The Buffett Effect

Tuesday's late news that Berkshire Hathaway chairman Warren Buffett is sinking $5 billion into Goldman Sachs kick-started today's stocks futures market in the moments before today's opening of the stock market.

Buffett is the world's richest man, according to Forbes, and is a Washington Post Co. director. He is a renown "value investor," which sometimes is another way of saying "bargain hunter." Goldman is a relative bargain right now.

What's interesting is that for the past several months, Buffett has eschewed the financials, saying he doesn't understand how they work. It's a reason he gave for buying into the Mars-Wrigley tie-up earlier this year, saying these are businesses he understands and whose products he uses.

However, it's worth noting that Goldman was the investment bank on the Mars-Wrigley deal.

Historically, the move is reminiscent of J.P. Morgan personally rescuing the crashing stock market in the little-remembered Panic of 1907, when the wealthy financier ponied up $3 million of his own money and directed a $35 million federal bailout to save the system.

--Frank Ahrens

September 24, 2008; 9:35 AM ET  | Category:  business
Previous: Morning Briefing: World Markets Mixed on Buffett/Goldman Deal | Next: But Do You Need the Whole $700 Billion Up Front?

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Wish we could all get such a sweet deal. He is getting perpetual preferred stock that will pay him a juicy 10% coupon yield, and is getting warrants as a sweetener on the side that allow him to buy common stock for 8% lower than the current price at some time in the future.

What is a warrant? A warrant is a security giving the holder the right, but not the obligation, to purchase the underlying security at a specified price in the future. Much like the stock options that are granted to CEO's to come into a company and help it grow. If the stock goes up you exercise the warrant at the previous low price for instant large profit. If the stock price goes down you don't exercise the warrant. All upside potential, no downside risk. Meanwhile he collects the 10% dividend yield on the preferred, which is a cushion if the preferred should decline further in price.

Posted by: US Taxpayers | September 24, 2008 10:18 AM

Congress should use the terms of Warren Buffet's $5B deal as blueprint for their $700B bailout plan. If these terms are good enough for Goldman, they should be good enough for the rest of Wall Street; and if they are good enough for Warren Buffet, they should be good enough for the taxpayers.

Better yet, Congress should appoint Warren Buffet as Chairman of a committee to structure the terms of the bailout plan. By their own admission, members of the Congress don't have a clue what they are doing (such as getting bogged down on irrelevant tangents such as executive pay), and Paulson has shown that he is on the side of his Wall Street buddies, not the American people. Warren Buffet is a patriot and is uniquely qualified to negotiate on behalf of the American people in this bailout plan.

Posted by: DrSeuss | September 24, 2008 12:34 PM


Let's hear more about the panic of (19)'07!

I'm just not convinced they need $700B. I mean, where does that figure come from?

Posted by: tony the pitiful copywriter | September 24, 2008 12:45 PM

DrSeuss, good suggestion.

However, there's an obvious conflict of interest now for Buffet to actually lead the restructuring effort.

He also said that he was counting on the government rescue when he called on the investment. A bit more fluidity in the situation.

Posted by: Humility still a virtue | September 24, 2008 1:58 PM

All this and he wrote "Margaritaville" too? Is there anything this guy CAN'T do?

Posted by: Cleetus | September 24, 2008 2:43 PM

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