Chances are that Warren Buffett will keep his stake in the Goldman Sachs perpetual preferred stock that he bought at the end of 2008, although Goldman Sachs would like to tell him goodbye sooner. Sitting pretty, Warren Buffett has no real reason to withdraw his warrants before their expiration in 2013, except to extend a favor to the no longer embattled investment bank. Meanwhile, John Paulson, the hedge fund manager turned billionaire and Wall Street celebrity by betting against his personally-selected pool of Goldman’s subprime loans, appears to have simply walked away from his Goldman investment. In the third quarter of 2010, John Paulson’s holdings as disclosed to the Securities and Exchange Commission, showed no stake in Goldman Sachs while Warren Buffett’s 5 billion dollar purchase is reportedly paying him $1.3 million per day.
John Paulson sold his Goldman stocks in the third quarter as changes to bank regulatory rules and disputes over mortgage transactions reduced bank profits. Revenue at US banks showed a one-third revenue shrinkage in the same time period, but Warren Buffett’s gamble on Goldman in 2008 can make a cool 70%. If he excercises his warrant option to buy up to 4.35 million in Goldman’s common shares before expiration, Warren Buffet would still make a $1.94 billion profit.
So, you might ask, “What do the investment philosophies of Warren Buffett and John Paulson have in common?” More than you might think. Both John Paulson and Warren Buffett have managed to come out smelling like roses after the Wall Street meltdown of two years ago. While the SEC filed a fraud lawsuit against Goldman Sachs, John Paulson, the man who is credited with actually creating the condition that led to the near demise of the firm, walked away scot-free. Like Warren Buffett, John Paulson excercised an “arms length” approach when transacting his investment business with Goldman. John Paulson was never named in the lawsuit because it was Goldman who made misrepresentations to investors, not Paulson. In fact, John Paulson purportedly made no secret of his desire to construct a mortgage portfolio which was likely to fail. It was Goldman Sachs who agreed to do the dirty work.
Warren Buffett put his reputation on the line to defend Goldman when they were “down and out” and when asked his opinion on John Paulson’s involvement stated “I don’t care if John Paulson is shorting those bonds. I’m going to have no worries that he has superior knowledge. It’s our job to assess the credit. The math either works or it doesn’t.” Warren Buffet is known for his lack of passion in picking investments, which he does by merely consulting the numbers.
In short, both John Paulson and Warren Buffett do business by the books. They review the statistics, then make their moves based on the information gleaned. Warren Buffett who consistently criticizes Wall Street, casually remarks , “They had all the relevent facts; we’re in the business of making our own decisions.” Mr. Paulson would probably agree. As always, John Paulson and Warren Buffet are both making their own decisions. Warren Buffett’s “hands off” approach to Wall Street players is as carefully calculated as John Paulson’s search for the right bank to create his winning portfolio!