About two years ago, Berkshire Hathaway (BRK.A) CEO Warren Buffett extracted a heavy price from Goldman Sachs (GS) to save the investment bank from what looked then like a potential meltdown. In a sign of how much things have improved on Wall Street, Goldman now wants to get Buffett out of its hair.
And why would it want to stay in this deal? According to The Wall Street Journal, Buffett got great terms when he swapped $5 billion in cash for so-called perpetual preferred stock in Goldman. That stock carried a 10% annual dividend -- which has cost Goldman $1 billion so far.
Buffett also received warrants to buy up to 43.5 million Goldman common shares at about $115 a share before Oct. 1, 2013. If he exercised those warrants today, he'd instantly bank a nice $1.94 billion profit, but he's expected to wait until the warrants expire so he can make even more, reports the Journal.
Goldman certainly doesn't need Buffett's capital anymore, and it would love to escape the restrictions that his deal imposed that prevent Goldman executives from selling shares until October 2011. Goldman reported $75.7 billion in shareholders' equity at the end of the third quarter, and has $173 billion in so-called excess liquidity -- a combination of cash, short-term investments, and borrowing capability -- some of which it could easily use to repay Buffett.
But getting the Oracle of Omaha out of its hair won't come cheap or easily: Goldman will have to pay $5.5 billion, take a $1.6 billion charge, and get approval from the Fed. But with interest rates near zero and Goldman bonds paying yields between 2% and 6%, it is highly likely that Goldman could find a less expensive way to get that $5 billion.
It's beginning to look like Wall Street -- and to a lesser extent, America's taxpayers -- are coming up roses on the money they invested in rescuing the financial system. After using part of its $700 billion in Troubled Asset Relief Program money to pay $18.4 billion in bonuses in January 2009 despite losing $35 billion in 2008, Wall Street is now back on its feet, and expected to pay out $144 billion in bonuses for 2010. And TARP is expected to generate an 8.2% profit for U.S. taxpayers.
But virtually nobody is doing better from their investments in the Wall Street rescue than Buffett: Between the $1 billion in dividends, the $5.5 billion repayment check, and the $2 billion or more in profits from the warrants, he's already looking at a nice 70% return on the $5 billion lifeline he threw to Goldman.