It looks like Berkshire Hathaway Inc (NYSE: BRK.A) CEO Warren Buffett needs another bite of the big apple. Bloomberg News reports that last night Buffett bought a stake in The Goldman Sachs Group (NYSE: GS). Let's hope he has better luck with this investment than the last time he ventured into New York to buy an investment bank -- his 1987 buy of a stake in bond trader, Salomon Brothers. Back then, Buffett doubled his money in a decade -- and went through nine months of misery cleaning it up after a bond trading scandal.
But let's get back to the present -- what exactly did Buffet do with Goldman? He bought "$5 billion of perpetual preferred stock with a 10 percent dividend. Berkshire also gets warrants to buy $5 billion of common stock at $115 a share at any time in the next five years," according to Bloomberg. Goldman can buy Berkshire's preferred stock in Goldman "at any time at a 10 percent premium" and it yields a "10 percent dividend," according to Bloomberg.
Will this work out better for Buffett than his ill-fated Salomon Brothers deal? in September 1987, 21 years ago, Buffett bought "$700 million of Salomon convertible preferred stock -- pay[ing] 9% and convertible after three years into Salomon common stock at $38 a share--against the $30 for which the stock had been selling. This equated to a 12% stake in the company," according to Carol Loomis.
Meanwhile, Buffett's $5 billion injection -- coupled with $5 billion more it plans to raise through what Bloomberg News reports it's calling "accelerated book-building [ABB]" -- brings Goldman's capital more in line with that required to operate as a commercial bank. Its ratio of assets to capital declined from 23.7 to 19.4 as a result of the $10 billion from Buffett and the ABB combined. But there is a long way to go. Goldman should ultimately reduce that ratio to 10, which means that it just needs to raise an additional $52.3 billion in capital. Goldman stock is up 1.5% in pre-market.
I hope for Buffett's sake that his investment in Goldman does not yield any unpleasant surprises like the Salomon trading scandal. But I am glad that this private sector solution is boosting the markets. More such private deals would help restore some luster to our financial system.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 1)
9-24-2008 @ 9:25AM
DFerraez said...
W B has the track record to show he knows what he is doing. I applaud him for buying the stock.
9-25-2008 @ 5:21PM
Rod Carlsom said...
I'm surprised Buffett endorses the $700 billion bailout plan proposed by the Treasury and Fed as is. I WOULD go along with a plan similar to the deal Buffett made with Goldman-Sachs, where the government/taxpayer receives perpetual preferred stock that pays 10% annual dividend, plus an option to buy more stock for five years at about the current market price.