Warren Buffett, the billionaire investor who foresaw the credit crisis, is investing up to $10bn in the US banking giant Goldman Sachs, in what is interpreted as a powerful signal that he sees long-term value in some battered financial companies.
Goldman said last night that Mr Buffett's investment vehicle, Berkshire Hathaway, would immediately buy $5bn (£2.7bn) of preferred stock and obtain warrants to buy $5bn in common shares over the next five years.
The bank is also raising a further $2.5bn in common stock to restructure a balance sheet that shareholders, creditors and regulators have all told it must be made significantly less risky.
Having $7.5bn more in liquid funds will immediately reduce Goldman's leverage, which is the ratio of its potential liabilities to its underlying assets. Sky-high leverage made investment banks unstable, leading to the collapse of Bear Stearns and Lehman Brothers, and threatened to sink the last two remaining standalone investment banks at the height of last week's panic.
As a result, on Monday, Goldman converted from an investment bank to a traditional bank holding company, bringing it under the formal purview of the US Federal Reserve, which insists on much lower leverage among the banks that it regulates. The change could dramatically change the culture of Goldman, a 139-year-old institution which in recent years has become the most powerful force in high-octane trading, yielding multi-billion dollar bonuses for its stars and record profits for shareholders.
It has been spared the worst of the write-downs on disastrous mortgage investments, which it largely shunned before the credit crisis struck, but still faced a near-death experience last week when bond market investors and share traders concluded that it could not survive in its existing form.
Last night's fund-raising gives it a cushion against future shocks, and a powerful advocate in Mr Buffett.
"Goldman Sachs is an exceptional institution," the tycoon said in a statement. "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."
That Mr Buffett should be making a headline-grabbing investment in a beaten-down bank is all the more remarkable because of his unhappy experience as a major shareholder in Salomon Brothers at the end of the Eighties, when he lost money and the company became embroiled in a trading scandal. Most recently, in his letters to Berkshire Hathaway shareholders, the man known as the Oracle of Omaha for his homespun investment wisdom has derided the complex derivatives beloved in the investment banking industry as "financial weapons of mass destruction" and "time bombs".
He has long predicted that the opaque nature of the derivatives market would lead to trouble, and the explosive chain reactions in the credit markets have proved his point.
Tim Ghriskey, the chief investment officer of Solaris Asset Manager, said: "Any time Warren Buffett and Berkshire Hathaway step in and invest in something everybody takes notice. It is certainly a vote of confidence in Goldman and its new structure. Clearly they are saying that Goldman is not only going to be a survivor, but that it is going to prosper in this new world of financial companies that is being created."
Goldman shares surged 10 per cent in after-hours trading when the news of Mr Buffett's investment was came through, although they later fell back to a more modest gain as investors digested the dilution to existing shareholders from the new common stock offering. They also noted that Berkshire Hathaway would be paid a handsome 10 per cent dividend on his $5bn of preferred shares.
"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, Goldman's chief executive. "We view it as a strong validation of our client franchise and future prospects."Reuse content