Compared To Buffett, Paulson And Geithner Have Gotten Taxpayers Little Bang For Their Bailout Buck

One of the best ways I've found to evaluate the actions taken by then-Treasury Secretary Hank Paulson in bailing out the nation's failing banks back in 2008 -- and current Treasury Secretary Timothy Geithner's efforts to uphold the validity of those actions -- is to compare them to the actions taken by billionaire Berkshire Hathaway CEO Warren Buffett around the same time.

It's a valuable comparison that hasn't gotten a lot of attention but those who have bothered to have shone an appropriately harsh light. In January of 2008, Mark Pittmaen got economist Joseph Stiglitz on the record, saying, "If Paulson was still an employee of Goldman Sachs and he'd done this deal, he would have been fired." Late last month, MBF Asset Management LLC founder Mark Fisher took it further in Bloomberg, ripping the bailout as the blown "Trillion-Dollar Trade of the Century," saying, "To put this all in perspective, just consider for a minute how in the world Warren Buffett managed to negotiate a better deal with Goldman Sachs Group Inc. than the government did for the taxpayer."

Flash-foward to this week's issue of Barron's, where we have Jon Najarian laying out the Buffett-versus-bailout comparison in terms of how well everyone did with their 2008 bailout-era investments. As it turns out, to make money, you sort of have to act as if you want to. Buffett, when he decided to invest in Goldman Sachs, chose "to invest $5 billion... through a purchase of perpetual preferred stock," and "got warrants to buy up to $5 billion of Goldman common shares at $115 each, some 8% below where the stock was trading at the time." This was, in Najarian's estimation, "a very public model" of how to structure a bailout investment. But come the middle of October, when "the Wall Street giants had their backs to the wall," Paulson "gave them billions of our taxpayer dollars for a relative pittance."

So. How'd that work out?

Fast-forward to Oct. 21 of this year, and now Paulson's successor at Treasury, Timothy Geithner, is telling us what a great investment the government made in Goldman. His office touts the 23% return on our $5 billion in taxpayer money. Let's compare that with what we might have gotten with terms similar to Buffett's.

Goldman was trading at $115, so a $5 billion stake bought the taxpayers 43 million shares. With the stock subsequently running up to $180, that $5 billion stake would be worth $7.8 billion, a gain of $2.8 billion. But wait, it gets better -- or worse, depending on your view. Given the added kicker of warrants on another $5 billion, 8% under the market, we'd also own warrants for 43 million shares at $105. So we'd have made another $3.2 billion.

Thus, the total gain before dividends would be $6 billion on a $5 billion investment. Last time I checked, that's 120% on our money, versus the 23% that Hank got us.

It's almost as if Paulson and Geithner are more concerned with their once, and future, Wall Street cronies than they are the taxpayers whom they serve. How Geithner can peddle his 23% return as anything other than a massive failure simply staggers the imagination.

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