Is Warren Buffett AIG-Proof?

Who needs six degrees of Kevin Bacon when you can play six degrees of AIG (NYSE: AIG  ) instead?

Since the witch hunt continues for anyone linked to the maligned insurer's money, isn't it really just a matter of time before public scrutiny begins to rain down on the companies that benefited the most from the $170 billion that AIG has received?

Here is where even Warren Buffett himself risks becoming an accidental tourist. Berkshire Hathaway's (NYSE: BRK-A  ) (NYSE: BRK-B  ) hands are completely clean, but his company's investment in Goldman Sachs (NYSE: GS  ) late last year places Buffett just two degrees of separation from the AIG fiasco.

Play along.

AIG didn't just receive $170 billion in bailout money. The government lodged explosive dye packs into the stash, and now it's starting to blow up in the pockets of everyone who's holding it.

If retention bonus recipients are being vilified for being handed $165 million of the bailout funds in contractual back pats, how much longer will it be before the hounds start sniffing around Goldman Sachs? After all, AIG handed over nearly $13 billion of the now tainted bailout proceeds to Goldman Sachs to settle a score.

Yes, Goldman Sachs is loaded. It probably didn't need the $10 billion in TARP proceeds that it was talked into swallowing down back in October. It also probably didn't need the $5 billion it scored a month earlier in selling high-yielding preferred stock to Berkshire Hathaway a month earlier.

In fact, yesterday's New York Times is reporting that Goldman Sachs is now considering paying back its $10 billion in TARP funds within the next month. After watching companies like Citigroup (NYSE: C  ) and now JPMorgan Chase (NYSE: JPM  ) get crucified over corporate jet orders, and nearly every TARP recipient being scolded for executive compensation practices, one can't blame Goldman Sachs for getting out of dodge while the stagecoaches are still running.

However, Goldman's clearly not going to return the nearly $13 billion it got from AIG. It's money that rightfully belongs to Goldman Sachs, though one has to wonder how much of that it would have seen if the government had let AIG collapse under its own weight last year before deeming it too big to fail.

If no one sees that that is where the public anger is going to next, I'll draw you a map.

So, let's go back to Buffett. Berkshire Hathaway's investment in Goldman Sachs was practically bulletproof. Collecting 10% on "perpetual" preferred stock seems like a risk-free bet, as long as Goldman Sachs is still in business. However, it also scored warrants in the deal to snap up $5 billion of Goldman Sachs at $115 over the next few years. Goldman Sachs has to not only survive -- but thrive -- for that to be valuable.

So, Buffett is positioned to likely laugh all the way to the bank on this one, but Berkshire Hathaway will clearly have more money to lug to said bank if Goldman Sachs can keep the bloodthirsty mob away.

They're inching closer, though, so watch out.

Some of Buffett's other greatest hits:

JPMorgan Chase is a former Motley Fool Income Investor selection. Berkshire Hathaway is a Motley Fool Inside Value selection and a Motley Fool Stock Advisor pick. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz enjoys the wit behind every single one of Buffett's annual shareholder letters, but he does not own shares in any of the stocks in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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  • Report this Comment On March 25, 2009, at 8:26 AM, MPov wrote:

    The public might get angry about the payments by AIG to Goldman Sachs (and other firms as well, some of them foreign), but I don't see how that anger is justified. And if any member of Congress claims to be shocked by these payments then that person should resign for incompetence.

    The reason for the loans and other captial infusions into AIG was so that they could pay their contract obligations on Credit Default Swaps and other instruments. The concern a few months ago was that, if AIG were to default on these obligations, the whole economy could come crashing down like a set of dominoes. So now AIG is honoring its contracts with GS and others, and people are complaining about this? AIG is using the money for its intended purpose. What is the problem with that?

  • Report this Comment On March 25, 2009, at 11:33 AM, 8k2u7FxK3QqlagX wrote:

    When was this written? GS is at $110.

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