Buffett Has the Last Laugh

Wednesday, September 09, 2009

Warren Buffett's decision for a large investment in Goldman Sachs last September amazed many in the financial community. Buffett stepped in to buy $5 billion in preferred stock in a month that saw the collapse of venerable giant, Lehman Brothers, the government takeover of mortgage behemoths, Fannie Mae and Freddie Mac, and the large-scale bailout of AIG.

Buffett's deal for $5 billion in preferred stock paying a 10% annual dividend included a redemption premium of $500 million and warrants enabling the purchase of 43.48 million shares exercisable at $115 anytime before October 2013.

Buffett was soon scoffed as an idiot as GS shares plummeted falling from $125 to below $50 per share. But, good ol' Warren is having the last laugh now with his holding conservatively estimated at $8.35 billion.

Investment Measurement Total Value
Preferred Stock Dividend $5 billion * 10% * (11/12) $458 million
Warrants 43.48 million shares * ($170 - $115) $2.391 billion
Redemption Premium $500 million $500 million
Total $3.35 billion

Buffett's investment has returned conservatively 67% in roughly 11 months should Buffett exercise today. Quite the investment indeed!


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