Warren Buffet Dines On Goldman Sachs, But Why Now?

• Why is Warren pulling the trigger now. I think one could make a strong case that he has decided that his downside is now limited. There’s a very strong likelihood that the Bailout will get pushed through Congress. Warren is the ultimate deal maker and has open lines to all Congressman and Senators in Washington. I think that he may have gotten word that the Bailout is definitely a done deal - it’s going through. The whole discussion on CNBC today was done to appease the American public and all their angry emails and telephone calls which politicians received at the 11th hour. They had no real intentions of stopping it, but they needed to make it look like they were doing their jobs by asking tough and pointed questions. I love how Paulson kept referring to excessive compensation when he was attacked. I didn’t really hear many tough questions being asked. I didn’t hear many questions about the whole judicial review issue. Maybe the congressman got the word to stay away from that issue….

• I think that the odds are probably better than 70-30 that the Bailout goes through with some minor tweaking. I believe that Paulson will get almost everything he wants as politicians don’t want to be seen as being on the opposition side as our Global Financial system implodes.

So then…….Why is Warren pulling the trigger now ?

• If the bailout goes through, then Goldman Sachs (GS) has a buyer of last resort for the bad mortgage debt. The US Government will buy GS’s worst bad debts, cleaning up their balance sheet. I don’t know if Berkshire Hathaway (BRK-A) or any of their entities have any counterparty exposure to Goldman, but it would not surprise me if they did. With Treasury Secretary Paulson (former Goldman guy) in Treasury, who better to oversee Warren’s investment in Goldman. All the details to the bailout plan are not even completed yet, but I’m sure that Buffet may start to get more involved in suggesting how things should now be done and Paulson will most likely listen, as I understand that he still owns a large stake in Goldman.

• If Warren exercises his warrants to purchase Goldman, that would give him a 10% stake in the company and most likely a seat on the board and involvement in the decision making process. He’s still getting paid 10% on the preferred, not bad when three month T-bill are not even paying 1%.

• Finally, the conversion of the firm from an investment bank to a bank holding company opens the door to growing the company by acquisition. As other small banks across the country collapse, Goldman can swoop in and buy the deposits for a small premium. It could setup an opportunity of a lifetime for Goldman to grow and Buffett to prosper.

Goldman rallied to 133 in after hours trading, up from its close of 125. Goldman has the right to buy $5bn worth of stock at 115. $5bn/115=43.478mm shares. If the stock is now trading at a price of 133, up 18 from the exercise price of the warrants (115), then Buffett has already made $782.6mm from the time the deal was announced until now. He put up $5bn, so he’s almost gotten back 1/4 of his original investment already.

Not bad.

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