Sep 24th, 2008 at 10:17 am
Buffett Buys Goldman
I’m not entirely sure what the implications are, but Warren Buffet plowing $5 billion into Goldman Sachs tends to make me even more skeptical that there’s an urgent need to hand $700 billion over to the financial industry with no strings attached. No doubt Warren Buffet would really like the federal government to follow up his $5 billion investment with some free money to ensure him a tidy profit, but that’s neither here nor there. There’s a difference between what the financial system really needs and what the key players in the financial markets happen to want.
38 Responses to “Buffett Buys Goldman”
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September 24th, 2008 at 10:23 am
Buffet putting money in Goldman Sachs = lining up to get major bailout goodies. Perfect example of why executive pay limits = token bullshit. Rich people like Buffet will rake in bailout $$$$ no matter what.
September 24th, 2008 at 10:27 am
Buffet already made his money. His 5 billion has a strike price at 115. GSachs is trading already at 126. I am not much of a mathematician, but it seems to me as if Warren Buffett has already cleared about 400 million on his investment in GS. If there is just a small rally behind him, which of course there already is, then chances that the stock will ever see 115 again are pretty slim. GS normally trades in the 170-220 range, thus even a recovery to 150, would mean that Buffett could net up to 1.2 billion that fast. I think his actions show what private capital could do to stabilize this if it existed and wanted these companies. Problem is GS was the only reasonably decent one, and its now gone. Hence, the Fed will now get complete junk.
September 24th, 2008 at 10:35 am
Buffet is one of the good guys. He is also a democrat. We should lay off him.
September 24th, 2008 at 10:36 am
Buffett is heavily invested in insurance and banking while making a deal with the company that has most benefited from the bail out thus far. He’s just doubling down on favorable terms that the taxpayer will not come close to seeing.
September 24th, 2008 at 10:38 am
C’mon Matt. “Hand $700 billion over to the financial industry with no strings attached” is quite a mischaracterization. First of all, the government will get assets for their cash. We can argue what price those will actually be worth but no one thinks they are worth zero.
September 24th, 2008 at 10:42 am
First of all, the government will get assets for their cash.
how is that a “string” ?
i take MY’s “no strings attached” to refer to this:
September 24th, 2008 at 10:47 am
I agree Section 8 of the original plan is ridiculous and so does Congress so that’s not going to end up in the final plan. I more had a problem with “hand over $700 billion.”
$700 billion is a shock value number to impress the markets and instill confidence. As Barney Frank has said it is very unlikely that the taxpayer will be on the hook for that amount.
September 24th, 2008 at 10:49 am
Has anybody pointed out that this 5 billion dollars was originally supposed to go to the Bill and Melinda Gates Foundation to help the most deprived people in the Third World?
With this financial crisis, Warren Buffet decided to send his money to the people that really need it instead.
September 24th, 2008 at 10:51 am
Also, it makes sense to remember that Goldman (sort of) got out of the mortgage backed securities relatively early–just before the all shit broke loose, so I assume Buffett knows what he is doing. Plus as others have pointed out, Buffett is awesome and definitely one of the good guys.
September 24th, 2008 at 10:57 am
Has anybody pointed out that this 5 billion dollars was originally supposed to go to the Bill and Melinda Gates Foundation to help the most deprived people in the Third World?
Whether or not Buffett is a good bad actor in this affair, that’s not fair at all. His 5 billion would have been invested in *something*; if he gets high returns, this will mean 7 billion or whatever for the Bill & Melinda Gates foundation.
September 24th, 2008 at 11:00 am
every day that goes by without the sky falling down undermines the argument of Bush et al. that the sky is falling down and that a bailout is necessary. When will some big financial or political cheese say–and get heard–”we really don’t need the bailout plan anymore?” (Maybe someone already has and I’ve missed it.)
September 24th, 2008 at 11:01 am
peep, who do you think is going to get a better return on this money, Buffet with this deal or the fund managers of the Gates Foundation?
September 24th, 2008 at 11:06 am
It should be noted that peep’s idea that this 5 billion is being taken from deprived third world people is completely wrong. The 5 billion is Berkshire Hathaway’s money, not Warren Buffet’s. The money he plans to give to the Gates foundation is primarily through BH stock. As the value of BH increases through deals like this one, Buffett’s donation increases in value.
Buffett is one of the most generous givers out there (I’m not talking just the sheer magnitude of his gifts, but also the % of his wealth).
September 24th, 2008 at 11:06 am
10: Of course, it was unfair. It was a joke (probably a bad one).
September 24th, 2008 at 11:08 am
12: I have no idea. I’m not exactly an expert on finance.
Do you have an opinion on this?
September 24th, 2008 at 11:15 am
13: Again, I was trying to make a joke.
One part of the joke was seeing Buffet’s investment in Goldman Sachs as a charitable donation as if Goldman Sachs was that hard up.
The other part was the absurdity of the fact we are rushing to give money to the richest financial institutions in the world when millions of people are continuously without adequate food, shelter and/or medical care.
September 24th, 2008 at 11:15 am
Peep, you’re confused.
The $5 billion being invested here is not Buffett’s personal wealth, it’s from Berkshire Hathaway’s cash reserves. Nearly all of Buffett’s personal wealth consists of Berkshire Hathaway stock. Improving the performance of the company — like, say, by investing parts of their huge cash hoard in great opportunities like this one — will presumably drive BRK stock prices up and increase Buffett’s wealth. And as his wealth increases, his post-mortem donation to Bill and Melinda increases.
September 24th, 2008 at 11:16 am
As others have said, isn’t the issue here that Goldman Sachs was the healthiest of these companies? That GS wasn’t insolvent doesn’t mean that there isn’t a serious crisis that needs some kind of action.
September 24th, 2008 at 11:20 am
Matt, your posts on the bailout have been poor in general — ill-informed, not well-thought-out, and marked by a singular refusal to face what’s actually happening in the economy. But this post is the worst of all, because it’s simply false. Far from being a sign that the financial system doesn’t need some version of the Treasury’s bailout, Buffett’s investment is a sign that he believes the bailout will work. The only reason Buffett invested in Goldman is because he believes that the bailout is going to occur. As he put it in an interview this morning, “”If I didn’t think the government was going to act, I would not be doing anything this week. I am to some extent betting on the fact that the government will do the rational thing and act promptly.”
When it comes to economics and understanding how markets work, Warren Buffett knows far more than you will ever forget. If he says the rational thing to do is act quickly, then that means there is a urgent problem. So stop saying there isn’t.
September 24th, 2008 at 11:23 am
every day that goes by without the sky falling down undermines the argument of Bush et al. that the sky is falling down and that a bailout is necessary. When will some big financial or political cheese say–and get heard–”we really don’t need the bailout plan anymore?”
The reason the sky hasn’t falling yet is because the markets anticipate some kind of bailout. If the bailout falls apart, the markets will pick up right where they left off last Thursday. This crisis has been percolating since March of last year. It doesn’t go away because no enormous financial institution has failed in the last few days.
September 24th, 2008 at 11:29 am
I agree that Matt’s commentary on the financial crisis could be improved. I recommend that he read this book when it comes out for a start.
September 24th, 2008 at 11:33 am
peep, This is a great deal for Buffett and by extension the Gates Foundation that will eventually reap the benefits of this deal. He will get a guaranteed 10% annual return on the $5 billion investment. That’s $500 million a year and an extremely high yield for an investment of this type. On top of that he has the option to buy $5 billion of Goldman stock at $115/share. Right now, Goldman’s stock is priced at $128/share so he can buy it right now and make a $13/share profit, which equals $565 million on the total investment. This is simplified view but yes, it’s a sweet deal and I’d be very surprised if the managers of the Gates Foundation Trust could do any better.
September 24th, 2008 at 11:35 am
17: Yes, I am confused. But not so confused as to actually believe what I wrote in 8.
September 24th, 2008 at 12:43 pm
Of course Berkshire Hathaway gets an equity share in return for their investment. Should the Fed get the same?
September 24th, 2008 at 1:12 pm
And of course Buffett is now saying that the Congress should immediately pass the bailout in the Paulson form! Talk about talking up your book.
September 24th, 2008 at 1:23 pm
Seriously Matt, did you even read the article?
September 24th, 2008 at 1:46 pm
Of course Buffett isn’t engaging in charity here. He’s a guy who’s always been scrupulously aware that the money he’s investing belongs to his shareholders as well as himself. As someone who owns a piece of Berkshire [You can, too!] I sure hope he’s right. Note, too, that it’s an expression of confidence that the bailout will actually work and that it will stabilize the markets and get American finance back on an even keel. Certainly skepticism of the administration plan is warranted, and Democrats are absolutely right to demand taxpayer protections, strong oversight, and workouts for mortgage holders. But it ain’t just Paulson and Bernanke who find the present situation frightening–Krugman, DeLong & Co. aren’t far behind. What Buffett’s doing is akin to the prominent local businessman ostentatiously making a deposit in the local bank during the Depression to avert a run–It helped, but it didn’t make the Bank Holiday unneccessary.
September 24th, 2008 at 2:17 pm
inthewoods: Do you have a link that quotes Buffet supporting the Pualson bailout strategy? Buffet was alway highly critical of the derivatives market — and he’s fairly liberal in his leanings. I suspect he’s making the investment, because the stock is cheap and GS internals are good. Nothing more.
David in Nashville: I don’t think you can take this as an endorsement of the Paulson bailout, especially since he’s buying preferred shares. Seems to me he’s not taking any chances on the bailout. But if you have a link that shows Buffet is getting behind Paulson, please share it with us.
–Beo
September 24th, 2008 at 2:54 pm
Beo, did you read the thread? Buffett said this morning:
“If I didn’t think the government was going to act, I would not be doing anything this week. I am to some extent betting on the fact that the government will do the rational thing and act promptly.”
“I am betting on the Congress doing the right thing for the American public and passing this bill.”
And he added that the next president would do well to keep Paulson on as secretary of the treasury for at least another year.
Do you now agree that Buffett is getting behind Paulson?
http://www.omaha.com/index.php?u_page=1208&u_sid=10441795
http://www.bloomberg.com/apps/news?pid=20601087&sid=a8B.QQmw5A8M&refer=home
September 24th, 2008 at 4:06 pm
Matt, you’re looking at it the wrong way around. Did you see the terms Buffett got from Goldman? They were terrible from the point of view of Goldman Sachs. They took the money because they needed it (too many hedge funds pulling their money out of prime brokerage, and since Goldman has no deposit base, they needed capital and quick to pay the hedge funds off).
Doesn’t it say something that Goldman, which actually made a bundle betting against subprime mortgages earlier in the year, which was by far the best of the investment banks when it came to the toxic paper, needed to be rescued by Buffett?
Of course Goldman can be rescued by the private sector, it’s got great assets and a great business. But if Goldman was on the brink, what does that say about everybody else? I don’t think this is a positive.
Also, it’s very possible Washington Mutual, the largest S&L by deposits in the country, could go under within the next week or two if we don’t get some kind of plan (note, this is not an argument for Paulson’s initial proposal, but I’d certainly take the Dodd plan). What happens if they go under? It will bankrupt the FDIC and then some. FDIC with no money? People will be lining up outside of every bank in the country, not just Washington Mutual branches, because they will think their deposits aren’t safe, and you know what? They’ll be right.
September 24th, 2008 at 4:33 pm
Cliff: It wouldn’t cost $700B to bring the FDIC out of bankruptcy and I would sure feel a lot better about that then handing the money to Paulson.
September 25th, 2008 at 2:06 am
Um, actually you have no idea what the implications are!
No idea at all!
And you really shouldn’t pretend otherwise.
Sure, you’re not as gullible as your old colleague (and rote Wall Street stooge) Megan McArdle, but the fact remains: you’re totally in over your head here and would really benefit from being up front about your utter ignorance.
I’m on your side politically and say that.
I fear, kid, this isn’t something (like, oh, say the reputation of the Dalton Prepschool lacrosse team) that you’re in any way capable of discussing with any authority. Admit that. And then do your best.
You might want to think, too, about more links to people who actually, um, know what they’re talking about.
“Not entirely sure” — yeah, tell me about! You’re not entirely sure about this the way Sarah Palin is “not entirely sure” about most things!
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