Don't Get Too Excited About Buffett's Buy

I wouldn't go overboard with the thought that Warren Buffett's purchase of Goldman Sachs (GS - commentary - Cramer's Take) preferred stock is a vote of confidence in the financial system of the U.S. I think it's a great example of an astute financier making a good businessman's investment.

He bought a preferred stock with a 10% coupon when Treasures are yielding less that 4%. The warrants he gets need never be exercised, so they are in effect freebies on the prospects for Goldman Sachs' future. That's probably a good bet to make, especially if it doesn't cost anything! Also, I would love a 10% yield on Goldman-type paper.

For Goldman, it's an expensive way to de-lever the balance sheet. Before this offering (and the additional offer of some common stock), its leverage ratio was around 23:1. With the proceeds from these deals, the ratio goes to roughly 18:1, a good bit of the way toward the required ratio it will have to have as a commercial bank. Earnings are diluted by about a healthy 20%, but its Tier One capital ratio rises to over 13%.

It's a great deal for Everybody's Favorite Uncle Warren. A necessary and fair deal for Goldman, financially and psychologically. But it says nothing about the financial system of the U.S., other than I doubt he would have done it if he thought the bottom was about to fall out completely.

Mr. Buffett gave an interview on "Squawk Box" this morning, and he praised Hank Paulson effusively and said he would want him to stay on as Treasury secretary in either a Republican or Democratic administration. He also said the current rescue plan is needed and probably as good a structure as any (my interpretation). This stamp of approval could well help in the final vote.

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Vincent Farrell Jr. is chief investment officer for Soleil Securities Group and a regular guest on CNBC and other national print and broadcast media.

Prior to joining Soleil in August 2008, Farrell was a principal of Scotsman Capital Management. Before that, he was chairman of Victory Capital Management of Cleveland and chairman of Victory SBSF Capital Management in New York. He was a founding partner of Spears Benzak Salomon & Farrell, which was acquired by KeyCorp in 1995. Vince held a variety of positions in his 23 years at SBSF, including chief investment officer, and he served as the portfolio manager on a number of the firm's largest client relationships.

Prior to joining SBSF, Vince spent nine years at Smith Barney as a vice president, sales.

Vince graduated from Princeton University in 1969 and received his MBA from the Iona College Graduate School of Business in 1972.