Proshare Logo
   Market Date: 29-01-2015   
Agriculture ARTS FINANCE All One Min News Archives Bonds Cap Mkt Sentiments Capital Market CASHLESS NIGERIA Commodities Corporate Earnings Daily & Weekly Market Updates Elections Enterpreneurship ETFs Forex Frauds & Scandals General Global Market Insurance Investors NewsBeat Islamic Finance Mergers & Aquisitions Money Market Mortgage Mutual Funds Nigeria Economy Oil Sector Opinions and Analysis Pensions People Personal Finance Politics Power Products & Services Professionals Property Public Offers Private Placements Regulators REITs Stock PICKS Taxation Telcos Travel & Tours Unlisted OTC MARKET World of Business

Buffett's Preferred Treatment From Goldman

Category: World of Business

  Read (1493)
Buffett's Preferred Treatment From Goldman



By David Reilly, February 07, 2011
Shareholders at Goldman Sachs paid dearly for being shored up by Warren Buffett during the crisis. They may find another cost in bidding him adieu.
While bank investors salivate over the prospect that the Federal Reserve soon will give firms a green light to increase dividends or share buybacks, Goldman shareholders may have to wait longer than others. That is because it makes sense to redeem Mr. Buffett's $5 billion in preferred stock first, given its eye-watering 10% dividend.
Although Goldman can argue its capital is strong, it is questionable if regulators would let the firm simultaneously buy out Mr. Buffett and repurchase stock much above that needed to offset employee share issuance. A Buffett deal would mean Goldman paying a 10% premium, or $500 million, on top of the headline $5 billion. It also would likely include a move to buy back warrants covering 43.5 million shares issued to Mr. Buffett as part of his crisis investment. This would result in a $1.1 billion charge.
Fed deliberations will look at current capital, but also how the firm holds up under the latest "stress tests" and how it will be affected by new Basel capital rules. The latter are particularly important since Goldman, like rival Morgan Stanley, has a big trading book and could see a sharp increase in risk-weighted assets, used to calculate measures like Tier 1 common capital.
Last fall, Goldman estimated its Tier 1 common ratio would be about 8% under the new rules. That is above a 7% minimum threshold, but using cash to buy out Mr. Buffett would bring the ratio closer to the minimum.
A wild card is Goldman's ability to take actions to lessen the blow of the new rules, such as unloading or hedging assets that would require high capital charges. Credit Suisse has forecast those could halve the swelling of the firm's risk-weighted assets. Also, since the new rules will take years to kick in, Goldman will add to capital through profits—analysts estimate it will earn more than $10 billion in 2011, according to FactSet.
The Fed likely will want firms to tread gingerly, given that moves to return capital will be seen in the context of recent bailouts and continued economic uncertainty.
But even if the Fed is conservative on payouts, Goldman will benefit. Getting rid of Mr. Buffett would remove a slug of seriously expensive capital, whose 10% payout cuts into profit attributable to common shareholders and damps returns on average common equity. Excluding the dividend payment to Mr. Buffett, the return would have been about 12.2% in 2010, instead of 11.5%.
Given postcrisis fears over Wall Street's ability to generate strong returns, Goldman investors should be happy to give Mr Buffett first dibs.
Write to David Reilly at

Tags: , 

Comment With Your Facebook or Yahoo! ID

Latest news

News on World of Business

About Us

Who We Are
Our Team & Partners
Corporate Governance
Advertise with Us
Subscribe / Unsubscribe
Site Map
News Feed - RSS
Contact Us
Volunteer Program
Message from CEO

News & Features
The Analyst / Market Data
Investor Relations Portal
The Regulator
Economy & Politics
Training Portal
Events Calendar
NewsStands - Online Reputation

Products and Services

Research & Market Intelligence
Analyst Services
Offers & Rights Support Service
Investor Relations Services
Alert & Subscription Services
Share Support Services
Proshare Consult
Event & Seminar Coverage
Market Directory
File a Complaint
News & Analysis

News from TheANALYST
Video News from WebTV
Money Market Updates
Opinions & Analysis
Nigerian Economy
Market Data
The Regulator
Discussion Forum

Subscriber Agreement
Privacy Policy
Data Policy
Copyright Policy
Comments in Site
Advertising Code
Conflict of Interest
Content Partnership
3rd Parties

Online Trading and Execution
Legal Support Services
Web/Technology Services
File a Complaint

CBN Governor 2014