One of the world’s shrewdest dealmakers is betting US$5 billion of his investors’ money that the US financial system is not about to collapse.
Warren Buffett’s Berkshire Hathaway Inc said on Tuesday it was investing at least US$5 billion in Goldman Sachs Group Inc, a huge vote of confidence for one of the survivors of the credit crisis that felled two of its investment banking peers.
In addition to buying US$5 billion in preferred stock, Berkshire got warrants to buy another US$5 billion in Goldman’s common stock. Goldman also said late on Tuesday it would raise another US$2.5 billion in its own public stock offering.
The news sent shares of Goldman Sachs and stock index futures soaring in electronic trading, after the Dow Jones industrial average posted a triple-digit decline for the second day in a row.
It also could lead to new probing questions from lawmakers for US Treasury Secretary Hank Paulson, a former co-CEO of Goldman Sachs.
He and Federal Reserve Chairman Ben Bernanke told Congress hours earlier that quick action on a US$700 billion bailout measure for financial services firms was needed to prevent economic havoc.
Goldman Sachs’ shares had been tumbling ahead of the announcement of the government rescue plan last Friday as investors feared it could face the same kind of funding squeezes as Bear Stearns and Lehman.
Now as members of Congress debate the bailout, it may look to many taxpayers like Wall Street is already cashing in.
Buffett, one of the most successful investors in history, did not mention what is happening in Washington, but he did heap praise on the New York-based firm.
“Goldman Sachs is an exceptional institution,” the chairman and CEO of Berkshire Hathaway said in a news release.
“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,” he said.
It will be Buffett’s second major foray into Wall Street.
In the late 1980s, Berkshire Hathaway invested in Salomon Brothers Inc. When the investment firm admitted wrongdoing in bidding for US Treasury bonds in 1991, Buffett became interim chairman and helped Salomon reach a settlement with the government before stepping down in 1992. Salomon was later sold to what is now Citigroup Inc.
Goldman’s shares rose US$4.27, or 3.5 percent, to close at US$125.05 on Tuesday in the regular trading session and jumped another US$9.70, or 7.8 percent, to US$134.75 in after-hours trading following the announcement of Buffett’s investment.
Morgan Stanley’s shares rose US$0.91, or 3.4 percent, to US$28 in the regular session, then soared US$2.97, or 10.6 percent, to US$30.97 in after-hours trading.
Morgan Stanley got its own cash infusion on Monday, agreeing to sell a 20 percent stake for more than US$8 billion to Mitsubishi UFJ Financial Group Inc, Japan’s largest bank.
Mark Lane, an analyst who tracks Goldman for William Blair & Co in Chicago, said he had expected Goldman and Morgan Stanley to raise capital after getting the Federal Reserve’s approval to become bank holding companies.
Buffett’s investment “sends a pretty strong message of support for the independent-bank business model,” Lane said.
“It sends a stabilizing signal to the market,” he said.
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