Hot off the press, a report that Warren Buffett's company, Berkshire Hathaway, has just agreed to buy $5 Billion of perpetual preferred in Goldman. This raises a significant question about how bad things really are even if the bailout bill isn't approved.
As reported in a just posted Heard on the Street column in the WSJ:
Confidence is a scarce commodity these days, and even Goldman Sachs has to pay through the nose for it. Berkshire is buying $5 billion of perpetual preferred stock with a juicy 10% coupon, as well as warrants that give it the right to buy $5 billion of common stock at any time in the next five years for $115 -- 8% below Goldman's closing stock price Tuesday.
The deal's high cost signals Goldman's need, but the stock could get a boost from Mr. Buffett's very involvement. . . . Goldman also plans to sell at least $2.5 billion of common stock to the public. That should net Goldman a minimum $7.5 billion in fresh capital immediately. . . .
Is that enough to tide Goldman through a time when its highly-leveraged business model has fallen out of favor? The capital infusion stamped with Mr. Buffett's brand certainly helps. But equally important is Goldman's transformation into a bank holding company, allowing it to access new sources of funding. It now has more firepower if it wants to buy a deposit-rich bank.
I think it is particularly interesting that Buffett made this investment before the budget negotiations concluded. While this could be an interpreted as an expression of confidence in the notion that a budget deal will get done, it wasn't exactly a warm and fuzzy day on Capitol Hill today. I think a far likelier explanation is that Buffett's not too worried about his investment even if Paulson doesn't get his $700M. While I don't know the specific terms of the instrument Buffett purchased, bear in mind that under the absolute priority rule that applies under the Bankruptcy Code, preferred stock is generally not entitled to be paid at all until after secured and unsecured creditors are paid in full.
Put differently, what does this say about how dire things really are?
Interesting to see what if anything Goldman alum Paulson has to say about this at tomorrow's hearing. . ..