Warren Buffett backs Goldman

By now, you have probably heard that Warren Buffett has made his bet and invested billions of dollars in Goldman Sachs. The market reacted positively and Goldman is now trading at near $133 a share (up 6% on the day).

While I do see Buffett’s move as a vote of confidence in Goldman, Buffett does drive a hard bargain. He is getting 10% upfront in perpetual dividends and another 7% in options value. Jake at EconomPic Data has done the math.

Below are Buffett’s own words on the deal from a live CNBC interview as well.

Berkshire Hathaway will receive warrants to buy $5 billion in common stock at a strike price of $115 a share, which can be used at any time in a five-year period.
Using the good old Black–Scholes model with the pre-“Buffett Bounce” $115 Stock Price, a $115 Strike, 5 Years to Expiration, and 40% Volatility (roughly the level it has been trading) we get an “option” value of $47.89 per share. Berkshire can buy $5 Billion of Goldman stock with these warrants, thus he owns 43,478,261 shares. This amounts to $2.082 Billion. Taking the $5 Billion Berkshire paid less the value of the warrants at initiation equals $2.917 Billion for the Preferreds.

Berkshire will receive $500 Million per Year, which divided by that $2.917 Billion = 17.14% Yield. If Goldman is willing to capitalize at this value, it makes me question how desperate they really are…

–Berkshire Goldman Preferreds Yield over 17% at Initiation”