I loved reading about that deal. Buffett handled it with aplomb and secured terms which warmed me to the cockles of my blackened capitalist heart. (It was very close to being a five billion dollar juice loan, because Buffett was standing on a large stack of actual money when the private equity markets were in barely restrained terror, and the BATNA to taking his money was probably bankruptcy or nationalization.)
Edit to add: The "juice loan" remark is in reference to the guaranteed 10% yield in perpetuity on those shares, which isn't actually a mafia interest rate but is such a worse deal than large megacorps usually pay for capital that it it had been done to a natural person I would hope a court would rule it unconscionable. At the level of megacorps though, shucks, you pays your money and you takes your chances.
At the time for example the UK government was taking lots of 12% preferred bonds/shares in the UK banks. So GS probably saw ready money and ~ 2% better terms from Buffet than other sufficiently large lenders.
Barclays took a lot of money from Saudi. If memory serves the terms were in many ways worse than the UK government were offering but they were keen (potentially rightly so in hindsight) to avoid the political / PR entanglements of being in debt to a government which was under pressure from a banker hating electorate.
I've read two books recently that shed light on Buffet's investment strategy - "Seeking Wisdom," which quotes a lot of the principles Buffet and his partner Munger use, and "The Intelligent Investor" which deals primarily with assessing fundamental investment values and making intelligent investments instead of knee-jerk reactions to booms and busts. Buffet has said "The Intelligent Investor" is his pick for best book ever written on investing.
They're both quite good. Seeking Wisdom is more about mental models and getting better heuristics for quick decisionmaking and assessment of complicated things. Derek Sivers's notes on it are good:
I don't know a great summary of Intelligent Investor to link to, but it's definitely recommended - it's a finance book so not beach reading, but it's light and casual enough and not too academic. It's as about as readable as you can get for a serious book on finance.
I've read Intelligent Investor and Security Analysis (1934 ed.) and bios of both Munger and Buffett, and I found Alice Schroeder's Buffett biography to be pretty good. It is long, but it covers a lot of stuff that he might not tend to mention as a public figure ... and you can see how his investment style evolved from Benjamin Graham style value investing into his present strategy.
Also Buffett wrote letters to his partnership during the 60s that give a simple explanation of his investment style and explain some of his larger non-securities investments: http://www.ticonline.com/buffett.partner.letters.html ... this would be how he thought when he was merely a millionaire.
I'm reading Seeking Wisdom now, and loving it.. I'm so blown by the fact that awesome stuff like these are often hidden deep in the web and not so obvious even for a regular reader.
I think it's easy to forget what the atmosphere was like when Buffett made the deal. Even the saner news outlets were entertaining some of the the financial armageddon scenarios.. and on HN, Buffett's attitude was mostly met with cynicism or disbelief: http://news.ycombinator.com/item?id=335452
As always, life and business went on and the brave made a profit. Unlike me who didn't invest during the last dip. D'oh.
"As always, life and business went on and the brave made a profit."
I agree with you, but we mustn't forget that this is partly survivor bias, too... Much money was lost on bets that turned out wrong. I remember being glued to the news for hours in autumn 2008, and doing the maths over lunch with my colleagues on how much I would've made on a local bank's stocks had I actually bought the evening before, like I said I was going to (didn't have the balls in the end :) ). Either way that was on a Friday, and on Monday they were nationalized and many people lost their life's savings... I would've been really screwed had I gone through with it.
Too true. I remember AMD being at $1.80 at the bottom of the trough, and thinking to myself "What a bargain!" Of course, that was the day that Lehman had collapsed and who knew what else was going to go down with it, so I held off. It went up to over $10 at one point since, and today it's around $8.50. Would've made a killing off it :-/
Still, hindsight is 20/20... and for every winner there are scores of others who were severely burned by taking the risk. I don't regret not going for it much.
This was more than just Buffet's good timing in making an investment. He was also renting out his reputation. Goldman Sachs's future was in question, so the vote of confidence from Warren Buffett, the so-called Oracle of Omaha, was very valuable for them. Thus, the deal was structured to be very lucrative for Buffett. No comparable investment opportunity was available to the public at the time.
Warren Buffett is very good at what he does, but he also has opportunities which just aren't available to the general public.
He has also long argued that investors with much money have far more attractive investing opportunities. If you're controlling tens or hundreds of billions, small caps don't even move the needle on your portfolio if you buy the whole company! At Berkshire's size high growth investments are very hard to come by. The almost have to be something exceptional like this.
Well, you can invest in Berkshire Hathaway stock and be sure that, unlike the evil idiots at Goldman Sacks, Buffet will be managing your money in your long term benefit, and putting it in those far more attractive investing opportunities in your behalf.
Last I heard, BRK.A trades at a pretty hefty premium above the market value of its assets (not something you normally want to see in a holding company), and nobody knows whether a protégé of Buffet will be able to come anywhere near his celebrated performance.
Buffet himself does not believe that will happen. If you read the 2010 letter to shareholders, he states that going forward he does not expect growth in the order they have in the past.
That he and Charlies biggest challenge is to maintain a solid baseline of market matching, and occasionally beating, performance. They can't really go for the big wins any more - due to their market cap, a big win would have to be astronomical to give them growth like they had in the 80s.
For example, there's no reason that the US should have enabled a bankrupt AIG to pay off their counter parties. GS got $14 billion from that one at our expense, just to pay off their bet that the housing bubble would collapse.
GS was also betting that AIG would be able to pay them. They lost that bet. Why should we have paid them? There is no reason, none that are in the public interest anyway. Clearly our officials have other hidden reasons for doing so.
>> there's no reason that the US should have enabled a bankrupt AIG to pay off their counter parties
Who exactly do you think you are? The Rothschilds have decided to transfer some money around their properties. Have they asked for your advice? No? Then keep your mouth shut, sheeple ;-)
There's no reason to use a URL shortener. Please don't since it makes it impossible to tell what you are linking to.
Also, I don't see how that article in anyway suggests that Buffett's support of a bailout was due to his financial interests as you imply.
Goldman Sachs is buying back their stock from Buffet. Buffet calls the redemption by Goldman Sachs as "unwelcome". And rightfully so. Buffet bought the stock in 2008 while it was incredibly undervalued.. Goldman Sachs is buying it back from Buffet before the stock price gets too high to ever get it back.
Theoretically speaking, would Berkshire Hathaway be able to prevent selling back to Goldman Sachs? Or would there most likely have been a clause that would have forced them to sell to GS whenever they wanted to buy back?
I'm almost certain that GS can buy the shares back no matter what. For one, the deal would have been too painful otherwise; additionally, Berkshire clearly doesn't want to sell.
Can Buffet now either redeem the warrants at $115 and sell them back to Goldman in this transaction or is that a completely different transaction altogether ?
I guess they don't call him the Oracle of Omaha for no reason.
Kudos Mr. Buffet.
You licensed the rights of your name for a cool $3.7B for 2 years. I would love to know if that is the most lucrative licensing contract to date.
People are missing half the story here. Buffett made such a killing because he was the only person with cash in the bank. For years and years before the crisis, while everyone was leveraged to their eyeballs and making tidy profits, Buffett was complaining how his cash was piling up because businesses were overvalued.
So although he made a 75% gain over the last 2.5 years, that was only because he made around a 20% gain in the previous 5.5 years. Still, doubling money in 9 years is far better than the Dow Jones.
Of all the investment bigwigs, Buffet -- the Oracle of Omaha -- has been the man to follow. Not only making good on investments, but he generally seems to care (where needed) about what he is investing in.
Edit to add: The "juice loan" remark is in reference to the guaranteed 10% yield in perpetuity on those shares, which isn't actually a mafia interest rate but is such a worse deal than large megacorps usually pay for capital that it it had been done to a natural person I would hope a court would rule it unconscionable. At the level of megacorps though, shucks, you pays your money and you takes your chances.