Too Big to Fail - Andrew Ross Sorkin [263]
After rising for two days the week before on hopes that TARP would save the economy, the broader market also was now moving again in the wrong direction. As investors had begun digesting the plan, they had come to realize that Paulson was going to have to do a better job of selling it if it was, as he intended, to renew confidence in the economy. To many Americans who had suffered substantial losses in their 401(k) plans, Wall Street simply didn’t deserve to be saved. “It would be a grave mistake to say that we’re going to buy up a bad debt that resulted from the bad decisions of these people and then allow them to get millions of dollars on the way out,” Barney Frank bellowed the day before. “The American people don’t want that to happen, and it shouldn’t happen.”
But the politics of the bailout was hardly a subject that was at the top of Blankfein’s mind, given the more pressing concern of raising capital. He had assigned that task to Jon Winkelried, his co-president, who had put together a team over the weekend to reach out to potential investors in China, Japan, and the Persian Gulf. But their approach was scattershot, and they only received polite refusals from all of their potential targets.
On Monday night Byron Trott, wondering why there had been no news from New York, called Winkelried from his office in Chicago.
“It’s been way too quiet since the weekend. What’s going on?” he asked apprehensively.
Winkelried told him that they were going to begin another round of calling investors on Tuesday with a new proposal to sell shares in the firm. With the market still seesawing, he said, he didn’t expect they’d be able to raise money from a single large source; given the conditions, it would have to come in smaller amounts from dozens of institutional investors.
“Hold on,” Trott interrupted him. “You guys, you have to slow down here.”
Trott, who was the firm’s closest—and perhaps only—conduit to Warren Buffett, suggested that they consider approaching him one more time. Since the previous Thursday, Trott had gone to Buffett with a number of different proposals to invest in Goldman, but the ever-circumspect financier had declined them all. Blankfein had encouraged Trott to propose a standard convertible preferred deal, in which Buffett would receive preferred shares with a modest interest rate, which could be converted into common shares at about a 10 percent premium to Goldman’s current stock price. But, as Trott had correctly predicted, there wouldn’t be enough upside to interest the Oracle. “In a market like this there’s no reason I can take the risk,” Buffett told Trott.
On Tuesday morning, after consulting with Blankfein and the rest of the senior Goldman team, Trott called Buffett again with a new proposal. Buffett’s grandchildren were visiting Omaha, and as he was planning to take them to the local Dairy Queen (a chain owned by Berkshire), the conversation lasted no more than twenty minutes. Trott knew the only way Buffett would be willing to make an investment would be if he were offered an extraordinarily generous deal, which he now presented: Goldman would sell Buffett $5 billion worth of stock in the form of preferred shares that paid a 10 percent dividend. This meant that Goldman would be paying $500 million annually in exchange for the investment, which would also allow Buffett to convert his investment into Goldman shares at the price of $115 a share, about 8 percent lower than their current price. With those terms Goldman would be paying an even greater amount than what Buffett had asked of Dick Fuld back in the spring, a sum that Fuld had seemingly rejected.
Relying on his gut, as always, Buffett quickly agreed to the outlines of the deal. Trott called Winkelried, reaching him just as he emerged from the Grand Central terminal on his way to the United Nations, where President Bush was scheduled to address the Sixty-third General Assembly, to tell him the good news.
“I think Warren will do this!” Trott said excitedly.
“Okay, stay where