The market has been waiting for billionaire investor Warren Buffet's investment company Berkshire Hathaway (NYSE: BRK.A) to invest in a financial firm, and Buffet announced yesterday that he would invest $5 billion in Goldman Sachs (NYSE: GS). The $5 billion will be used to purchase perpetual preferred stock bearing a 10 percent annual interest rate.
The move comes as Goldman is looking to raise $7.5 billion worth of fresh assets. In addition to the initial $5 billion investment, Berkshire also will be receive warrants to purchase an additional $5 billion worth of common stock in the company for $115 a share. The stock closed yesterday's trading at $125.05, and has jumped nearly 7% in after hours trading following this afternoon's announcement.
Goldman believes that this cash infusion will, in the words of Lloyd Blankfein, Goldman chairman and chief executive, "bolster our strong capitalization and liquidity position."
In addition to Buffet's capital, Goldman is also looking to raise "at least" an additional $2.5 billion by selling common stock in a public offering.
Buffet had warm comments regarding Goldman, saying in a press release "Goldman Sachs is an exceptional institution... with a deep management team and the intellectual and financial capital to continue its track record of out performance."
The move comes in the wake of Goldman's decision over the weekend to reclassify itself into a bank holding company, a move which will broaden its scope and help it avoid the sort of meltdown Lehman Brothers went through earlier this month before filing for bankruptcy.
Morgan Stanley (NYSE: MS) also reclassified itself as a bank holding company. This marks a big change for Wall Street, as the two companies were the last of the big independent Wall Street banks. The change into regulated commercial banks marks the end of the Wall Street we have known since the 30's.
Michael Fowlkes has worked as a stock trader for seven years and spent the last four years working as an analyst for the online investment advisory service Investor's Observer.
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Reader Comments (Page 1 of 1)
9-24-2008 @ 12:26PM
Mike Sanders said...
I am directing the the majority of discretionary investment funds, back into the financials. This morning, before the bell, I put out a buy signal on Marshall & Isley (MI)... I am hereby, re-iterating that call. With Warren picking up GS and myself, more than doubling my position in MI, I hope that this market will begin, once more, to climb, lifting all boats. Thank you, for the cooperation which I've received, particularly from Scottrade, for proding the additional financing necessary for me to accelerate my purchaes, of MI.
9-27-2008 @ 4:29AM
junglejim said...
Not being very good at math, let me see if I understand this. Warren Buffett bought 5.0B of preferred stock in Goldman Sachs that pays 10% interest or $500,000 a year interest. For that he also received 5.0B in warrants to purchase comon stock at $115.00/share. The closing price of the common stock stands at $125.00/share. If my poor math is correct that reprsents a $10.0B profit. Therefore Warren Buffet makes $500M a year for a zero dollar investment and secretary of the treasury makes $70 million on his holdings, if the bailout goes through. I don't understand how this is a good deal for the american taxpayer.