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

[dgscol]

Coverups, etc.

Buffet is covering Goldman Sachs because it takes away from Paulson's bailout plan, to ask for a bailout for Goldman Sacks.

One might notice that Congress was resisting paying for another bailout when Paulson came up with this. They knew the candidates would not support this, and so they had a crisis if they wanted a bailout. when McCain declared himself a maverick and said the government needed reform, Paulson declared a crisis.

I believe there is no serious crisis. They are grabbing the money because it is there. They might be pinched, but they will get by. They might ask for the federal government to assist them, by investigating criminality in banking, and imposing sensible regulations.

[Project4NuBostonTeaParty]

Are any of you wondering where this $700 billion sum has come from?

I'm wondering. Oddly enough, just last night I came across an old New York Times editorial, "Hardball with Warren and Eliot", from Feb. 16, 2008, in which "$800 billion" was mentioned in the same sentence as Warren Buffett:

http://www.nytimes.com/2008/02/16/opinion/16sat1.html?_r=1&th&emc=th&oref=slogin

"... earlier this week, Mr. Buffett offered to provide backstop insurance for $800 billion of municipal bonds insured by the troubled companies, for a hefty fee. His proposal would essentially split the bond insurers’ profitable municipal business from the money-losing subprime business. They were loath to do that, but unless they come up with a better plan, a potential breakup along those lines by New York State regulators could be in store." ...

Anyone know if this breakup happened?

Is Paulson's Plan a coverup for stuff that Eliot Spitzer had unearthed but then got buried underneath his "prostitution" troubles that strangely surfaced a couple of weeks after this editorial?

What a tangled web we weave, Mr. Hank of Goldman Sachs?

[Rule Of Law]

""This Is Sort Of An Economic Pearl Harbor"

So, wait--is he saying that this was an inside job, that was known about in advance, and pushed by the banking special interests in order for us to rush into a rash course of action?

Wow. But I guess that given the fact that a government spokesperson admitted today that they had been looking at solutions for this "crisis" for several months already, lends credence to the reality that this meltdown was about as unanticipated and lacking in collusion as Pearl Harbor was!

[vschicago]

I suspect Buffett is just one of the few racists that thinks his philanthropic contributions and his eagerness to "help" all those who seek his counsel will neutralize his part in all the heinous and hideous mistreatment done to billions across the globe. You don't have to worry about a paycheck Mr. Buffett; don't you think you would serve the majority of the population more by talking to white people about their practicing of white supremacy on the highest level and telling them to replace justice with racism? If you do this, you might lose your life, but at least you'll have a very nice funeral.

[LemonMeringue]

This is good. Buffet is the free market.

NO BAILOUT

NO WELFARE FOR WALL STREET BOYS

[SCG]

Where are the moguls and financiers of the world, trying to prop up our banking system? If we go down, will pull the global plantation along for the ride.

"Give me liberty, not debts"

I'm not a debt slave.

[chicago25624]

Well dumb ole repubers like me just plopped down money and bought 5000 shares of Freddie and 5000 of Fannie at less than .35 per share last week, and dog gone ifin it aint up over $1.70 a share.

Man I love being so dumb. I was so stupid to sell off my 10,000 shares today and make more than 5times profit. Dang I is dumb. Maybe I is dumb enough to buy back in as the government has just stated they are not going to let it go down the tube, and when it goes back up be dumber and makes me some more monies. Dang it's fun being a dumb reper.

But why should we be so greedy and make money? I guess when Warren buys in at the bottom, and is backing a certain candidate, it's OK. But when we repers do it, it is pure greed.

[blueshield]

B.uffet, recognizing the dimensions of the pipeline being built from the US Treasury to Goldman Sachs by Paulson, former Goldman exec, current shareholder, decides to take a "gamble".

[bascombe]

all the reason anyone needs not to approve this package. who else could buy into a government bailout?

[Harod]

this a buying opportunity folks..

[chicago25624]

AMEN. It has been a great time to buy. Bought 5000 Freddie and 5000 Fannie at less than .35 a share.

But who would think to buy low and sell high? Oh Yea, Capitalists.

[berrycooda]

Buffet has gotten rich off stocks.

Why doesn't he bail out Wall St. with 700 billion....Then he can own the whole thing.

Unless he is one of the wealthy who stand to lose if we don't bail out the sinking boat.

[NCNative]

Why doesn't the US offer "Bailout Bonds" - like we did with War Bonds during WWII? That way, we could let the Americans who want to invest do so, by choice rather than by force. Warren Buffet has stepped up to the plate - why not others?

[bascombe]

warren is looking for government bailout money. he simply has enough money to buy in. who else gains with the bailout? bankers and insurance. no one else. many will still lose jobs and much of the middle-class will suffer in either case. I simply prefer they recover, just like they did before, without my treasury being looted.

[gretcheno]

Must be nice to have billions in your account.

[PT6]

Buffett should be proud!

This is the TRICKYiest Mortgage of all!

They want use to borrow money from China and others and give it to them with no EQUITY in return.

This is the last great Haul of this coruuupt administration.

INSIST on EQUITY IN THE BANKS!

[jake1492]

Part 1
Mr. Buffet,

A reading of the transcript from the interview in which you expressed "unqualified support" for the Paulson plan.... it appeared that you accepted the idea of the bailout being in the form of government purchase of (non-performing) mortgage backed assets. You also state that you believe that the government would stand to do very well in the long run with these assets as they re-appreciate in value. You also explain that the only reason the government has to do it is because they are the only ones capable of borrowing enough money to do it effectively. In the interview you don't explicitly comment on the "There shall be no review....." clause of the proposal.

All of this begs the following questions:

1) How is it that the government is going to do well in the long run if the people who are supposed to be paying these mortgages now (and have shown that they can't) are left in exactly the same predicament after the bailout,

[DARKESTDONNIE]

The needs of the many out weigh the needs of the few!

[bascombe]

or the one!

[jake1492]

Part II
2) Why is it better to make the intervention at the mortgage backed asset level than at the individual mortgage level? It appears to me that, by intervening at the home owner (indivdual mortage) level, the intervention at least addresses all the problems... which are.... the disruption to the lives and financial health of the individuals who owe these mortgages, and the illiquidty in the finanicial markets because of the non-performing mortgages. Please explain why it's better to leave the home owner "on their own" while solving the financial crisis for the bank.
3) Do you actually support the idea of there being no possible review of the actions of the person weilding this $700Billion treasure chest? Surely there must be some cause for concern about the possibility of either corruption or incompetence.

[DARKESTDONNIE]

The home owners whose arms were twisted and made to sign without any idea what they were doing (supposedly tricked by the banks and realtor) should be helped by a credit for a class at the local city college in basic home economics!

[gretcheno]

I am a realtor and I have never tricked ne one to sign, homeowners need to take responsibility for not paying thier bills. With the arm type loan I would have told them not to do that because this is where a great deal of the problem came into play.

[bascombe]

the federal gov't should assume the mortgages, in effect becoming the lender, and then they can set terms for mortgages to be paid when circumstances make it reasonably certain that a mortgage will be paid. for the 'bad' ones, they can do like banks and hold the properties for auction. In any case, there are rules and formulas for underwriting good mortgages. they should be followed.

that cleans up a significant amount of the "CDS" problem. I am absolutely certain that it would not cost $700,000,000,000.00.

[SomeNut]

And there ya have it a nutshell.
Likely the most unintelligent post yet.
However everybody wants to blame others

[DARKESTDONNIE]

No some oversight is needed just not by the sightless congress!

[bascombe]

now you're seeing it! the $00,000,000,000.00 is so the rich are cushioned. notice that there is no taxpayer, worker or consumer protection in any part of the three page proposal. not one syllable.