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

[solid]

Isn't it interesting that Fratto admitted that Bernancke, Paulson, and the Bush Crime Family had this whopping 3 page bailout plan drawn up months ago? It was nice of them to finally let us in on the secret.

[styleturn]

http://www.cnbc.com/id/26867866

"And the big buyer, if they -- they shouldn't pay any attention to the cost of these instruments to the selling institutions. They shouldn't pay any attention to the carrying value. In fact, one thing you might do, is if someone wants to sell a hundred billion of these instruments to the Treasury, let them sell two or three billion in the market and then have the Treasury match that, for what they pay. You don't want the Treasury to be a patsy."

Buffet appears to be saying the exact opposite of what everyone believes Paulson is promoting. In fact he is arguing that the government should be getting a better deal than he did from Goldman, and he got a whale of a deal. That applies to bad assets, the government puts out a bunch of the stuff in order to find the floor and then uses that as a basis for other purchases. Paulson wants to buy high and sell low. Buffet wants to clean things up and is trying to establish a negotiating standard.

[steveRB]

I admire Buffet in many respects. But to say this is an economic Pearl Harbor and we must bailout these financial institutions is disappointing.

[Seamus]

It will probably drive the price down on other struggling institutions so he can buy them cheaper.

[naschkatze]

Buffet plays Pied Piper.

[NGuarente]

If the U.S. government would spend 1 trillion dollars in the next 18 months
in the 3,141 counties, parishes and incorporated cities in the United States,
it could infuse over $300,000,000 million dollars into every one of them
(assuming each got the same amount, which would not be necessary).

What would your county do with $300 million? What could it build? Who
could it employ?

This generates jobs, car loans, mortgages, savings, investment and
tax revenues.

[solid]

At the very least, we would get all those d*mn potholes fixed!

[mediawatcher1975]

That has been my point. Why not use this money to rebuild our economy and infrastructure from teh bottom up? They are just trying to keep us in a credit cycle. On of Bernake's reasons for the bail out is so that money is available for buying homes and cars!! More credit is not the answer. The big banks can crash and burn for all I care. If it starts to trickle down then the government can bail out the people.

Funny how trickle down economics only works with debt and not profit.

[OutOfContext]

Buffet's deal is like saying to the average Joe - "look..., there's a 100 dollar bill. You can have it if you can find a penny..."

It's also just a confidence-building device. I doubt the markets will buy into the smoke-screen all the way.

[FogBelter]

Let's see ... 700 billion bailout dollars managed by the former CEO of Goldman Sachs ... probably a good investment for Buffet

[poppaculture]

Trash Buffet if you must, but at least he walks the walk. --
Where is the PRIVATE SECTOR in this debacle? -- Where are the RICH with capital? WHEN will they step up and save this country? Or is their patriotism NOT a market value, and their golden chutes have opened and they're far away? -- --- --- It's time for the private sector to put their profits where their mouths are and SAVE the market (this is not the PUBLIC sector's problem in a truly capitalistic society)

[FogBelter]

When have the rich ever been about patriotism? "Patriotism' is the narcotic the wealthy employ on the poor so they will sacrifice their children in money making endeavors.

[surferbuoy]

Funny you should mention that, Jack Welsch just sais he would work as a McCain economic advisor for $1.00 per year.

[ChimpmasterDJ]

Gee Warren... it's like deja-vu all over again, innit?

Who remembers John Gutfreund and the Salomon debacle?
http://cityfile.com/profiles/john-gutfreund

[MissingAmerica]

Yes, if that is what is needed, by all means we should do it. But we should not give Paulson the keys to the treasure chest. To ask for $700 billion dollars with no oversight and no questions as to how it's spent is totally against democratic principles of this country, as has been everything else this administration does. If we are going to bail out Wall Street, there have to be conditions. If not, we are simply doing what we have done with Bush -- ignore a record of waste, underachievement and corruption and leave him to do the same thing on a grander scale. If our money is given with no oversight, it is truly time to make some changes in the way this country does business.

Further, as it is apparent Bush will not be impeached, he should certainly be held responsible and accountable once he leaves office. He lied to wage a war that has killed and maimed hundreds of thousands, left millions homeless and, ultimately, financed it with our money. He has left us to drown in a sea of debt while he puts his corporate bigshots in the life raft. He needs to be in prison, at the very least.

[BluePride]

These pics, then, are worth $700 BILLION words:

http://www.youtube.com/watch?v=dVwpMB8QAUU

http://www.youtube.com/watch?v=59mOukUZNUo

[SlithyTove]

Howard Rodman said it better than anyone else, and in a blog right here on HuffPo...t­he simplest primer on why Paulson's proposing what he is, and why Buffet is doing and saying what he is.

It's a great read:
http://www.huffingtonpost.com/howard-a-rodman/keith-richards-cockroache_b_128760.html

[reggieb]

Buffett is in the process of transferring something like 85% of his estimated net worth of 44 billion to five philanthropic foundations - one them being the Bill and Melinda Gates Foundation. He has always said the bulk of his wealth would go to charity and began to implement his plan in July.

[NGuarente]

Buffett buys 5 billion Goldman preferred at 10%. Intraday price 115. Has warrants to buy 5 billion more at 115 when the price has been bumped by the news to 135. On paper, in a day, Buffett has
made $870 million.

Bankrupt Lehman paid 2.5 billion in bonuses.

The American public gets to buy uncapitalized assets of unknown value for a mysterious price
controlled by a man from Goldman, who is out in four months, and probably going back to
Goldman where he was previously for 32 years.

Spend 1 trillion in 18 months on American infrastructure instead.

[bascombe]

it's that blatant, isn't it. buying into corporate welfare.

[BradPittsburgh]

barack isn't even going to vote on the bill, some leadership.

[DARKESTDONNIE]

If he does not vote for it and it turns out good he will say I voted for it before I didn't vote for it.

[solid]

Brad and Donnie, stop fondling each other in public!