By Heather Landy and David Cho
Washington Post Staff Writers
Wednesday, September 24, 2008
NEW YORK, Sept. 23 -- Billionaire investor Warren E. Buffett will pump at least $5 billion into Goldman Sachs, restructured this week as a bank-holding company, as the firm tries to quell concerns about its access to financing, Goldman Sachs announced Tuesday.
The investment by Buffett represents a major vote of confidence in the battered financial system from one of the country's most respected investors.
Buffett has long touted the value of investing in well-known brand names such as Coca-Cola and Kraft because they can charge premium prices for their products and services. Goldman Sachs is no exception.
Long regarded as the standard-bearer for Wall Street, the firm has largely avoided the massive write-downs from mortgage-related assets that have felled its rivals. It also has not posted a quarterly loss since the credit crisis began more than a year ago.
Still, the investment bank's earnings have been dwindling over that time, and its stock was punished last week by markets that doubted whether the investment banking model could survive the current turmoil.
Goldman's shares sank as low as $85.88 on Thursday, well below its 52-week high of $250.70, reached last October. And, after some of its clients began to withdraw their business from the firm last week, Goldman launched a sweeping plan to turn itself into a traditional commercial bank.
If the restructuring goes well, Buffett, the nation's second richest man, could reap a handsome reward.
The deal allows Buffett's Berkshire Hathaway to buy $5 billion of preferred stock, which will pay out a 10 percent dividend. Goldman can buy the stock back at any time, but it would have to pay a 10 percent premium to do so.
In addition, Buffett's Omaha conglomerate has the option for the next five years to purchase an additional $5 billion of common stock in Goldman Sachs's common shares at $115 apiece. That price is already 8 percent below where Goldman Sach's shares closed Tuesday at $125.05.
The announcement was made after the close of financial markets. In after-hours trading, Goldman shares soared another 7.8 percent to $134.75.
The combined investments would give Buffett an ownership stake of about 10 percent in the firm. Buffett is a director of The Washington Post Co.
"Goldman Sachs is an exceptional institution," Buffett said in a statement. "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."
Goldman Sachs chief executive Lloyd Blankfein called Buffett's investment "a strong validation of our client franchise and future prospects." Goldman Sachs also said in a statement that it would raise $2.5 billion more in a public offering of common stock.
Separately, Sumitomo Mitsui Financial Group, Japan's third largest bank, is planning to invest hundreds of millions in Goldman Sachs, the Kyodo news agency reported Wednesday, citing unnamed sources.
A spokeswoman for the bank later said Sumitomo did not have any such plans at this time. Over the past two decades, Goldman and Sumitomo have alternated making substantial investments in each other, usually when one of the companies is in need of capital.
Correspondent Blaine Harden contributed to this report from Tokyo. Cho reported from Washington