THE DOT - if this turns orange or red be alert

Tuesday, September 23, 2008

Buffett buys stake in Goldman

Well, now we know why Buffett praises Secretary Paulson - the story starts to make sense.

Excerpt from the WSJ:

Warren Buffett's Berkshire Hathaway announced plans to invest $5 billion in Goldman Sachs Group Inc., which recently agreed to change its structure to a bank-holding company from an investment bank.

In addition to the $5 billion from Berkshire Hathaway, which comes in the form of perpetual preferred shares, Goldman will raise at least $2.5 billion in common equity in a public offering.

Berkshire Hathaway will have warrants to buy another $5 billion in common stock. The perpetual preferred stock will have a dividend of 10%.

"We are pleased that given our longstanding relationship, Warren Buffett, arguably the world's most admired and successful investor, has decided to make such a significant investment in Goldman Sachs. We view it as a strong validation of our client franchise and future prospects," said Lloyd Blankfein, Chairman and chief executive of Goldman Sachs, in a prepared statement.

"Goldman Sachs is an exceptional institution," said Mr. Buffett, chairman and CEO of Berkshire Hathaway. "It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance," he said.

I think Mr. Buffett tries hard to keep MARKETS UP. Goldman is not worth more than 100 going forward, as a bank it’s a different leverage game and they were mainly a Prop. Trading house. They still have the information infrastructure that is better than any competitor so far and they try to make sure it stays that way with Rubin and Volcker close to Obama. So why buy now at a premium with troubled times ahead? He made a call around 1250 a few weeks ago, claiming markets were at a good value. His cash position is melting substantially, he bought for roughly $10 bil. in the last two weeks.

Last time Mr. Buffett bought a powerhouse of Wall Street in trouble (Salomon Bros.), he had quite some trouble getting out of there alive. That turned out to be a piece of Citigroup later, which is in deep trouble again with Mr. Rubin (former secretary of Treasury and CEO of Goldman) as Chairman of the Board being responsible as well. Mr. Buffett has earned the great reputation by making wise investments and being a prudent citizen but has he changed his attitude the last weeks? On TV, he criticized the payment schemes of Hedge Funds with 15-25% profit participation, which I find strange since he founded an investment pool on the same principle in 1956 until 1969, earning him a 25% profit share after a 6% bechmark with an average profit of 29.5%. In 1969, he turned it into Berkshire and seems to have not taken the profit share anymore. His astrology shows that he has the making to earn a fortune but I also can see that starting in one year, he will run into trouble for 1-2 years by a Saturn/Saturn square and going forward Pluto will cause big trouble in the following years and he might loose serious money in the upcoming crises between 2009-12.

We should expect 2 takeovers of banks - one by Goldman and one by Morgan Stanley in short order. Goldman could be interested in Wachovia as well since a former ally (their CEO is an ex-Goldman and Treasury Undersecretary) may give good insights of the value and make a smooth deal possible. The other option might be a bank Mr. Buffett holds an interest in. Wells Fargo might be the target for Goldman but those deals will be done on a stock basis, not cash, that’s why the stockprice of Goldman needs to go up as well. In the end, the stake in Goldman will rise for Mr. Buffett and that’s not a good idea, with more trouble ahead for banks in the years to come.

No comments:

About Me

I am a professional independent trader