Buffett's Goldman, GE Warrants Worthless for Now as Shares Drop

By Erik Holm

Oct. 8 (Bloomberg) -- Billionaire investor Warren Buffett's instant paper profits on Goldman Sachs Group Inc. and General Electric Co. have been wiped out amid the stock market's worst yearly slump since 1937.

Goldman, the most profitable Wall Street firm, fell 7.3 percent yesterday in New York trading to $115, the price at which Buffett can buy $5 billion of shares at any point in the next five years. When the deal was announced last month, Goldman closed at $125.05, meaning Buffett was $437 million ahead.

Goldman and GE also sold Buffett a combined $8 billion in preferred shares that pay a 10 percent dividend, allowing his Berkshire Hathaway Inc. to earn $800 million a year without the warrants unless the companies collapse. In exchange, the firms got Berkshire's cash and the endorsement of the ``Oracle of Omaha'' at a time when stock prices are falling on concern that a tightening credit market may hobble even the largest companies.

Buffett ``doesn't have a two-week time horizon,'' said Frank Betz, a partner at Warren, New Jersey-based Carret Zane Capital Management, which holds Berkshire and GE shares. ``Just because these prices drop below the strike price, it doesn't suggest that either of them are not exceptionally good investments.''

GE, the world's biggest maker of jet engines, agreed Oct. 1 to give Berkshire warrants to purchase $3 billion in shares at $22.25 apiece. The stock, which closed at $24.50 that day, dropped to $20.30 yesterday.

Pick and Hold

``You've got to pick them and hold them,'' said Gerald Martin, a finance professor at American University's Kogod School of Business in Washington. ``He admits that he can't time markets, and he takes a very long time horizon.''

Buffett, heralded as the world's best stock picker, agreed to the investments while some rivals find themselves with a cash shortage. The worst housing slump since the Great Depression has resulted in record mortgage defaults in the U.S. and a yearlong contraction in global credit markets, driving down stock prices and sending firms like Goldman and GE in search of funds.

For Buffett, whose Berkshire Hathaway had $44.3 billion in cash at the start of the year, it's also been a call to action. He's committed at least $28 billion this year to acquire companies, finance buyouts and purchase securities for Omaha, Nebraska-based Berkshire. Buffett is Berkshire's chairman.

``We want to use cash,'' Buffett told PBS's Charlie Rose in an interview last week. ``There are times when cash buys more than other times, and this is one of those times where it buys more.''

`Beginning to Scream'

Goldman has fallen 47 percent this year through yesterday in New York Stock Exchange composite trading; GE has declined 45 percent. The Standard & Poor's 500 Index slid 60.66 points, or 5.7 percent, to 996.23 yesterday, extending its 2008 tumble to 32 percent in the market's worst yearly slump in 71 years.

``Top-quality, well-managed firms like Goldman and GE are getting to the point where the values are beginning to scream,'' Betz said. ``Those are the sorts of companies that will continue to earn money and continue to function well.''

Buffett, ranked the second-richest man in the U.S. by Forbes magazine, transformed Berkshire from a failing textile maker into an enterprise with businesses ranging from ice cream and underwear to corporate jet leasing and insurance.

To contact the reporter on this story: Erik Holm in New York at eholm2@bloomberg.net.