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Wednesday, September 24, 2008

Warren Buffett on Goldman Sachs and Financial Bailout Package

Yesterday Warren Buffett invested in Goldman Sachs (GS Charts). His Berkshire Hathaway holding company (BRKA Charts) 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.
Click for BRKA Graphs
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. It worked as he was on CNBC this AM 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.

    Jim Cramer Rant Video
Erin Burnett in Giraffe Dress with Jim Cramer on Dec. 11, 2007

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.

Since January 1, 1999 through 9/23/08 Warren Buffett's BRKA is up 83% while "Kirk Lindstrom's Newsletter Explore Portfolio" is up 160%. For more information and a free sample or subscribe today and get the September 2008 issue for free.

Update 7/29/13:

Kirk Lindstrom's Investment Letter Performance

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