Buffett and Berkshire Cash in on Great Recession-Era Goldman Sachs Deal

Michael Teague |

It was not so long ago, during the financial crisis in 2008 to be exact, that the nation’s biggest financial institutions were on the brink of collapsing into a punctured housing bubble, threatening to take the entire economy down there with them.

The Great Depression was the only historical precedent for what might happen in the event of such a disaster, and so the Federal Government stepped in to save the banks from ruin.  Prior to that, however, in an atmosphere of uncertainty and perhaps even panic, Goldman Sachs (GS) made an attempt to stave off its own demise by offering Warren Buffett a really great deal.

In 2008, Warren Buffett’s Berkshire Hathaway (BRKA) spent $5 billion for the rights to buy 43.5 million of the bank’s common shares until October 1st of this year, at an exercise price of $115 apiece.

On Tuesday, a revised version of the deal was announced, the terms of which will give Berkshire an amount of stock equal to the difference between its average closing price for the last 10 days of September and its exercise price of $115, multiplied by 43.5 million.

If that were to go into effect based on Goldman’s most recent closing price, Berkshire would walk away with more than 9 million free shares, for a profit calculated at $1.35 billion.  This is because the deal’s revision saves Berkshire from having to go through the trouble, and more importantly the cost, of actually purchasing the shares and then re-selling them.

Another perk of the original deal, one from which Buffett has already profited, was the preferred stock he received that returned $500 million a year, or $1.4 million a day, in dividends.

The deal also puts Berkshire among the bank’s 10 largest shareholders, while it lends Goldman some of the credibility and reliability of the Berkshire/Buffett name.

Goldman’s shares closed the day up 0.29 percent to $146.54, while common shares for Berkshire were up 1.39 percent to close at $103.82.

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Symbol Name Price Change % Volume
ULTI The Ultimate Software Group Inc. 201.44 -9.47 -4.49 460,902 Trade
GS The Goldman Sachs Group Inc. 228.13 1.50 0.66 1,970,120 Trade


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