The conventional wisdom is that Warren Buffett's "white knight" $5 billion investment in Goldman Sachs is a "vote of confidence" for the financial markets and a sign that things are getting back to normal. But what if the deal is actually a sign of just how weak Goldman Sachs really was -- and a sign that the financial markets are nowhere near being fixed? TradeKing community member DavidDT "trades to win," and his take on the "Bush Effect and the Goldman Goose" is that Warren Buffett walked away with a sweetheart deal -- at least $500 million a year in preferred dividends (more than $1 million per day!) and warrants to buy additional shares of Goldman at the bargain basement price of $115. (Think of these as long-term call options with a strike price of $115 and an expiration date some time in 2013)

Steve Murray of the site Bullish Bankers agrees that the deal was a very expensive one for Goldman to do:

"The terms of the deal were very positive for Berkshire; Warren Buffett agreed to invest $5 billion in Goldman in exchange for perpetual preferred shares with a dividend yield of 10%. This will set Goldman back roughly $500 million a year, which will be taken directly off their net income in after tax dollars. This means that Berkshire will be making well over $1 million each day from this investment. It will also be extremely expensive for Goldman to redeem these shares, as they must buy them back at a 10% premium. Buffet also has the option to invest an additional $5 billion in common stock at a strike price of $115. If Buffet exercised these options today, he would make over $650 million in unrealized gains since Goldman’s stock price has jumped back over the $130 range. These warrants to purchase common stock are good for only 5 years, which may turn out to be extremely profitable for Buffet in the long-run.

Buffet protected his money by only investing in perpetual preferred stock. If he truly believed in Goldman’s operations and current valuation, he would have also purchased the equity stake in the company. This 10% dividend payment is a great deal to land, especially in these treacherous markets."

What do you think? Did Buffett force Goldman to capitulate, or did Goldman use Buffet's name and cachet to re-capitalize its balance sheet quickly and cheaply? The Wall Street Journal has posted the inside story on how the Goldman-Buffett deal got done. Some of the details are just too amusing to pass up -- while the rest of Wall Street has been pulling all-nighters to get deals done, Warren Buffett has been very quietly going to bed at 10:30 every night, eating Cheetos and licorice and drinking Cherry Coke, and just waiting for all of the Masters of the Universe to give him a ring at home.

[image: Warren Buffett]