Buffett to take $5bn stake in Goldman

By Henny Sender and Greg Farrell in New York
Published: September 23 2008 22:58 Last updated: September 24 2008 00:41

Goldman Sachs is to raise $7.5bn from Warren Buffett and other investors, fortifying its financial base as it begins its transition from Wall Street broker to Federal Reserve-regulated bank holding company.
Goldman said late on Tuesday that Mr Buffett’s Berkshire Hathaway had reached an agreement to buy $5bn of preferred stock in a private placement and to receive warrants enabling it to purchase another $5bn of common stock. Goldman also said it planned to sell $2.5bn in common stock through a public offer.
The deal appears to represent a change in strategy for Mr Buffett, 78, who has avoided investing in Wall Street firms since helping to rescue Salomon Brothers nearly two decades ago.
The deal seems to reward Berkshire handsomely. The preferred stock will pay a dividend of 10 per cent. Although it can be bought back by Goldman at any time, the bank would have to pay Berkshire a 10 per cent premium to do so. The warrants – which can be exercised over a five-year period – have a strike price of $115, well below Goldman’s closing price of $125.05 yesterday.
The shares rose in after-market trading – a reflection of the regard Mr Buffett enjoys in the markets. Insiders said raising money from Mr Buffett represented an endorsement during a period when cash is king on Wall Street.
The $7.5bn boost in equity comes a day after Goldman received an accelerated approval from the Federal Reserve to restructure itself as a bank holding company. The transition from pure investment bank – which could operate outside the regulatory purview of the Fed – to bank holding company was designed to allay investor concerns about the future of Goldman’s business model.
As recently as Monday, senior Goldman staffers had maintained they had no need for new equity unless the new capital helped served a strategic purpose.
Sovereign wealth funds such as the Kuwait Investment Authority have long sought a stake in Goldman. In recent days, there has also been market speculation that Industrial & Commercial Bank of China, in which Goldman has a minority stake, was considering making a reciprocal investment in Goldman.
“We are pleased that, given our longstanding relationship, Warren Buffett, arguably the world’s most admired and successful investor, has decided to make such a significant investment in Goldman Sachs,” said Lloyd Blankfein, chief executive of Goldman . “This investment will further bolster our strong capitalisation and liquidity position.”
“Goldman Sachs is an exceptional institution,” said Mr Buffett. “It has an unrivalled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance.”
Copyright The Financial Times Limited 2008