By Eric J. Fry
It’s probably nothing at all…but the timing and speed of Warren Buffett’s investment in Goldman Sachs seems a bit curious.
A well-known cynical New York short-seller observes: “This morning, Mr. Buffett referred to the ‘economic Pearl Harbor’ that would occur if the Federal government did nothing. Well…given that Mr. Buffett’s Berkshire Hathaway has written almost $40 BILLION in equity puts…one Pearl Harbor would certainly arrive in Omaha!”
According to Berkshire Hathaway’s June 2008 10-Q, the company’s balance sheet contained $8.8 billion in notional value of Credit Default Obligations – UP 88% from 12/31/07. The balance sheet also contained $39.9 billion in notional of equity index put options, which is up 14% from 12/31/07. In other words, a falling stock market would be very bad news for Berkshire Hathaway.
“I am betting on the Congress doing the right thing for the American public and passing this bill,” Buffett told CNBC. If we may read between the lines, the “right thing” would be anything that boosts the stock market.
“What I found most interesting in the Warren Buffet interview on CNBC was the fairly apparent lack of due diligence he seems to have done with regards to Goldman,” the New York shortseller continued. “Mr. Buffet claimed that he had looked at the Lehman ‘marks’ for certain assets last spring and was somewhat concerned, but ‘he felt very comfortable with how Goldman was marking its assets.’ This statement seemed in conflict with Warren’s later claim that he got a call from Goldman and pulled a deal together in a rapid fashion, simply based on the favorable terms of the investment and his general comfort/faith in Goldman from decades of doing business with them. Warren even went so far as to admit that he did not even tell Charlie Munger about the deal until it was finalized…not exactly the type of rigorous process that one would expect for a $5 billion investment!”
Hmmm…maybe Mr. Buffett hopes his Goldman investment will produce the sort of headlines that will jumpstart the stock market. Stocks don’t have to rally for a long time, just long enough for the puts he wrote to harmlessly expire with no value.
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