Warren Buffett's $5 Billion Worth More Than Paulson's $700 Billion

While Hank Paulson and Ben Bernanke were busy explaining to Congress that the only way out of the mess they created was a blank check for $700 billion, Warren Buffett was working on a deal.  As the day wore on, stocks drifted lower as confidence waned that a working solution between lawmakers would be reached.  Then, Warren Buffett's $5 billion investment in Goldman Sachs was announced after the close and stock futures perked up.  Mr. Buffett will receive $5 billion in perpetual preferred shares that pay a 10% dividend and can be called at any time for a 10% premium.  Berkshire will receive an option to purchase $5 billion in GS stock at $115, exercisable within five years.  Naturally the market is up on this news.  The following are a few reasons why this is bullish news:

• Warren Buffett is THE MAN.  He is a deep value investor and always picks the bottom.
• GS is demonstrating investor confidence in the safety of its balance sheet and can raise money easily.
• Warren Buffett is THE MAN.  Did I mention he always picks the bottom?

If you were more of a skeptic, you might wonder about the following:

• Geez, isn't a 10% dividend a bit steep?
• AND warrants on $5 billion of common stock with a strike price of $115 a share?  Isn't that roughly equivalent to giving away a 60 delta call option (worth around $2 billion) for nothing?
  
• AND GS plans to issue $2.5 billion $5 billion  in common equity?

On one hand, the world's greatest investor just took a large stake in the bank.  On the other, the world's greatest traders just sold a five year in-the-money call option on themselves.  Which side are you going to take?  Well, if you believe that Mr. Buffett is giving you the signal to rush out and buy the stock, you're going to rush out and buy the stock.  If you think that buying GS stock is foolish because the equity will be worth less now that the company is paying a 10% dividend on preferred shares AND doing a dilutive equity issuance AND handing out call options on itself, well, you can sit around and watch the action.  Because you can't short the stock.  Thus, GS is up $10 after hours.  Isn't this market great?

Update:  GS doubles size of equity issuance to $5 billion.  Might as well take advantage of that short-sale ban...