Let’s get a couple of things straight before we start. First, we agree that Warren Buffett is probably the best investor the markets have seen in the last fifty years. Second, we have no problem with the fact he is worth over $40 billion.

We do have a problem with the fawning that has surrounded his $6 billion investment in Goldman Sachs. The headlines have been typical:

“Buffett’s buy heartens stricken market”

“Buffett waves a $6bn magic wand”

“Warren Buffett, Goldman’s White Knight”

“Buffett Deal at Goldman Seen as a Sign of Confidence”

The gist of all the newspaper reports suggests that this investment shows that Buffett believes the US economy is “fundamentally” in a great shape. And that this must be the bottom of the market because Buffett never gets any investment decisions wrong.

The key comment from Buffett was that he would not have done the Goldman Sachs deal unless he believed the US Congress would pass the USD$700 billion bail-out bill.

Why should that matter if he is so confident in the Goldman Sachs business? We can only conclude that Goldman’s will get something out of the deal. And not just indirectly, but directly.

From Taxpayer to Buffett
In other words Goldman’s can be virtually assured of being involved in some shape or form with a slice of the $700 billion. After all, when the US government gains ownership of these assets it will need someone to manage them.

We wonder whom they will look to. Goldman’s perhaps. Treasury Secretary Paulson is the former CEO of the company. It also explains the urgency by Paulson to have his plan completed as soon as possible, while he is still Treasury Secretary, to ensure Goldman’s gets their slice of the action.

Buffett claimed last night on an interview with CNBC that if he had a spare $100 billion he would gladly leverage that up to $700 billion and buy the stinky mortgage assets himself. In his view they would be a great investment.

We don’t know whether that is true or not. But it is certainly good propaganda to convince Congress that the government should proceed with the bail-out. Once it goes through and Goldman’s are installed as one of the asset managers they won’t care whether the mortgages make a profit or not for the government.

It’s the management fees and excising of bad credit from the market that they will be celebrating.