Barrons: US Government = Worlds Worst trader

From Barrons

THERE ARE SOME LISTS YOU WANT TO SEE your name on, and others you'd rather not. It would be nice to make the Forbes 400, for instance, but not so great to be mentioned in the obituaries.

When listing the worst traders of all time, many of you would include some sports teams that made infamous deals. In football, the Atlanta Falcons traded Brett Favre to the Green Bay Packers. In baseball, you can debate whether the Chicago Cubs trading Lou Brock to the St. Louis Cardinals for Ernie Broglio was worse than the Philadelphia Phillies trading Ryne Sandberg and Larry Bowa to the Cubs for Ivan DeJesus. As bad as those swaps were, there is one that's far worse.


To paraphrase my friend Mark Fisher, founder of MBF Clearing and one of the biggest energy trader/brokers in the world, the federal government let the trade of the century slip through its fingers at the depths of the financial crisis. Worse, Warren Buffett had already drawn up the perfect blueprint, in steps so easy even a Treasury secretary could follow. Doesn't that make the government a candidate for worst trader of all time?

Long before his acquisition of the Burlington Northern Santa Fe (ticker: BNI) railroad, the Oracle of Omaha agreed, on Sept. 23, 2008, to invest $5 billion in Goldman Sachs (GS) through a purchase of perpetual preferred stock. The shrewd chairman and CEO of Berkshire Hathaway also got warrants to buy up to $5 billion of Goldman common shares at $115 each, some 8% below where the stock was trading at the time.

In a single bold stroke, when Goldman and the global markets needed it most, Buffett put his money and reputation on the line. He stood to own roughly 10% of the bank, and his convertible shares also pay a fat 10% dividend.

Yet even with this trade serving as a very public model, what did then-Treasury Secretary Hank Paulson ask for? When the Wall Street giants had their backs to the wall, he gave them billions of our taxpayer dollars for a relative pittance. In mid-October 2008, Goldman and Morgan Stanley (MS) each got $10 billion from the Treasury; Bank of America (BAC), Citigroup (C), JPMorgan Chase (JPM) and Wells Fargo (WFC) each got $25 billion.

Fast-forward to Oct. 21 of this year, and now Paulson's successor at Treasury, Timothy Geithner, is telling us what a great investment the government made in Goldman. His office touts the 23% return on our $5 billion in taxpayer money. Let's compare that with what we might have gotten with terms similar to Buffett's.

Goldman was trading at $115, so a $5 billion stake bought the taxpayers 43 million shares. With the stock subsequently running up to $180, that $5 billion stake would be worth $7.8 billion, a gain of $2.8 billion. But wait, it gets better -- or worse, depending on your view. Given the added kicker of warrants on another $5 billion, 8% under the market, we'd also own warrants for 43 million shares at $105. So we'd have made another $3.2 billion.

Thus, the total gain before dividends would be $6 billion on a $5 billion investment. Last time I checked, that's 120% on our money, versus the 23% that Hank got us. I didn't go to Dartmouth, as Secretaries Paulson and Geithner did, but I think Buffett got the better deal.