Berkshire to invest at least $5 billion in Goldman
Buffett may be lured by stabilized business model of Wall Street firm
SAN FRANCISCO (MarketWatch) -- Berkshire Hathaway agreed late Tuesday to invest at least $5 billion in Goldman Sachs Group, with billionaire investor Warren Buffett backing a Wall Street firm that's begun transforming itself into a more-stable banking business.
Berkshire , the insurance-focused conglomerate run by Buffett, will invest at least $5 billion in Goldman by buying $5 billion of perpetual preferred stock issued by the investment bank. The securities pay a dividend of 10% and are callable anytime at a 10% premium, meaning Goldman can buy them back at the higher price.
Berkshire also gets warrants to purchase $5 billion of Goldman
common stock with a strike price of $115 a share. Buffett can exercise these at anytime over five years, Goldman said in a statement.
"Buffett did this after Goldman converted to a bank holding company," said Pat Dorsey, director of equity research at Morningstar.
This means the Federal Reserve will be Goldman's new regulator, so Buffett "has people looking over their shoulder," he added.
"Buffett is saying that, with less leverage and more stable sources of funding, this is an institution worth investing in," according to Dorsey. "From Buffett's perspective you have a world-class firm in a less-competitive landscape with a hopefully less-risky business model."
Goldman also said that it's raising at least $2.5 billion by selling common stock in a public offering.
Shares of Goldman Sachs shares jumped 8% to $135.30 in after-hours trading Tuesday.
Buffett's investment is "a strong validation of our client franchise and future prospects," said Lloyd Blankfein, chief executive of Goldman, in a statement. "This investment will further bolster our strong capitalization and liquidity position."
"Goldman Sachs is an exceptional institution," Buffett commented. "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."
Less 'evil'?
Goldman and rival Morgan Stanley , the last two major, independent brokerage firms, gained approval on Sunday to become bank holding companies that will be regulated by the Fed.
The Fed will be a much tougher regulator than the Securities and Exchange Commission, which oversaw these companies until this week. That means Goldman and Morgan Stanley will probably become less profitable, but more stable, as they reduce leverage and limit riskier activities such as proprietary trading, commodities and merchant banking, analysts said Tuesday.
The changes may be especially big at Goldman, which has made big profits from proprietary trading in recent years - a source of returns that's inherently opaque and volatile.
But a less-profitable, more stable Goldman, overseen by a stronger regulator, may be exactly what Buffett has been looking for as he searches for big investments in the wreckage of the current financial crisis.
Berkshire already has big investments in banks and other financial companies including Wells Fargo & Co. , American Express and US Bancorp.
But Buffett said earlier this year that some investment banks and commercial banks were too large and complex to run.
The culture of investment banks is in some ways "evil" and counterproductive to the financial health of the United States, Berkshire Vice Chairman Charlie Munger said in May.
Traders in such firms are often eager to make overly risky investments, a practice which is difficult for the heads of brokerages to stop, he commented, putting too much risk on the financial system.
Buffett specializes in buying undervalued companies. But until now, he's been notably absent as financial-services stocks plunged this year.
The billionaire investor has been particularly critical of some investment banks' reliance on computer models to manage risk.
The Goldman investment is Buffett's first in an investment bank since 1991. That year, he became the largest shareholder of Salomon Brothers after the firm almost collapsed in the midst of a trading scandal. The Berkshire chairman salvaged the business, but his investment didn't generate much profit.
"The worst thing you can have is models and spreadsheets," Buffett told Fortune magazine earlier this year. "At Salomon, they had all these models, and you know, they fell apart."
That experience probably soured Buffett's view of brokerage firms, making him less likely to get involved in bailouts of companies like Bear Stearns, investors said earlier this year.
