Buffett Watch

Warren Buffett's GE Warrants Still Under Water One Year Later


Warren Buffett's warrants to buy almost 135 million General Electric common shares are still worthless, (in terms of their current intrinsic value), as they have been for almost the entire time since Berkshire Hathaway's $3 billion investment in the company was announced exactly one year ago today.

That's in sharp contrast to the Goldman Sachs deal Berkshire made just a few days before the GE infusion.  Today, Buffett's Goldman warrants have an intrinsic value of about $3 billion.

The main element of both deals was Berkshire's multi-billion dollar loans to both Goldman ($5 billion) and GE ($3 billion), made near the height of the credit crisis last fall when it seemed that no company was immune from potential collapse.

Both loans, which came in the form of preferred stock purchases, pay a guaranteed 10 percent a year.  Berkshire gets that hefty interest rate on its money no matter what Goldman and GE's common shares do in the market.

CNBC.com Illustration

But, in what Buffett has called a "bonus," Berkshire also got the right to buy a pre-set amount of common stock in each company at a pre-set price, until the warrants expire in 2013.

Berkshire has the right to buy 43,478,260 shares of Goldman at $115 each, for a total price of $5 billion.  It can also buy 134,831,460 shares of GE at $22.25 each, for a total of $3 billion.

Goldman's stock has soared above the $115/share strike price, which means Berkshire would be getting a bargain if it exercised its right to buy.

Value of Buffett's Warrants

GE, on the other hand, is trading today around $16, about 27 percent below the $22.25 strike price for those warrants.  Unless GE's market price rises above that level, Berkshire has no reason to exercise its right to buy at the higher market price.

(As a reader points out, however, the GE warrants can still be been seen as having some value larger than zero, using an option pricing model such as Black-Scholes.)

General Electric is CNBC's parent company.

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