Warren Buffet, the legendary investor has put money in Goldman Sachs (GS). Here are the terms:
1. Mr. Buffett’s stake is in perpetual preferred shares, which pay a whopping 10% dividend.
2. Berkshire, Mr Buffet's company, also receives warrants giving it the right to buy $5 billion of common stock at $115 a share. (current price $131).
This is a good deal for Mr Buffet. He gets an assured dividend of 10%, and an opportunity to buy shares at a low price. But, there is a risk. The preferred shares will be worth nothing if GS becomes bankrupt.
Mr Buffet, trader, has put up this trade:
Risk: GS goes bankrupt. Current probability is low.
Reward: 10% assured return plus possibility of buying shares at low price.
It’s a classic Buffett deal: he's buying into a great company at a distressed price, with unbelievably good terms.
What Mr Buffet is NOT doing: he is not buying Goldman’s “bad” assets. He is NOT buying into any of the other financial services companies - there are hundreds! He has chosen the number one - GS.