Buffett Buying $5 Billion Stake In Goldman Sachs

OMAHA, Neb. — Warren Buffett's Berkshire Hathaway Inc. is investing at least $5 billion in Goldman Sachs, a huge vote of confidence for one of the survivors of the credit crisis that felled two of its investment banking peers.

In addition to buying $5 billion in preferred stock, Berkshire also got warrants to buy another $5 billion in Goldman's common stock. Goldman also said late Tuesday it would raise another $2.5 billion in its own public stock offering.

The news sent shares of Goldman Sachs and stock index futures soaring in electronic trading, after the Dow Jones Industrial Average posted a triple-digit decline for the second day in a row.

It also could lead to new probing questions from lawmakers for Treasury Secretary Hank Paulson, a former co-CEO of Goldman Sachs. He and Federal Reserve Chairman Ben Bernanke told Congress hours earlier that quick action on a $700 billion bailout measure for financial services firms was needed to prevent economic havoc.

Goldman Sachs' shares had been tumbling ahead of the announcement of the government rescue plan last Friday as investors feared it could face the same kinds of funding squeezes as Bear Stearns and Lehman. Now members of Congress have to deal what may look to many taxpayers like Wall Street is already cashing in.

Buffett, one of the most successful investors in history, made no mention of what is happening in Washington, but he did heap praise on the New York-based company.

"Goldman Sachs is an exceptional institution," the chairman and CEO of Berkshire Hathaway said in a news release. "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."

It will be Buffett's second major foray into Wall Street.

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In the late 1980s, Berkshire Hathaway invested in Salomon Brothers Inc. When the investment firm admitted wrongdoing in bidding for U.S. Treasury bonds in 1991, Buffett became interim chairman and helped Salomon reach a settlement with the government before stepping down in 1992. Salomon was later sold to what is now Citigroup Inc.

Buffett's latest investment comes two days after Goldman Sachs Group Inc. and Morgan Stanley, the last two independent investment banks on Wall Street, won approval from the Federal Reserve to change their status to bank holding companies.

By becoming commercial banks, the two companies avoided the fate of Bear Stearns and Lehman Brothers _ the first taken over in a fire sale and the second now bankrupt _ by giving them broader access to borrow federal money and the ability to build a stable base of deposits.

But it also comes with closer regulatory oversight that likely limit its ability to generate the kinds of sky high profits that were topped by few others companies.

The strict rules set by the Federal Reserve will limit opportunities for big payoffs from what is known as proprietary trading, using borrowed funds to place high-octane bets on everything from the price of oil to currencies and other commodities.

Berkshire's preferred stock in Goldman will pay 10 percent and can be bought back any time at 10 percent premium. The warrants allow Berkshire to buy $5 billion in common stock at $115 per share any time over the next five years.

Goldman's shares rose $4.27, or 3.5 percent, to close at $125.05 Tuesday in the regular trading session, and jumped another $8.46, or 6.8 percent, to $133.20 in after-hours trading following the announcement of Buffett's investment.

Morgan Stanley's shares rose 91 cents, or 3.4 percent, to $28 in the regular session, then soared $3, or 10.7 percent, to $31 in after-hours trading.

Morgan Stanley got its own cash infusion on Monday, agreeing to sell a 20 percent stake for more than $8 billion to Mitsubishi UFJ Financial Group Inc., Japan's largest bank.

Mark Lane, an analyst who follows Goldman for William Blair & Co. in Chicago, said he had expected Goldman and Morgan Stanley to raise capital after getting the Fed's approval to become bank holding companies.

Buffett's investment "sends a pretty strong message of support for the independent-bank business model," Lane said. "It sends a stabilizing signal to the market."

On Sept. 14, the No. 4 investment bank, Lehman Brothers, filed for the largest bankruptcy in U.S. history, weighed down by fouled commercial real estate holdings and a loss of faith from investors, and on the same day ailing Merrill Lynch & Co. arranged a hasty deal to be bought by Bank of America Corp.

Wall Street's troubles came as a freeze-up in credit markets threatened to clog the global financial system. The U.S. government arranged an $85 billion loan last week to rescue the huge insurer American International Group Inc. and is seeking approval from Congress to buy back some $700 billion in bad mortgages and other toxic debts from financial institutions.

A message left for a Berkshire spokeswoman seeking further comment on the transaction wasn't immediately returned Tuesday. Berkshire officials do not typically comment on its stock investments beyond what they are legally required to disclose.

A spokeswoman at Goldman Sachs said no one was immediately available to talk about the deal.

At last report, Berkshire had total assets of nearly $278 billion, including significant stakes in companies such as Wells Fargo & Co., American Express and the Washington Post Co.

___

AP Business Writer Marcy Gordon in Washington contributed to this report.

Comments

[Gulfhome]

Read my comments: http://sucksalot.com/kw-Sa-Jeffrey-Immelt-CEO-General-Electric.aspx

or not, as you wish. Immelt is no Warren Buffet

[darthdarcy]

It's not Pearl Harbor, it's The Alamo..!

[MyTake]

Hey there Mr. Buffet, why don't you and Bill Gates get together and raise a $100 billion and give it to Bush to help with this crisis.

Hell, you are in your 70's and don't have much time left. Your company as $35 billion in cash, Gates has that Foundation that he can collapse and toss in $50 billion or so. I am sure you could fund raise the rest.

You were so successful in repudiating the Bush tax cuts for the wealthy when you publicly
stated that your secretary's tax rate was much higher than yours. You forgot to tell that secretary how you dumped a big chunk of change into the Gates Foundation and then used that donation to zero out your federal income tax return that year, you sly devil you!

And you and Gates went up to Alberta to see if there was any action in investing in oil operations that cause the most environmentally toxic territory on earth.

Now you cherry pick on Goldman while having insider information on the bailout package which will make you some profit. A patriot you are not, sir! Has anyone introduced you to the hydrogen economy yet? Think of the money you could make there!

[NGuarente]

Alternative Plan:

In 18 months, the U.S. government commits to provide 1 trillion dollars
divided by the 3,141 counties and incorporated cities in America. Every
one of them gets $300,000.000. Money used for infrastructure, roads, rail,
school refurbishment etc. Purpose: create jobs, lending, borrowing,
car sales, home sales, savings and tax revenues.

Let wall street, including Buffett, fend for themselves.
Wall street cheated for the gains. They eat the losses.

[cognitivedissident]

and if 100 billionaires did the same?

well, you do the math. ahem.

[Semper]

When Bush changed the bankruptcy laws, this guaranteed payment on the mortgages. But no one saw the bottom fall out of the real estate market. If funny how nature seems to get around us. Yes Bush tried to help in the making of a mortgage backed security that failed. Now he wants to provide another guarantee, the BAILOUT.

[Semper]

Now Warren has a very good marketing arm for his insurance business. Yes at his level you can't make any mistakes. I just love the synergism of this deal.

[windwalker1984]

The headlines in the world newspapers tomorrow:

Hurry, hurry, get your copy!

"Inferior Socialism Finally Bails Out Superior Tricknomics Capitalism That's on it's Deathbed"

[Semper]

Yes this is bad paper sold to China and the foreign market. Payments are coming due and we must pay. If we default, then China won't lend us anymore money. No one thought that the real estate market would fall. no one was watching or regulating what Goldman Sachs was doing. Benacke went to the White House, nice job. Bush forgot that the banking system is separate from the investment market, but if Bush keeps threatening the Public, the markets will drop to 800, because the markets are based on confidence. The Congress must not be very smart on our financial systems, and it tells. The Bush Administration is selling so much hype, that almost everyone is fooled. Man, George has no conscience. I hope the Congress has the back bone to just say NOOO to the Bailout. Its a very bad idea. If a few investment firms fall, the world will not come to an end. Just a few executives will be sued via a derivitive class action suit for misconduct. But if the bailout comes, all will be forgotten and we will never get to the bottome of this.

[Rondo]

this is one more reason why the global warming extrapolations cannot be trusted. It only takes one buffet variable in the system, even unknown to be part of the system, to totally disprove the so called scientific theory once it is put into practice. I wondered when buffet would start playing the role of jp morgan in 1907. now he is in . he would be best to replace paulson. bernake would be better replaced too. I heard bernake on tv today and he does not have what greenspan had. he is a wonky donkey. greenspan was not so great either considering the mess we now have was his baby but greenspan had mystique. bernake is some guy who would otherwise be running a diner in new jersey along the highway. the two of them should have snapped and told off some of the senators like dodd that dodd bears responsiblity for a lot of bad mortages because of how his committee decided to react against greenspan's desires to change the fannie and fredie&n bsp; business models before we got to this point. fox played the original tapes from those hearings today! greenspan was ignored by the senator and his committee in telling them that fannie and fredie were going to go down in massive crashes if the government did not change rules in advance. dodd voted against greenspans's recomendations.

[Rondo]

So in better times twenty years from now buffet's transaction today could come out being worth ten billion dollars in interest paid in 20 years (if it were to continue as i dont know the maturity ) plus 20 billion dollars worth of common shares worth a total of 30 billion dollars to the 5 invested! I think goldman is going to look ugly in the future before it looks pretty again but buffet has the ten percent locked in now.

now you know some of the truth behind the media fiction you will read tomorrow and see on tv.Jim cramer on mad money will be telling people to sell the gold tomorrow or will he wait till it slips to $700 an once? This one move by buffet could be a big bear squeeze for a while and longer as it still is an election year. I have given up on the election year pop theory but who knows.

[Rondo]

I bet that the money he spent may even have come from the federal government as a gift to help stop the bleeding on wall street's recent sellathon. just goes to show that capitalist solutions by government can work a hell of a lot better , once again , than the alternatives, buffet is no average financial genius. to write an insurance policy like this on ground zero wall street is right up there with sir issaac newton! now i both wish i did not sell the shares and am glad i did as buffet is really valuing the shares as dividend paying convertible bonds at around 1/10 their present value (PS I am one of the few financial geniuses who can dicipher that for you that it was really a market insurance premium and that the intrinsic value buffet effectively calculates on shares is about 1/10 the market price) the reason I can do it is the central core of buffet's objectives in buying anyshares is in getting a better deal than mere intrinsic value&n bsp; of shares. the google finance says intrinsic value is maybe as high as $400 a share before the revenues recently crashed there.

[Rondo]

I just ran some numbers on buffets special deal purchase of Goldman Sachs shares. Ordinary common share investors would have to buy the $118 stock at yesterday's price for just $13.21 cents a share to get the benefit of the 10 percent perpetual convertible annual dividend that buffet will get on the 5 billion dollars worth of shares he bought today. (I dont actually see how many shares at what price he did buy we just have the total ) buffet took about an 8 percent stake in the company I would guess at yesterday's price. the whole deal looks more like an insurance premium for market survival that buffet paid because his deal is 8 to ten times more favorable to his cap infusion than to the poor existing shareholders! The risk to buffet is 8-10 times lower than that of ordinary holders with the first claims on ten percent interest a year or 500 million dollars a year! He wrote a god damn premium against the demise of that company for all practical purposes.

[Siryn]

It is important to remember, Buffett isn't buying the assets, he is buying preferred stock that will return a healthy dividend. Goldman is the most likely to come out on top of the mess, and they've been very astute so far with their analysis. Not perfect, but very good. The bailout package is the federal government buying the assets, but there is negligible return for the taxpayer, if any, under the plan - not to mention the crazy amount of unchecked power at Paulson's fingertips. This plan could single-handedly destroy the already embattled dollar if wielded by a fool.

[Ihaveadream]

Here's the big story everyone missed this year - CONNECT the DOTS

Why was Eliot Spitzer politically assassinated? Because of this public editorial he wrote that was published in the Washington Post: Predatory Lenders' Partner in Crime, How the Bush Administration Stopped the States From Stepping In to Help Consumer, by Eliot Spitzer Feb 14, 2008 - less then one month before the hookergate dirt was released to the media frenzy:

http://www.washingtonpost.com/wp-dyn/content/article/2008/02/13/AR2008021302783.html

Video here http://www.brasschecktv.com/page/291.html

Spitzer single-handedly rallied first state attorneys general and then fellow governors to fight the creation of these sub-prime, predatory loans and, in the process became Public Enemy #1 to the Bush Administration. And that was rain on Bush's bases' parade of greed and corruption.

[DARKESTDONNIE]

Where were the dems these last two years that they have been in charge?
Where was the outrage?
Where are the proposed laws to allow oversight?

Paid off maybe?
Complicit for sure!

[blueshield]

We lost a lot when we lost Spitzer - even more so now than before - but, hey, he knew how to keep his zipper up. It wouldn't surprise me they were gun.ning for him, but nobody made him do it. Real sad for the country.