So Warren Buffett has decided to invest in Goldman, to the tune of $5 billion for the purchase of preferred shares and warrants to purchase up to an additional $5 billion in common shares. While there is certainly lots of things going on in the markets right now, it is interesting to ponder what that investment means.
It seems like a tremendous vote of confidence in Goldman, and in fact prompted others to invest some $5 billion in the company. Though Business Week cautions that the deal is “hardly a glowing statement about Goldman’s health and upbeat prospects,” and warns that the company is likely to face years of financial trouble.
It also could be viewed as a revelation that private investors actually can help boost the financial markets, and hence maybe the investment undermines the notion that we need government intervention. And yet in a CNBC interview, Buffett admitted that he would not have been willing to invest in Goldman if he didn’t believe that some government help was on the way, calling such help “absolutely necessary” to “avoid going over the precipice.” So in this regard it may be a signal that government intervention is necessary to encourage private help. Moreover, Buffett’s decision appears to confirm what we have been hearing from the feds—that broader and more sweeping intervention is necessary, even for companies otherwise able to attract private funds.
The decision also appears to say something about Goldman’s management. Indeed, Buffett admitted that other entities have asked for his financial help, but he has declined. So why Goldman when he has steered clear of others? Buffett said it was the right price with the right terms. But that wasn’t all it took for him to step forward. He also said it was the “right people,” suggesting that he trusted Goldman’s management in a way that he did not trust the management of other companies, particularly those who seemed incapable of making a realistic assessment of the risk they were facing.
As Gordon points out, this issue of trust is important, and a nagging question with the bailout plan is, if we give companies billions of dollars, how do we trust that they have the leadership and governance apparatus to navigate their way out of their financial crisis? In other words, how do we find or make sure that they are the “right people”?
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1. Posted by fedgovernor on September 25, 2008 @ 5:53 | Permalink
When you have $10 billion in cash that creates some problems.
Seriously, what else can Warren do with his cash? It's not like he has safe investment choices for cash at this point.
Might as well gamble with it.
2. Posted by fedgovernor on September 25, 2008 @ 11:43 | Permalink
Not that it's that much of a gamble.
He gets preferred shares paying $500 million a year for as long as he owns the shares, and warrants to buy $5 billion more in stock at $115/share.
Since the stock is today trading at $136 ... that's an instant profit of half a billion.
I wish I could find companies willing to sell me themselves for no risk on my part.
They'd call me an Oracle too.
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