The “Oracle” Speaks: Listen Up, Hank

During the depths of the AIG crisis, which seemed like it was six years ago but was, in fact, early last week, we were contacted by a reporter who wondered if Warren Buffett would say something reassuring about the U.S. economy to help calm down the panic on Wall Street.

We pointed out that Buffett is, first and foremost, a money-maker. He is not a public treasure—although his shareholders treat him that way—to be trotted out on occasion to make pronouncements about the health of the country, as Old Man Rockefeller did back in 1929.

If Buffett was in fact going to do anything, we ventured, it would be to search for opportunities in the market freeze-up just as he had done in January and February of this year, when he bought $4 billion worth of auction-rate securities while those went into free-fall.

We said the world would only hear from Buffett after he pulled the trigger—not before.

Well, last night we heard from Buffett. And what we heard was that “The Oracle of Omaha” is buying $5 billion worth of preferred shares in Goldman Sachs that carry a 10% dividend, and along with those he’s buying warrants for $5 billion worth of Goldman stock at $115 a share.

Last trade, $133.

It’s a classic Buffett deal: he’s buying into a great company at a distressed price, with unbelievably good terms.

Now, Warren Buffett might be called “The Oracle of Omaha,” but he is not, in our opinion, an “Oracle.” (We explain why in “Pilgrimage to Warren Buffett’s Omaha,” coming soon to a bookstore near you.) Still, oracle or not, Buffett is worth listening to. And with this $5 billion-plus investment in Goldman Sachs, he is speaking loudly and—we think—quite clearly.

What we think he’s saying is that the $700 billion bailout plan being pushed down the country’s throat by Hank Paulson and Ben Bernanke—two men who both had seats at the bar while the lethal subprime mortgage cocktail was being concocted by Wall Street—is for the birds.

Sure, Buffett’s telling CNBC this morning that without the Paulson/Bernanke plan he might not be making this investment. And yes, he’s saying a Paulson/Bernanke plan would keep us from going over the edge.

But what else might you expect a man whose company, Berkshire Hathaway, has sold S&P Index put options with a notional value of $39.878 billion dollars as of June 30, 2008, to say? As is always the case with Warren Buffett, it pays to look at what he’s doing—not what he’s telling CNBC.

And what he’s doing is not what the U.S. Treasury wants to do with Goldman’s sick brethren: he is not buying Goldman’s “bad” assets.

He is, instead, buying preferred shares with a nice fat yield.

Second, he is getting warrants to buy Goldman stock in order to capture whatever upside that his stability-inducing investment helps foster while Goldman adjusts to being a bank holding company.

Paulson and Bernanke seem to have had no such notions in their heads. Their plan was to buy $700 billion of whatever junk got thrown at them by men in pinstripes who got paid very, very well for many, many years while they made some very, very bad decisions they now regret.

We wonder what else Paulson and Bernanke will want to buy to prop up the system: old, expired lottery tickets, perhaps?

More seriously, we wonder this: how is it that Warren Buffett can cut a better deal with the best-run financial company in America than the U.S. Treasury can ask from the worst-run financial companies in America?

Jeff Matthews I Am Not Making This Up

© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.