Does Warren Buffett Think Goldman is more Credit Worthy Than GE?

9/23 - Goldman Sachs Group announced today that it has reached an agreement to sell $5 billion of perpetual preferred stock to Berkshire Hathaway, Inc. in a private offering. The preferred stock has a dividend of 10 percent and is callable at any time at a 10 percent premium. In conjunction with this offering, Berkshire Hathaway will also receive warrants to purchase $5 billion of common stock with a strike price of $115 per share, which are exercisable at any time for a five-year term.

10/1 - GE announced that it has reached agreement to sell $3 billion of perpetual preferred stock in a private offering to Berkshire Hathaway, Inc. The perpetual preferred stock has a dividend of 10% and is callable after three years at a 10% premium. In conjunction with this offering, Berkshire Hathaway will also receive warrants to purchase $3 billion of common stock with a strike price of $22.25 per share, which is exercisable at any time for a five-year term.

Today's announcement that Berkshire Hathaway (BRK/A) would invest up to $6 billion in General Electric has many of the same terms as the deal Buffett announced about a week ago with Goldman Sachs.  In both cases, BRK/A is receiving perpetual preferred stock with a yield of 10%, that is callable at a 10% premium.  Additionally, in each case BRK/A has received warrants to buy an equal amount of stock at a price of about 5% below where each stock traded before the deal was announced.

However, there are some differences.  First, Berkshire is investing $5 billion in Goldman and only $3 billion in GE.  Second, while Goldman can call the preferred shares at any time, GE has to wait at least three years before they can call the preferred shares they are issuing.  In other words, BRK/A is lending less money to GE than it is to Goldman and attaching more strings to that smaller investment.  While the market has reacted to the investment as an endorsement of GE by BRK/A, based on these differences, one could argue that Buffett thinks GE's credit worthiness is no better than GS, even though GE is rated AAA while Goldman is rated AA-.