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Warren Buffett v. Uncle Sam: Who got the better deal?

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.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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