Tuesday, September 23, 2008

Buffett Invests $5 Billion in GS

I wonder why Buffett is willing to accept less than the government demanded of AIG. The feds took 850 over prime, which at the time was 11.4%. Buffett is willing to take 10%, but it is on preferred shares, so, depending on how the stock performs, he could earn substantially more. Nonetheless, GS is still very heavily leveraged:

In return, they will submit themselves to greater regulation, including limits on the amount of debt they can take on. When it collapsed, Lehman had about a 30:1 debt-to-equity ratio, meaning it had borrowed $30 for every dollar in capital it held. Morgan Stanley currently has a debt-to-equity ratio of 30:1, while Goldman Sachs has one of about 22:1.

Bank of America, on the other hand, currently has about an 11:1 leverage ratio, while JPMorgan has about 13:1 and Citigroup about 15:1. Because they can borrow less, bank holding companies typically have lower earnings multiples.


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