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Goldman Sachs Buys Out Warren Buffett

Goldman Warren Buffett

03/18/11 04:15 PM ET   AP

OMAHA, Neb. — The Goldman Sachs Group Inc. said Friday it has received regulators' permission to spend $5.65 billion to repurchase Berkshire Hathaway's preferred shares in the banking giant.

Goldman said the Federal Reserve has approved its plan to repay Warren Buffett's company for the $5 billion investment it made at the height of the financial crisis in the fall of 2008.

Goldman was eager to repay Berkshire because it had been paying 10 percent interest on the preferred shares, which translated into an annual expense of $500 million.

"Berkshire Hathaway's 2008 investment in Goldman Sachs was a major vote of confidence in our firm and we are very appreciative of it," Goldman spokesman Stephen Cohen said.

The repurchase will weigh down Goldman's first-quarter earnings by $2.80 per share because it includes a one-time preferred dividend of about $1.65 billion.

The Federal Reserve also approved Goldman's overall capital spending plan for 2011, including the repurchase of common stock and a possible increase in the bank's quarterly dividend. But Goldman did not announce any stock purchase or dividend plans on Friday.

Goldman was one of a number of banks subjected to "stress tests" conducted by the Federal Reserve to see if their balance sheets were strong enough to weather another recession. On Friday, the Fed said it had completed those tests and expects that "some" banks will increase or resume dividend payments and buy back shares. The Fed did not reveal the names or number of banks that are expected to do so.

Berkshire's Goldman investment figures in a high profile insider trading trial because prosecutors say a former Goldman board member tipped off Galleon hedge fund founder Raj Rajaratnam about Berkshire's investment before it was announced.

The SEC said Rajaratnam directed his hedge fund, the Galleon Group, to buy 175,000 shares of Goldman stock within a minute of receiving the tip about Berkshire's investment, enabling him to earn nearly $1 million in profit. Rajaratnam's trial began earlier this week. He has denied wrongdoing. The former Goldman board member has also denied wrongdoing.

Buffett did not immediately respond to a message Friday seeking comment, but he predicted in his annual letter to shareholders last month that Goldman would soon redeem the shares.

Buffett has said that the $500 million dividend Goldman had been paying Berkshire broke down to nearly $16 a second, making every tick of the clock sound like music to his ears. But he said Goldman didn't seem to like hearing its money tick away.

Buffett told shareholders that Goldman's decision to redeem shares – along with similar moves by Swiss Re and General Electric – will diminish Berkshire's earning power because it will no long receive the special high dividends.

Berkshire's 50,000 preferred shares of common stock will be repurchased for $110,000 apiece on April 18 because Goldman was required to give 30 days notice.

But Berkshire will continue to hold warrants to buy 43.5 million common Goldman shares at a price of $115 per share anytime before the fall of 2013.

Earlier this week, Berkshire found a use for some of its cash when it announced a deal to pay $9 billion for specialty chemical company Lubrizol Corp. That deal, which includes $700 million in debt, is expected to close in the third quarter, if shareholders and regulators approve.

Berkshire owns roughly 80 subsidiaries, including clothing, furniture, jewelry and corporate jet firms, but its insurance and utility businesses typically account for more than half of the company's net income. It also has major investments in such companies as Coca-Cola Co. and Wells Fargo & Co. Berkshire has more than 260,000 employees worldwide but only 21 at its headquarters in Omaha.

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Filed by Ryan McCarthy  |