Buffet is smarter than I am. He's probably smarter than a lot of other people as well. He certainly showed how smart he is when he jumped at the opportunity to get a 10% yield on a piece of paper from Goldman Sachs.
He also has warrants which are separate and obligate him to nothing but watching Goldman's fortunes for the next five years for free. I don't think his opportunistic investment says anything about the health (or non-health) of the financial system in total. I think his investment says lots about how smart he is. First, to make the deal, and, second, to have the cash to make the deal when most are scrambling for capital.
- Bernanke's Plea for Bailout Is Met With Skepticism
- Click here to watch Bernanke's testimony
It's an expensive vehicle for Goldman, but it makes sense financially, and, especially, psychologically. Their leverage ratio goes from about 23:1 to around 18;1. That's a good step towards the lower leverage they will be required to have as a commercial bank. Earnings will be diluted about 20%, but their Tier One capital ratio goes to over 13% from 11% or so. Dilution is to be avoided if possible, but this makes sense since they either have to sell off a lot of assets over the next few years to conform to the commercial bank standards, or sell equity to get there. Or a little bit of both.
In the old days of start up biotech investing, the rule was to raise capital when you could, not when you had to. This is a good del for Warren, and fair deal for Goldman. But it says nothing about the overall health of the financial structure. Unless you figure he wouldn't have done such a deal if he thought the game was going to end tomorrow.
I was struck by his high regard for Paulson which he voiced during "Squawk" this morning. I agree that either candidate should ask him to stay on for at least another year. I did love his comment that he wished he had $700 billion to buy the derivatives with. Maybe we should ask him to do it ! And I'm not kidding !