Buffett boosts Goldman Sachs with $5-billion investment

Warren Buffett to the rescue: His Berkshire Hathaway Inc. agreed today to invest $5 billion in Goldman Sachs Group via a purchase of preferred stock.

Berkshire also will get warrants to buy up to $5 billion of Goldman common shares.

The deal, announced after markets closed, amounts to a huge vote of confidence by Buffett in the investment banking titan, at a time when investors remain spooked about the future of Wall Street.

"Goldman Sachs is an exceptional institution," Buffett said in a statement. "It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance."

Goldman CEO Lloyd Blankfein said the firm considered Buffett’s capital infusion "a strong validation of our client franchise and future prospects." Goldman also said it would raise another $2.5 billion by selling more common stock to the public.

Buffett will earn a hefty 10% dividend yield on his preferred shares. The warrants, which are immediately exercisable, have a strike price of $115 a share.

The deal has given Goldman’s shares a pop in after-hours trading, to $135.87. The stock had gained $4.27 to $125.05 in regular trading, after falling as low as $113.

After the harrowing turmoil in the financial system last week, the Federal Reserve late Sunday announced that it had granted bank holding company status to Goldman and Morgan Stanley -- a move that essentially ended the era of the giant standalone investment bank.

The change means the companies intend to seek more stability for their businesses by relying more heavily on consumer and business bank deposits to fund themselves, instead of the capital markets. Dependence on the capital markets is what sank rival investment banks Bear Stearns Cos. and Lehman Bros. this year as the credit crisis deepened. And in what was viewed as a desperation move, Merrill Lynch & Co. just a week ago agreed to a rushed merger with Bank of America Corp.

For Goldman and Morgan, the price for bank-like stability will be tighter federal regulation -- and far less profit potential than they had enjoyed as independent investment banks, including the ability to lever their investment bets by using extremely high levels of borrowed money.

Buffett obviously thinks that’s just fine. And with a strike price of $115 a share on his common warrants, he can buy into Goldman for less than half the stock's peak price of $248 a share about a year ago.

Until now, the 78-year-old billionaire has steered clear of making significant new investments in financial companies even as the sector has plunged this year. But the choice of Goldman is classic Buffett:  He tends to favor the premier businesses in any field. He has long owned major stakes in companies including Coca-Cola Co., Wells Fargo & Co. and American Express Co.

There will be a sense of deja vu on Wall Street with Buffett's Goldman deal: In 1987 he paid $700 million for a 12% stake in what was then Wall Street’s largest investment bank -- Salomon Inc., a firm as respected (and feared) in its day as Goldman is now.

But that investment wound up putting Buffett through the wringer, after the government in 1991 accused Salomon of trying to corner government securities markets. The charges threatened to destroy the firm.

Buffett stepped in as chairman of Salomon to save its reputation and get it back on track. The firm was later acquired by Travelers Group, the predecessor of Citigroup Inc.

Top photo: Warren Buffett (Chip Somodevilla / Getty Images); bottom photo: Goldman Sachs CEO Lloyd Blankfein (Jin Lee / Bloomberg News)

Comments

[Robert Laughing]

GS is clearly one of the SMARTER banks, but don't forget, Warren Buffet goes to the HEAD of the buffet line, taking his CHOICE CUTS, before anyone else. GS GLADLY rolled over for the cachet of Warren Buffet, but for you and me...? How do I put this succinctly? Oh, yes! "Bend Over!!"

[Shelly]

Now there's a good American.

[Cottage]

"Bend Over" ???

How do you figure. Go buy some Goldman stock. Of course you won't get the same deal, but you still get the upside. If you want to get sweetheart deals, get $5 billion together or just shut up.

[Sick of it]

I will admit to not being a business or financial wizard (or even of average intelligence on either topic) so I apologize if my question and statement are both completely idiotic.

Could this take GS off the table to receive a bailout? If so, isn't that a GOOD thing?

[Spitz]

re: "get $5 billion together or just shut up."

Amen.

[Fred2]

If you cannot raise $5 billion, just raise $4,300 and buy brkb.

You can then participate in the sweetheart deals too.

If you think GS is still a risk and don't want to invest, then be silent...
and let Buffett take the risk and probably reduce the need for one more taxpayer bailout.

[Doug in Toronto]

Buffett is not being altruistic here. He made a very good deal for himself and his investors. The strike price for the common share warrants ($115) is a 15% discount on the after-hours closing price. The deal improves for him as the share price rises. What he has accomplished here is to demonstrate that even a vulture can accomplish some good. All that matters is timing.

[Nilesh]

nice deal by buffet... this wil improve americans investment mindset..!!

[tom]

Berkshire is only up about 23% since January 1994. That's only 6% a year! Buffett is scrambling to retain his status as premier investor but BH is too big now. Look for him to make big mistakes trying to keep up. BH is finished and can be relinquished to that great ocean of has-been investment groups.