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Arbitary Obsessionist's Blog : Ambition is redundant. In life, mission is everything.

Goldman Sachs find their guardian angel – Warren Buffet buys into GS

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It is said that nothing brings out the vultures like smell of death. We can use it for Mr Buffet too..

Nothing brings out Mr. Buffet [..to invest..] like the smell of a ‘undervalued’ company ready-to-die.

GoldmanSachs_buffetWarren Buffet’s through his ‘legendary’ Berkshire Hathaway Inc. is investing at least $5 billion in Goldman Sachs. Now this is a huge thumbs up for one of the survivors of the credit crisis that felled two of its investment banking peers.

But that’s not all. In addition to buying $5 billion in preferred stock, Berkshire also got warrants to buy another $5 billion in Goldman’s common stock. Goldman on its own, would raise another $2.5 billion in its own public stock offering.

 

I was actually planning to title my post as Warren Buffet Strikes Back. But I thought Mr. Buffet as the guardian angel of the market and so the title. πŸ™‚

So why did  Mr. Buffet, buy into Goldman Sachs? This is what he had to say –

“Goldman Sachs is an exceptional institution. 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.”

A very important point to note here is that Buffet’s latest investment comes two days after Goldman Sachs Group Inc. and Morgan Stanley, the last two independent investment banks on Wall Street, won approval from the Federal Reserve to change their status to bank holding companies. That is, Mr. Buffet invested in the model of banks and not investment banks. It seems he has no faith left in the investment bank model.

What would have happened if GS had not converted to a bank holding company? The question can best be answered by Warren Buffet himself… πŸ˜‰

By becoming commercial banks, Goldman Sachs gets broader access to borrow federal money and the ability to build a stable base of deposits. But it also comes with closer regulatory oversight that likely limit its ability to generate the kinds of sky high profits that were topped by few others companies.

Another major thing to notice here is that Buffet prefers to invest in organization that are usually present in ‘unregulated’ or partially regulated sectors. But here, Goldman will be under close watch of the Fed. So is Mr. Buffet changing his investment style?

To tell the truth I was really surprised to see Goldman Sachs panicking out, since Goldman stood alone among the investment banks in refraining from participating in the subprime market. Its balance sheet was the strongest, and it was still making money up to the present. Profits fell, of course, but at a time when others are writing off billions, a black bottom line should have kept its stock at healthy levels. When your competitors are all dying, hardy survival should point toward future dominance in your sector. But Goldman had other ideas…

Mr. Buffet was actually asked to buy its assets for 10% of their value; he wanted to pay just 5%, so it wasn’t a good enough deal. Buffet only commits his money when there is a very high chance of profit. He would have made money on even at 10%, and clearly the firm’s positions appeared to be eventual winners when the market settled down, but on short notice saw no reason to take on any risk. Buffet has passed on other potential deals as well, including Bear Stearns last year.

For a long time, Buffet had avoided Wall Street since he came to Salomon Brothers, when it was hit by a trading scandal in 1991.  He had bought a $700 million stake in the company four years before. He eventually turned a profit on the investment, but it was a long and difficult experience for him.

A really interesting observation of mine is that I think Warren Buffet’s $5 billion are much more important than Fed’s $700 billion. You must be thinking that I am out of my mind. But just think about it. Warren Buffet is THE MAN OF THE MOMENT.  He is a deep value investor and always picks the bottom. So he seems to have sensed the bottom. And that should be a very pleasant news for the people. 

And yes, during the credit boom, there were some idiots who kept on saying that Warren Buffet had lost his touch. Now the Berkshire Hathaway boss has collected what looks like a canny investment in Goldman Sachs. And those idiots are nowhere to be heard. Why? They have been crushed by their own stupid-high-risk portfolios. πŸ™‚

Hail Mr. Buffet

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