And the Winner Is....?

This morning the media gushed with the news that Warren Buffet has bought a sizable portion of Goldman Sachs. The man with the golden touch sent a sigh of reassurance through some circles. In other circles it sent calculators clicking as we all tried to figure out just what the Oracle of Omaha had actually done. It's not a bad thing that a slow, patient, important investor has thrown in with GS, but rest assured that Warren struck a hard bargain with a weak negotiating partner.

In Buffet's words "Five" billion is "a bet on brains," but his boot is firmly on the throat. First Goldman will pay a 10% dividend, or $500 million per year from after tax earnings. Nice little cash flow for WB.

Next, he has "given" Goldman the right to call (buy back) the preferred stock at a premium of 10%. So, 10% yearly dividend and 10% more if they decide things are going well enough to buy back the shares.

Finally Mr. Buffett gets warrents giving him the right to buy 44 million shares of Goldman at $115. It is now trading at 128. The value in the option market of that right is $1.5 Billion. So he really is paying $3.5 Billion and has an effective dividend rate of 14%. Sweet. What an extrordinarily generous man to say he was, "betting on brains." Over the summer Goldman Sachs bought back 1.5 million shares at $180/share. He never did say whose brains he was betting on.

John Barnyak
President