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Buffett Busts a Move

The Oracle has spoken. Listen up, people

By: Victoria Coates (Diary)  |  September 24th, 2008 at 11:52 AM  | 

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I was among the many who took heart when the news crossed the wire last night that Berkshire Hathaway founder and CEO Warren Buffett was investing $5 billion in perpetual preferred Goldman Sachs stock. Many have been wondering where Mr. Buffett has been these last turbulent weeks. One analyst opined that he has been “‘lurking in the shadows’, looking for a deal,” which is perhaps an over-dramatization as Mr. Buffett tends to lurk in plain sight. The saliant phrase is that he has been “looking for a deal”–which in Mr. Buffett’s universe is something very different from the exotic schemes that have done so much to contribute to the current economic predicament.

And what a deal he got. The purchase of the preffered shares is a means of providing Mr. Buffett with an income stream on his capital in the form of a 10% dividend. Mr. Buffett also has the option to purchase an additional $5 billion in common stock at $115 a share at any time over the next five years. And I did not take heart simply because (disclosure) I own stock in Mr. Buffett’s company–I took heart because of what I know about his investment philosophy, and what this investment says about his prognosis for the financial markets.

As may of you probably know, Mr. Buffett’s personal politics are anathema to most here at Redstate. I suspect that he, like Senator Biden, believes that paying personal income tax is the patriotic duty of the rich. Oh, the horror. Why should we listen to such a man?

We should listen because Mr. Buffett does not play politics–or patriot–with shareholder money, which is what he invested in Goldman Sachs yesterday. He had been approached to spend some of Berkshire’s copious cash on hand to rescue both Lehman Brothers and AIG, but had opted not to even though his action might have had a symbolic impact well beyond the investment and served to help avoid the financial woes of these last weeks and months. In his opinion, these were bad deals.

Mr. Buffett is a man who will not spend a shareholder dollar for God or country. He will do so because he thinks he is getting in return something that will be worth more than a dollar in some reasonable amount of time–and ideally worth a dollar many times over in the long term. This philosophy may seem simple, but it has allowed him to accrue more dollars than anyone else on the planet, so when he acts we should probably pay attention.

What Mr. Buffet’s investment in Goldman Sachs tells us is that he believes there is substantial upside value in the company, and that he wants in at this price to realize some of those profits for Berkshire shareholders. I think actions speak louder than words, but for those who want to hear about it he said as much in his interview this morning on CNBC (I’ll update with the additional transcript segments as they become available).

Matt Drudge is calling Mr. Buffett a “savior” today. I do not think he has any such aspirations. Mr. Buffett is not out to save the world, or even the country. He’s out to make money for Berkshire Hathaway. And if he has the confidence in Goldman Sachs, not to mention Treasury Secretary Henry Paulson’s misnomered “bailout” plan, to make this investment, then my bet is on him.

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  • baserunr

    until by attrition the numbers worked in his favor, and has stepped in to buy when there is “blood in the streets”. Its a classical strategy, and few have ever deployed it as well as Mr. Buffet. With Bear Sterns, Merrill Lynch, and Lehman all kneecapped or defunct, the timing was excellent for the Oracle to step in and scoop up a quality asset on the cheap. Capitalism does work, it’s just not always elegant or pretty.

    • nod90

      Could we save our financial system by purchasing preferred shares with a nice fat dividend while taking options on the stock in order to profit from a recovery?

      The government can borrow for under 4%, so a 10% dividend plus options is a very good deal as long as the company doesn’t go broke.

      • Strelnikov

        The poll mentioned above on Drudge was from ABC>

        Earlier I had no time to check into the details, but I was suspicious, which is why I wrote “supposedly” above.

        Looking more carefully, we see that nearly 40% of the 800 people polled were Democrats, Republicans were 30%, and Afro-Americans were included beyond their percentage of the electorate.

        Ta-Da! Big Brobama is up in the polls by 9% Imagine that! If you want proof that the media is pro-Obama, look no further!

  • Marcus_Traianus

    And I might add, if they do it right, and I think they will do it reasonably right, they won’t do it perfectly right, I think they’ll make a lot of money. Because if they don’t — they shouldn’t buy these debt instruments at what the institutions paid. They shouldn’t buy them at what they’re carrying, what the carrying value is, necessarily. They should buy them at the kind of prices that are available in the market. People who are buying these instruments in the market are expecting to make 15 to 20 percent on those instruments. If the government makes anything over its cost of borrowing, this deal will come out with a profit. And I would bet it will come out with a profit, actually.

    Emphasis mine.

    Paulson needs to ensure we the people don’t get all the garbage where underlying cash flows are never realized and we pay for that at some “unobservable” price. This is where I start to get somewhat nervous, since most of that valuation expertise is on, and paid by the Street.

    Government, and in particular Congress has absolutely no clue how to swim in this shark tank. They also have a proclivity for self-serving, nonsensical, illogical and reactive legislation which put us in this position to start with. My only exception to that statement would be Paulson who has been at this negotiating table many times before. Congress would be wise to leave his plan relatively untouched or larded up.

    As an aside, Warren made a sure bet as he always does. About three months ago we bet Goldman would be the last man standing. If there is any place to stake a defensive position, it is in their organization which is the most undervalued of all financial institutions.

  • JoeH

    I think that his investment into goldman could help that company get enough capital to survive this mess without government intervention.

    I also see this as giving him a direct vested interest in paulson’s bailout….since that’s the case, it makes me listening to anything he says about the matter far less likely.

  • Badill_T

    How can I get access to a fund or account or stock that will pay 10% interest?

  • mike_volpe

    at the same time he was making this move, Buffett also came out and strongly backed the bailout. What Buffett is actually saying is that this bailout will benefit Goldman Sachs. That is a whole lot different than saying that the worst is over.

  • Strelnikov

    I wrote earlier in another topic last week that if the crisis is “real” it should be over in a few days.

    If it is being promoted to last weeks or months, it will be a phony crisis.

    The signs right now are:

    1. The Dems are posturing with Orwellian language that the crisis stems from the W. Administration and Republican economics. The media of course gives them the attention and emphasis.

    Given that the record shows them A. taking loads of money from Fannie and Freddie lobbyists, and B. preventing better oversight, and C. pushing the whole subprime idea, we know that they cannot really believe what they say.

    I know this, you know this, but to turn Howard Cosell around, the fans do NOT know this, thanks to class warfare ads and entrenched attitudes from the Dems.

    Which leads us to Sign Number

    1. Drudge today reports a poll that Big Brobama is trending upward beyond the margin of error, with people supposedly believing the Dems and Big Brobama can handle things better.

    These 2 can form a self-feeding loop, in Dem theory, and lead to a victory in November.

    So watch for the crisis to be continuing, even when it could or does calm down, even if any good news appears: the negative rhetoric will keep on coming.

    Footnote and a possible #3: I do not believe in conspiracy theories, and cetainly Warren Buffet would not be involved.

    But think of various leftist, internationalist billionaires who could make trouble in world markets simply by selling off their pocket change.

    Would that not also contribute to the “crisis” ?

  • red_oakster

    Buffett is right on the bailout. The commercial paper markets are frozen, and some folks think that by opposing this bailout they are punishing Wall Street.

    Failure to act is going to kill credit. The ability to buy a car, get a mortgage, meet a payroll (and therefore keep a job) are seriously at risk.

    Frankly, it has been frightening to read people talk so blithely about “toughing it out”, about punishing the bad guys and letting the good guys survive.

    By all means, argue about the auction process or about valuation, or about oversight.

    But dumping all over Paulson and Bernanke is showboating, and whether it’s Gingrich or LaHood or Pryce, it represents a total abdication of the responsibilities of representation, and it’s a surrender to populism. It’s as shameful as financial arsonists like Barney Frank and Chris Dodd pretending to be statesmen.

  • Jaded

    McCain’s office said he is voting NO on this bill as written and I am glad he is….I see the market is still humming along…no anarchy in the streets of America…we had only day…my oh my I felt like I was watching Al Gore talk about Global Warming and the need to ACT now or McCain/Kennedy talk about the need to ACT now about illegals….GIVE ME A BREAK…if it’s worth fixing just give it time and let US the American people KNOW each and every piece of this legislation….DEBATE it! That is what the Senate is about DEBATE….lets hear each and every part of it.

    What’s the rush…