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New York: Warren Buffett's Berkshire Hathaway Inc will invest $5 billion in Goldman Sachs Group Inc, in a major boost for the Wall Street bank from perhaps the world's best-known investor.
"It's a vote of confidence which is gold plated," said Michael Holland, a money manager at Holland & Co in New York. "You don't get better than this."
Shares of Goldman rose 8.1 per cent after the announcement, while Standard & Poor's 500 futures gained 15 points. Goldman also announced plans to sell $2.5 billion of common stock.
Buffett is adding Goldman to a portfolio of investments at Berkshire that includes large stakes in a handful of major US commercial banks.
On Sunday, Goldman won Federal Reserve approval to become a bank holding company, giving it easier access to financing and adding to speculation it might buy another bank.
This came after many investors questioned its business model amid this month's market turmoil, causing shares to fall 50 per cent from their record set last Oct 31.
"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."
Buffett is the second-richest American according to Forbes magazine, and built Berkshire into a $199 billion conglomerate by investing in undervalued companies with strong management.
He was not available for immediate comment, according to Debbie Bosanek, who works in his Omaha, Nebraska office.
Lloyd Blankfein, Goldman's chief executive, in a statement noted Buffett's "longstanding relationship" with the company, and called the investment "a strong validation of our client franchise and future prospects. This investment will further bolster our strong capitalization and liquidity position."
Second big investment
Berkshire will buy $5 billion of Goldman perpetual preferred stock that carries a 10 per cent dividend.
It also will receive warrants to buy $5 billion of common stock, or 43.5 million shares, at $115 per share, within five years, which could give it a roughly 9 per cent stake in Goldman. Last week, Goldman said it averaged 448.3 million common shares in the quarter ended Aug 29.
On Sunday, Goldman and rival Morgan Stanley said they would become bank holding companies, enabling them to accept deposits and killing the investment bank model that dominated Wall Street for decades.
The following day, Morgan Stanley said it would sell up to a 20 per cent equity stake, worth as much as $8.5 billion, to Japan's largest bank, Mitsubishi UFJ Financial Group Inc.
Goldman and Morgan Stanley announced the investments barely a week after upheavals at the two other major Wall Street investment banks. Merrill Lynch & Co Inc agreed to sell itself to Bank of America Corp, while Lehman Brothers Holdings Inc filed for bankruptcy protection.
"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," said Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, New York.
Berkshire as of June 30 disclosed stakes in six major U.S. financial services companies: American Express Co, Bank of America, M&T Bank Corp, SunTrust Banks Inc, U.S. Bancorp and Wells Fargo & Co.
A person familiar with Goldman's thinking said the company is not likely to announce deals with these banks.
US Bancorp spokesman Steve Dale and Wells Fargo spokeswoman Julia Tunis Bernard declined to comment. The other companies did not immediately return calls seeking comment.
Goldman said on Sunday it intends to expand its deposit base by buying deposits from other banks, including those in distress.
Goldman's bank unit had about $25 billion in assets and $23 billion in deposits, tiny in comparison to its total assets of $1.1 trillion at the end of August.
The investment is Buffett's second major purchase in a week. On Thursday, Berkshire's MidAmerican Energy Holdings Co affiliate agreed to buy power supplier Constellation Energy Group Inc for $4.7 billion. Constellation took that bid over a higher offer led by France's Electricite de France SA.
Despite his disdain for investment banking excess, Buffett has publicly praised Goldman investment banker Byron Trott, who helped arrange Berkshire's $4.5 billion purchase in March of a majority stake in industrial conglomerate Marmon Holdings Inc from Chicago's Pritzker family.
Goldman also provided financing for Mars Inc's planned $23 billion acquisition of chewing gum maker Wm Wrigley Jr Co. Berkshire committed $6.5 billion to that transaction. Wrigley shareholders will vote on the merger on Sept 25.
When Buffett was 10 years old his father brought him to visit former Goldman Sachs head Sidney Weinberg. And as a young broker Buffett worked with Gus Levy, who later ran Goldman in the 1970s as senior partner.
Buffett's most famous foray into Wall Street came in 1991, when he became interim chairman at Salomon Inc to help it clean house following a Treasury market scandal. Salomon was a major Berkshire investment, but not one of Buffett's best.
"I don't know if it's a statement on all the financials or the market," said Marshall Sonenshine, chairman of Sonenshine Partners in New York, referring to the Goldman investment. "He sees Goldman Sachs as a good value where it's currently priced. Remember, he invested in Salomon Brothers in the past, and that wasn't a sign that Salomon was going to start doing well."
Buffett may have reason to believe a Goldman investment will fare better, said Anton Schutz, a portfolio manager at Mendon Capital Advisors in Rochester, New York.
"The valuation is great, and with what the government's doing to unfreeze debt markets, it's a great time to be buying," he said.
Shares of Goldman rose $10.10 to $135.15 in after-hours trading following the announcement, after closing up $4.27, or 3.5 per cent, to $125.05 in regular trading.