time had Paulson on the phone with Blankfien constantly prior to TARP, so Buffett had to know he couldn't lose his investment in Goldman since it was going to be backstopped by the taxpayer.

  2. Let me guess, that type of insider trading cannot be punished.