My understanding is that the GS investment was $5 billion perpetual preffered, placed privately, with a 10% yield.  warrants for $115 exercisable for 5 years were thrown in.  

"Indeed one theory making the rounds this week is that Buffett put $5 billion into Goldman at around $125 per share in September not as an investment but to help provide funds for the collateral. "

If I am right the above paragraph in your article is factually incorrect.  Where did you get the information the price for the preffered investment is $125?  How did you assign a value to the warrants?  Are they traded?  

I am not an expert but if I am correct I am very disappointed to read something so far away from the actual circumstances.  If I am am wrong I look forward to learning what I misinterpreted from the press release.

the following is a reprint from the press release.New York, NY - September 23, 2008 -- The Goldman Sachs Group, Inc. (NYSE: GS) announced today that it has reached an agreement to sell $5 billion of perpetual preferred stock to Berkshire Hathaway, Inc. in a private offering. The preferred stock has a dividend of 10 percent and is callable at any time at a 10 percent premium. In conjunction with this offering, Berkshire Hathaway will also receive warrants to purchase $5 billion of common stock with a strike price of $115 per share, which are exercisable at any time for a five year term.

WhAt did I misinterpret?  

Just one quick point here, as it seems there is a misunderstanding of  Warren Buffet's use of derivatives. Buffet did not going out and buy a bunch of calls or puts. What he did was to sell a large number of puts which gives the owners the right to sell Berkshire the underling stock at a certain price.  If the stock goes up, Berkshire gets to keep the money received and the puts expire worthless. If the stock goes down below the strike price, then Berkshire would be required to buy it.  All that Buffett has done here is agreed to purchase a stock that he already liked if it fell below a certain price.  Also, since there are 14 years to expiration, this options is not likely to be exercised in the near future. But even if it was, then Berkshire would be required to buy the stock.  

So in the worst case scenario, Berkshire would be required to buy stock for significantly higher price than it is trading today, but still at a price that Buffet was willing to pay when he sold those puts. In that sense, Buffett's bet using derivatives is not any different from his usual MO of buying value, only here he received some premium for selling those puts and got some income from it up-front.

I hope this helps  :)

Hi Jon,

Thank you for the clarification about Japan and the misery they have experienced but the difference between Japan and the US is that there regulatory financial authorities were in denial for many years and refused to accept the problems and address them with the vigor the Fed is now...If you go back to the panic of 1873 or 1907 or any decade in the 20th century you will find that for each crisis there was a sense of doom and gloom...I pulled out a chart of the Dow published in the WSJ weekend of Oct 11 and in that chart you can clearly see that only 2 out of the 10 decades did the market end up lower from the beginning of the decade and we had 8 up decades...I do beleive that we may have a lost decade but if you do give Harry Dent any credit you might find his demographic analysis offers food for thought suggesting that the bottom of the market may be 2013 and the next consumption cycle will begin from there...now all this leverage will be worked out since it seems so systemic that the globe is coming together to address it...the game will go on one way or another but what 1929 and Japan taught us is that you address the issue take the medicine as bitter as it may be and move on

Japan is not as versitile and dynamic a society as we are (said with the utmost respect for their culture) I beleive a nation that in 200 years has achieved so much as we have can also undo the excesses of greed...and this cycle will pass...the demographics and consumption patterns support a basing out and an eventual rise

the world has tasted what a better life is and people in India, China and the Mid East will continue to consume and will park alot of their "cash" in the one safe nation with a transparent judicial system like the US which would guarentee every 250000 they deposit...all the legit and shady money in the world will eventaully be parked in US assets or banks since we have the best legal, judicial and guarenteed banking option...there is too much political risk in other jurisdictions...slowly the world will save us from this crisis since without the US there is no game in town...

We are still the promise land...and the shining star that people aspire to

trust me things will work out and Japan we are not

cheers

and thank you for the response

MM.

MM -- I hope that you are right. Intuitively makes sense. However I think we are in for an experiment to see how well the investment world operates w/o the extreme levels of leverage that have become commonplace in the last 15 years. As for Japanese govt: They made some mistakes but largely they did what US  policymakers, including Geithner (when posted in Tokyo) recommended. Also there's no guarantee that acting "faster" here will equate to acting "better."

Paz -- thanks for your interpretation.

I always thought WB was a straight up kind of guy, savvy & gutsy but straight.  Now i wonder if he had a plan to bring ruin on Goldman since they are being punished for WB's move.  And WB gets more GS shares on the cheap.   Not straight / or is there more to the story than we read here?  

Looked a another way, while Warren can be admired muchly, he does show a lot of hubris in assuming the next 20 years will be like the last 20 years.  Hardly likely as the entire US discovers the meaning of hubris.

Offer Incentives:  In all the talk of a bailout plan for the Auto industry, I’m surprised that no one has thought of an alternative solution. Instead of a bailout why not introduce incentives for buying American cars? Incetive rebates,elimination of sales taxes and lower registration fees are a few examples of such incentives. Perhaps the Idea of a hefty rebate or no sales tax would entice foreign car buyers to buy American, creating a bailout for the Auto industry that benefits consumers directly and immediately. Also the auto industry should get lean and mean. Only sell the models that sell the best chopping out all those loser models that most people do not want anyway. Also raising MPG ratings and start producing electric cars that can be charged from home that can go at least 100 miles on a single charge.   This is my plan and I’m sticking to it.  I know it would work.  George Harmsen

Yes folks ,the old Gentleman has lost his marbles ,keep selling, I'm begging you, short ,Berky ,Please Please Please.....