Everything Warren Buffett: CNBC: Warren Buffett's Goldman Sachs Warrants Rebound From Deep Losses

Wednesday, March 25, 2009

CNBC: Warren Buffett's Goldman Sachs Warrants Rebound From Deep Losses

Companies:Goldman Sachs Group Inc | General Electric | Berkshire Hathaway Inc.

Goldman Sachs at 85 Broad Street in New York City. (2007 File photo)

Warren Buffett's warrants to buy over 43 million shares of Goldman Sachs at $115 each are almost back "in the money."

MarketWatch's Alistair Barr reminds us that Goldman's rally in recent months has greatly increased the potential value of those warrants.

They were essentially thrown into the deal as a sweetener when Berkshire Hathaway bought $5 billion worth of preferred stock from the firm at the height of the credit crisis last fall.

Buffett's main objective was the 10 percent guaranteed annual return from the preferred shares. In his letter to Berkshire shareholders last month, he called the equity participation a "bonus."

Back on September 23, the day Buffett's multi-billion dollar "vote of confidence" in Goldman was announced, shares of the firm closed at $125.05. Three days later, they finished just short of $138.

Over the next two months, Goldman shares plunged over 62 percent to close at $52.

Since then, however, Goldman has staged a comeback, more than doubling to finish yesterday (Monday) at $111.93. Current price: [GS 115.23 3.30 (+2.95%) ]

That's just a few dollars below Berkshire's strike price of $115 a share.

For every dollar that Goldman's stock price rises above $115, Berkshire could potentially make just over $43 million by purchasing Goldman shares at the strike price and reselling them at the higher market price.

Barr's example has Berkshire clearing $1.5 billion if Goldman shares rise to $150. The warrants don't expire until 2013, so there's plenty of time for Goldman to move even higher.

Last fall, Berkshire also bought $3 billion of General Electric preferred shares, and received additional warrants to buy $3 billion of GE common stock at $22.25. Those warrants remain well out of the money, as GE only recently moved back above $10 a share. Current price: [GE 10.85 0.42 (+4.03%) ]