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Warren Buffett's $3 Billion Goldman Anniversary

Wednesday, 23 Sep 2009 | 10:27 AM ET
Warren Buffett and Goldman Sachs: Golden Anniversary
Warren Buffett and Goldman Sachs: Golden Anniversary

It's 12 months later and Warren Buffett's Berkshire Hathaway is $3 billion richer.

One year ago today, on September 23, 2008, with the financial world still reeling from the collapse of Lehman Brothers just days before, Buffett stunned Wall Street with a massive vote of confidence for Goldman Sachs.

In a late-day news release, Goldman announced a private deal to sell Berkshire $5 billion of perpetual preferred stock. In effect, Berkshire was giving Goldman a massive loan. And you don't loan that kind of money to a firm you think could follow Lehman down the drain.

In that release, Buffett called Goldman "an exceptional institution" with an "unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance."

The next day, in an interview on CNBC, Buffett said, "The price was right, the terms were right, and the people were right."

(The transcript and video clips of the complete day-after interview are still available on Warren Buffett Watch.)

Buffett's money, and his endorsement of Goldman, didn't come cheap.

Goldman agreed to pay Berkshire a 10 percent annual dividend on the preferred stock. That's $500 million a year, and the payout didn't depend at all on what happened to Goldman's common stock price.

But there was more. In what Buffett later described as a "bonus," Goldman also gave Berkshire the right to buy $5 billion of common stock at $115 a share. Berkshire could exercise that right any time in the next five years.

The bonus has turned into big bucks. Goldman's stock sunk as low as $47.41 amid the late November panic at the height of the credit crisis. Some were saying Buffett had lost his touch, citing the under-water Goldman warrants. (That's didn't take into account, however, the 10 percent dividend on Berkshire's $5 billion loan. That payout was guaranteed, as long as Goldman didn't go under completely.)

Note: Actual value of warrants would be $0 when Goldman share price was below strike price.  Chart shows how deeply "under water" the warrants have been.
Note: Actual value of warrants would be $0 when Goldman share price was below strike price.  Chart shows how deeply "under water" the warrants have been.

By March, however, the warrants were almost back "in the money" as Goldman's stock rebounded.

Today, those warrants are worth almost $3.1 billion. (The difference between this morning's market price around $186 and the strike price of $115, multiplied by the 43,478,260 warrants Berkshire received.)

Current price:

That's on paper, of course. Berkshire doesn't actually get any hard cash from the warrants until it exercises the option to buy at $115 and then sells at a higher market price.

So far, Buffett show no interest in doing that, on the expectation Goldman's stock is still going higher.

In July, as Berkshire's stock rallied to a six-month closing high, he told Fox Business News, "Every instinct in my body tells me that we will want to hold those warrants until they're very close to their expiration date. The preferred pays us the dividend and the warrants are going to make us the money."

Current Berkshire stock prices:

Class A:

Class B:

For more Buffett Watch updates follow alexcrippen on Twitter.

Email comments to buffettwatch@cnbc.com

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