Here’s what I think is going on with these notes.
Previously, I wrote about Buffett’s brilliant derivatives deals. He will be paid to borrow money. The deals are structured so that Berkshire Hathaway avoids counterparty risk (people who make dumb deals have a very high chance of blowing up). So who are the counterparties?
According to this 2010 news article, two of the counterparties are Lehman Brothers and Goldman Sachs. Buffett knows who all of his counterparties are. Presumably, he had somebody shop around Wall Street to figure out who would give him the best pricing on these derivatives deals. He should know which companies were and weren’t willing to make dumb derivatives deals. He knows that Goldman Sachs was willing to do a dumb deal with him. So I find it incredibly interesting that he decided to invest $5B into Goldman Sachs for preferred shares and warrants. On the preferred shares, Buffett is exposed to any other number of dumb things that Goldman Sachs may have done. If Goldman was essentially giving him free money, it was likely that it was giving away free money to other people.
