Wednesday, September 24, 2008 1 comments ++[ CLICK TO COMMENT ]++

Hmm... Looks Like Warren Buffett Is The Latest To Attempt to Profit Off The Government

I highly respect Warren Buffett but he is just like everyone else in attempting to profit off everything. His latest investment in Goldman Sachs seems to be nothing more than an attempt to profit off the latest government plan. As Calculated Risk points out, Buffett says he wouldn't have made the investment if he didn't think the government plan was going to come to fruition.

I'm left-leaning so I am not as hostile as those on the right when it comes to government throwing around money. However, the $700 billion Paulson plan is very large and looks like it will benefit many firms that aren't even impacted much. Bloomberg had a story yesterday saying how Morgan Stanley and Goldman Sachs may be two of the biggest beneficiaries of the plan:

Goldman Sachs Group Inc. and Morgan Stanley may be among the biggest beneficiaries of the $700 billion U.S. plan to buy assets from financial companies while many banks see limited aid, according to Bank of America Corp.

``Its benefits, in its current form, will be largely limited to investment banks and other banks that have aggressively written down the value of their holdings and have already recognized the attendant capital impairment,'' Jeffrey Rosenberg, Bank of America's head of credit strategy research, wrote in a report dated yesterday, without identifying particular banks.

For those not familiar, these two banks are the least worries right now. Goldman Sachs has largely avoided the mortgage problems and Morgan Stanley, although badly hit, is better off than countless smaller banks. It would be ridiculous if most of the money went to these two instead of the smaller ones that need greater help.

As for the Goldman Sachs capital funding plan, it's not clear what the reason for it may be. As 24/7 Wall Street alludes to, this is a very expensive capital injection for a firm that didn't seem to need it. A 10% perpetual share (not sure if it's callable) is junk-like and very costly. Given the somewhat low valuations of Goldman, there is sizeable dilution (up to 20% for the full $10 billion). Unless you were desperate, selling off 20% of your firm doesn't seem prudent in my eyes.

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1 Response to Hmm... Looks Like Warren Buffett Is The Latest To Attempt to Profit Off The Government

September 24, 2008 at 2:23 PM

The Paulson plan is primarily about restoring confidence, which got shot along with Lehman. Without a return of confidence the financial sector, and with it the economy, are toast.

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