How Warren Buffett's Gamble on Goldman Sachs Paid Off Big

Last Updated Oct 21, 2010 4:03 PM EDT

Goldman Sachs (GS) has a message for Warren Buffett: Thanks for nuthin'.

According to the WSJ, the bank wants to get the "Oracle of Omaha" out of its tentacles by making early repayment on the $5 billion the company borrowed from him in September 2008, when Goldman appeared to be going over the falls with the rest of the financial industry:
One reason for the potential move: Hefty dividend payments of 10 percent a year on Berkshire's "perpetual" preferred shares have cost Goldman about $1 billion so far. The payout is equivalent to more than $1.3 million a day -- or $15 a second.
Goldman could also replace the costly capital from Berkshire with much cheaper funding now available in the debt markets. Goldman's unsecured bonds currently yield between 2 percent and 6.5 percent, and long-term interest rates are near record lows.
Can't blame Goldman there. Unlike the federal government's investment in AIG, Buffett drove a hard bargain in shoring up the banking firm. And it's shaping into one hell of a deal. Peter Cohan calculates that Buffett stands to collect a total of $3.5 billion on his original investment, a whopping 70 percent return. By comparison, U.S. taxpayers must make do with an 8.2 percent bump on their investment in financial firms through TARP.

Not that Buffett didn't give good value. His investment acted as a tonic on Goldman's stock, which had plunged in preceding weeks, immediately boosting it 10 percent. More important, it sent a message to other shareholders that Buffett, a longtime investor in the company, would use his enormous clout to ensure Goldman's financial stability, like Gandalf warding off the Balrog ("You shall not pass!").

After his investment, Buffett duly went to work as the company's biggest cheerleader. Earlier this year, for instance, he exonerated the company of any wrongdoing in the Abacus affair and defended CEO Lloyd Blankfein as critics were calling for his scalp. Buffett also dialed down his attack on derivatives, which were at the heart of the SEC investigation into Goldman's CDO practices and which he'd previously derided as "financial weapons of mass destruction."

Indeed, Buffett has softened his critique of the entire banking sector since the financial crisis began. His description of Wall Street the other day at a Fortune magazine event in Washington conjures up something short of nuclear holocaust:
It's like a church that's running raffles on the weekend.
So you mean Lloyd really is "doing God's work?" Let us pray. In the same speech, Buffett also said that CEOs of companies that had to be rescued by the government "should go broke," adding, "and I think your wife should go broke, too."

If memory serves, during the heat of the crisis Goldman borrowed $10 billion from the U.S. Treasury and bent Tim Geithner's fingers back until he made the company whole on its credit insurance losses from AIG. I trust Mrs. Blankfein is saving her pennies.

Image from Wikimedia Commons, CC 2.0
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  • Alain Sherter On Twitter»

    Alain Sherter is an award-winning business journalist who has written for The Deal, MarketWatch and Thomson Financial Media.

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