In the dark days of September 2008, when it seemed that the global financial system was on the verge of collapse, Goldman Sachs (NYSE: GS) borrowed $5 billion from Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A). The loan carried what many considered to be onerous terms, but Goldman was willing to take the money because Buffett’s confidence in the bank was itself bankable.
Things look considerably better for Goldman today, and now the company may want to pay back the $5 billion investment early, according to a report in The Wall Street Journal. Who can blame it?
In exchange for the $5 billion, Buffett received warrants to purchase 43.5 million shares of Goldman shares for about $115 per share anytime before Oct. 1, 2013. Goldman shares are currently trading at around $160 per share. But wait, there’s more.
Goldman also agreed to pay 10% annual interest to Berkshire, part of the deal that’s already cost the bank $1 billion. Buffett also demanded a restriction on share sales by Goldman executives that doesn’t expire for another year. The Goldman execs would certainly like that restriction to disappear.
Buying out Buffett won’t be cheap. Goldman would have to repay the $5 billion plus another 10% interest. The bank would also have to take a charge against its earnings of $1.6 billion. In addition, the Federal Reserve needs to approve the repayment.
At the end of its third fiscal quarter, Goldman reported $173 billion in excess liquidity, from which it could easily repay Buffett. It won’t be cheap, but at least it will be over, except for the warrants.
Toting it all up, Berkshire Hathaway stands to receive $6.5 billion in exchange for the $5 billion loan. If Buffett cashes out the warrants right now, he’d realize another $1.95 billion or so. Roughly, $3.5 billion profit — a tidy 70%.
While that may seem in the neighborhood of a payday loan, at the time Buffett put up the money Goldman really needed it. And it needed the vote of confidence even more. That’s what Buffett offered, and Goldman was glad to pay for it.
