Posted by: Ben Levisohn on September 25, 2008
Sure, AIG’s an overextended insurance company on the brink, while Goldman is a profitable investment bank forced to raise cash and reduce leverage. Of course, the Oracle of Omaha made a considered investment. Uncle Sam had its hand force. Comparing the two deals is probably worse than comparing apples and oranges. I’m doing it anyway.
What do they give up?
Uncle Sam: $85 billion line of credit good for two years
Warren Buffet: $5 billion in exchange for preferred shares
What are the terms?
Uncle Same: 2% fee — that’s $1.7 billion — up front.
8.5% interest on unused portion of loan, at least $7.2 billion/year
8.5% + Libor (currently 3.48%) on money drawn
Warren Buffett: 10% Dividend = $500 million/year
What else do they get?
Uncle Sam: Preferred shares convertible to common stock.
Warren Buffett: Warrants to buy Goldman stock at $115. Goldman closed at $133 on September 24.
What are the risks?
Uncle Sam: AIG can’t pay back the loan. Uncle Sam would have recourse to all AIG assets — if there are any left.
Warren Buffett: Goldman Sachs shares fall, company suspends dividend. No recourse if Goldman fails.