9/23/2008
by John Rubino, DollarCollapse Blog.
If the Fed can’t save us, maybe Warren Buffett can. That seems to be what U.S. markets are hoping in Tuesday after-hours trading, as they rally on the announcement that Goldman Sachs has attracted $5 billion from Buffett’s Berkshire Hathaway. The deal comes just in time, since investors seem to have finally figured out that the government isn’t omnipotent. Despite the mother of all bailout programs, the Dow declined more on September 22nd and 23rd than in any other two-day period since 2002. Goldman, meanwhile, is a logical candidate for a market-saving deal, since it’s the last investment bank standing and has a cool name. Buffett might reasonably see it as a platform for building a legitimate business.
But a closer look at the deal paints a different picture, of a desperate investment bank giving away the store to an investor who is now in a position to demand a sweet deal from guys who not so long ago considered him a dinosaur. Consider:
• Goldman recently announced plans to convert its structure from investment bank (lightly regulated and able to operate, in effect, as a giant hedge fund, leveraging itself to the hilt and making aggressive, sometimes wildly unethical bets) to commercial bank, more tightly regulated and less able to use leverage to goose returns. In other words, to make money it now has to find investments that pay more than its cost of funds.
• In return for his $5 billion, Buffett gets preferred stock that yields 10% a year, plus warrants enabling him to buy $5 billion of Goldman common stock at $115 per share anytime in the next five years. The stock was $135 in Tuesday evening trading.
A bank operates by borrowing low and lending high. So if Goldman’s cost of funds is 10% plus potentially massive stock dilution, and home mortgages, car loans and business loans all yield considerably less than 10%, how does it turn a profit on that cash? Clearly it can’t. This deal isn’t about getting money to operate a profitable business. It’s about keeping Goldman's stock from declining further (it’s down over 100 points in the past year) and maybe enabling it to raise cheaper capital from other sources later. But as far as this $10 billion goes, whatever it earns will flow not to Goldman’s current stockholders, but to Warren Buffett. The old guy wins again.
Related Posts :
- Berkshire to GS: "I Got $5 Billion, but Its Gonna Cost Ya"
- Warren Buffett Invests Billions in Goldman Sachs
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