Buffett and Goldman

Alice,
I think WEB will unfortunately easily deflect criticism of Berkshire's Goldman investment. How?

First, he will disarm his critiques with a "moth-returning-to-the-flame" mea culpa, meaning "I didn't learn my lesson back when I stumbled into the Salomon mess." In fact, if he wants to come off as au courant, he may even play the Britney Spears song "Oops, I did it again." It will get a lot of laughs and deflect the serious critics.

Second, he will elevate the investment to a symbolic gesture of confidence in the financial system when it was most needed. This will be some vague conceptual thing, "something I did for the good of the country, a vote of confidence in our shakey financial system at a time when trust in those institutions was at its nadir." He may possibly even suggest that "Congress was as happy to see me make this investment as Blankfein was."

Third, he will remind shareholders that, strictly on the investment merits, the $5 billion preferred portion will enjoy the 70% dividends-excluded tax benefit. He may not say, but we know it is true that, no matter the cost to Goldman, they won't call in the preferred, so the investment will indeed remain perpetual because Goldman will not want forfeit the Buffett glow, the reputational enhancement his investment in them gives them.

Fourth, I am guessing he will at the annual meeting give no Goldman managerial endorsement. He will probably make NO mention of Lloyd Blankfein or other Goldman managers by name. Compare that to what he said about Blankfein in 2006 ("They just don't come any smarter").

The only one he could have said that about is gone and has set up his own shop -- Byron Trott, whose timing at leaving GS could not have been better.

Fifth, and finally, Buffett will remind the attendees that the "kicker" -- the $5 billion, 5-year warrants with a strike price of $115 -- are going to go very big into the money, easily to $250 within the next five years and possibly much much higher. The 5-year warrants give him the right to buy, what, 43 million shares, out of a total 527 million shares outstanding. That equals approximately 7-8% of shares outstanding. Assuming GS does indeed trade at $250 per share by then (which may be conservative), the LTCG will be at least $6 billion.

So my best guess is he views the current brouhaha as a blip that will pass. I doubt that he he will come to Blankfein's defense. He may say about Goldman itself the old saw that: "it's an unrivaled globabl franchise with a deep bench." And, "We're getting paid extremely well for renting my name and reputation out on those terms."

And that will be it. Then the lovefest will continue unabated. Certainly Andrew Ross Sorkin is not going to get rough on him.

At least that's how I see it playing out. He will do the mea culpa, stress the symbolism of the investment, and then throw out the big return numbers.

After that, the questions will go back to the really important stuff, like "could you do our charity a favor and capture some of your urine in a coke bottle so we can auction it off and greatly enlarge our endowment?"

Interesting that Goldman just announced they've bought back common stock, days after your observation that they haven't called Buffett's preferred in spite of its high ongoing cost. Maybe the 10% call premium is a (secondary) factor holding them back...

You observe that Goldman knows far more about its internals than Buffett, but doesn't his requirement that the top guys keep their stock for a while mitigate that risk to some extent?

Do you think there's any rate Goldman would have paid in hindsight that would have been high enough to make this situation net positive for Buffett? For what it's worth, it looks to me like the total return on his investment is about 70% from inception vs. 2% for the S&P 500.
I acknowledge though that reputation is too valuable/complex to pin a single number on.

Speaking of which, it always struck me that Buffett could have made a lot of money on the short side, but he didn't do it because of what it would have meant for his reputation, and in the final analysis he's probably made more money because of deals he wouldn't have been presented with if he were known as a short-seller.

I wonder if Goldman will have their own "rotten to the core" moment.

ask the HARD questions ?

As expected the clueless clowns of CNBC are lost in wall street double talk and bullsheeeet . They keep saying this was sold to ACCREDITED INVESTORS ONLY the buyers should have protected themselves and not relied on others or rating agencies. Why doesn't BECKY call her pal Warren who is a control person, of Moody's ? It is BUFFETTs understanding that Moody's rates for RETAIL investors ONLY ? Really, they rate just for us, retail investors ? I'm honored. Is that disclosed in the offering or any offering featuring Moodys ratings that accredited investors should NOT rely on any representations made by Moodys ? So, retail should TRUST a Moodys rating but accredited investors should know better ? I have a question ? IF, IF, this package was designed to be sold to ACCREDITED INVESTORS ONLY, WHY would the issuer pay for a Moody's rating IF accredited investors knew a Moody's rating is toilet paper and should NOT be relied upon ? What does BUFFETT think about the INTENT and value of a Moody's rating ? Does BUFFETT respect a Moody's rating does he think it should be relied upon by smart rich guys, like him ?