Why Does Goldman Sachs (GS) Need Buffett?

By Douglas A. McIntyre Updated Apr 28, 10:16AM EDT · Published Sep 24, 4:42AM EDT

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Under Goldman Sachs (GS) appears to be out of the woods of the credit crisis. It will take on the mantle of being a bank holding company. The Fed is likely to buy its toxic mortgage paper assets. If Paulson gets his way, they will even be redeemed at close to their original value, a gift of stupendous proportions.

Goldman made money last quarter. Perhaps it was not as much as a year ago, but there was no sign of trouble hiding in the 10-Q. The financial company’s stock price is up 45% from its low. There is nothing to indicate that the next few quarters will undermine Goldman’s ability to do business or keep clients.

There has always been some chance that Goldman could go the way of Lehman, but it does not have the failed financial company’s huge leveraged portfolio of commercial property.

Getting Warren Buffett in as an investor may be a Good Housekeeping Seal of Approval, a stamp that confirms that Goldman is okay. For $5 billion, Buffett gets preferred shares and warrants. Goldman’s market cap is only $54 billion, so that is a potentially large amount of dilution.

By converting to bank holding company, Goldman is in a position to bring in a deposit base to improve the foundation of its balance sheet. It may do that by buying up commercial banks. With its reputation as one of the premier financial companies in the world, those deposits would probably not be hard to come by.

Buffett being Buffett probably means that Goldman’s shares will move up sharply on the news. That may negate any dilution issues within a day of the old man making his investment. But, that will not offset the 10% dividend Buffett gets on his shares. That is higher than most subprime borrowers pay for a car loan. It is, in the scheme of things, exorbitant.

If the Paulson rescue package is approved and Goldman’s balance sheet gets an nearly automatic improvement as the government takes its junk in trade for cash, the arrangement with Buffett may have been an affirmation of the firm’s value, but it will have come at an unnecessarily high price.

Douglas A. McIntyre

About the Author Douglas A. McIntyre →

Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.