While Washington debates how to bail out America's troubled financial industry, two of the sectors' brightest lights announced a deal that serves both well: Warren Buffett's Berkshire Hathaway is investing $5 billion in Goldman Sachs.
Late Tuesday, Goldman Sachs announced the infusion, along with a planned sale of at least $2.5 billion in common stock. In normal times, the announcement of a share sale might be expected to depress a company's stock price, but the after-hours effect was the opposite and Goldman shares jumped 13.8%, or $16.74, to $136.
I'd bet that Buffett makes a nice killing on this deal and not just because he has demanded a hefty premium for his cash (10% and 18% depending on the shares) but because Dana Blankenhorn was not the only one waiting till Buffett moved and, as of tomorrow, you can bet that the Dow will go straight up, not because of the buy but the buyer. If Buffett says its back in, everyone else will do the same and Berkshire Hathaway's investments around the world will join the rise as everyone and his brother piles back into the markets.
Buffet is a smart guy, he doesn't want the financial system to collapse or he loses everything, but neither does he want the US government on an infinite hook bailing out idiots and criminals.
And he is an Obama adviser, all of whom must recognise the latest chicanery for what it is, just another grab for money and power out of the white house. So here's what I think is going on.
Buffet's money means more than anyone else's in the market. He buys Goldman sachs and signals that the bottom is in. His $5Bn turns very quickly into a lot more and, while he holds the GS chares, he eases out of a whole lot of others, reaping the cash back that way.
The Congress, the media and the great unwashed, having the attention span of a gnat, think that the problem is solved by the invisible hand of the market, the pressure comes off to act immediately for Congress to buy the world, they adjourn at the end of the week as planned and the Bush power grab fails.
Obama then gets to make more rational decisions over a longer time span and attack the real problems of the market.
For years we have seen, and are now experiencing the effects of, the Greenspan Put, I thionk we are now seeing the Buffet/Obama call, and its effect will be every bit as important, though god knows where it will lead.
And I WONT be going anywhere near the markets myself, I have even stopped using my credit card, from here on, I will tolerate no level of debt, for any period, for any reason, the debit card is all that comes out when I have to buy something.