Professor Elam

Warren Buffet has bought a stake in Goldman Sachs.  I have had you read his latest 2007 letter to shareholders. IN it he stressed thathe looked for companies that paid him on his invested capital and that had a 'moat' around them, a startegic advantage that other companies could not duplicate. In my opoinion Buffet is both a fundamental and technical investor. Let's examine this purchase to see how it fits the Buffet mold.

Goldamn and Morgan are the last two independent big investment banks. Goldman got out of the sub prime business two years ago.  Both Robert Rubin and Hank Paulson, past and present Treasury Secretaries are ex Goldman partners. There is nearly always a Golaman man at the White House. As Barton Biggs at Morgan observed several years ago, no one else can do what Morgan, Goldman and Merrill could do, which WAS to raise large amounts of money for big clients. Merrill went on to demonstrate that they could do something enormously stupid like put all their investment egss in a one risky basket but that is another story.

We are studying the equity side of the balance sheet in all three classes I teach. Buffet followed his dictum to the letter. He bought the preferred, not the common stock of Goldman. It pays a whopping 10% dividend, and will have to be paid before any dividends to the common stock holders, which are mostly as in 858%, Goldman partners. IN adition the stock has a call provision so that Goldman can buy it back, but at a 10% premium over what BUffet paid, so he stands to make 10% a year on dividends and a 10% cap gain if Goldman decides they do not need his money. But who especially in these circumstances would not want it known that Warren was one of their 'partners?'

Now the really good part. Warren negotiated $5 B worth of at the money warrants or call options with a virtual at the money strike prices.  A call option give the buyer the right to purchase common stock shares at an known price, in this case $115, the shares are already up to $134 on the news that Buffet bought the preferred, such a deal for him. And he paid no premium for the warrants, apparently that ws part of the deal to get him to buy the preferred. The only gripe I hvae is that I was not invited to participate in this deal.

So how much money has Warren already potentially made on the warrants. Rounding the commonis up to $135 or $20 above his strike price. THe MSFT calculator says that is rounding $870 M profit already, and only one day is past. Not many investors could strike that kind of deal. But Warren did. And so he gets 10% interest while he waits and unlimited upside potential in the warrants in the future. No wonder people trek to Omaha to hear this guy.

Warren is a Democrat but he is also an American and an investor. I have to believe that all parties, the US Govt, Hank Paulson, Goldman, and Berkshire shareholders were thrilled at this deal at this time. In after market trading the Dow jumped over 1% on this news alone. Such strategic moves are telegraphed at such times to give all of us confidence to hold our shares in whatever.  In short if Warren is buying , why aren't the rest of us?  While Goldman Sachs may not approach us with such a deal, there are lots of stocks discounted to their price months ago which are paying dividends in excess of 6%, the tradditional benchmark of a market bottom.