Buffett upbeat on America
Washington, September 24, 2008
Warren Buffett's $5 billion investment in Goldman Sachs Group is not just a bet on the US financial system, but is also a typical play for perhaps the world's best-known investor: a big bet on a battered blue-chip name.
'We had a lot of cash, and we are now seeing things that give us a chance to use that cash sensibly,' Buffett told CNBC television, referring to holdings at his Berkshire Hathaway, an insurance and investment company.
'Five years from now, 10 years from now, we'll look back at this period and we'll say you could have made some extraordinary buys,' he continued.
'The American economy over a period of time will do very well, and people that own a piece of it will do very well.'
Buffett dove into Wall Street amid a month of turmoil marked by the US government's takeover of mortgage companies Fannie Mae and Freddie Mac and bailout of insurer American International Group Inc, the bankruptcy of Lehman Brothers Holdings Inc, and a proposed $700 billion bailout for banks.
Some analysts said the investment by the 78-year-old Buffett, the second-richest American according to Forbes magazine, might be the shot in the arm the financial sector needs, following hundreds of billions of dollars of write-downs and loan losses in the global credit crisis.
'When Buffett jumps in the pool, others may follow,' said Andre Bakhos, president of Princeton Financial Group in Princeton, New Jersey. 'That says to investors that all is not lost.'
Berkshire bought $5 billion of perpetual preferred stock with a 10 percent dividend, generating $500 million a year even if Goldman shares fall. It will also get warrants to buy $5 billion of common stock at $115 per share over the next five years. Because Goldman shares closed Tuesday at $125.05, that gave Berkshire an instant $437 million paper profit.
Goldman separately sold $5 billion of common stock, twice as much as it planned. Its shares rose $2.49, or 2 percent, to $127.54 in early trading.
While it hasn't been spared, Goldman has fared better than many rivals in avoiding the toxic mortgages-related securities and other debt that have curdled balance sheets industrywide.
Yet this week it changed its structure to become a bank holding company, after many investors questioned the Wall Street investment banking model that had endured for decades.
The move should reduce Goldman's business risk and profitability, but allow it to amass deposits and give it easier access to financing, and perhaps steer it into mergers with one or more commercial banks. Goldman shares had fallen 50 percent since last October.
Goldman's chief rival, Morgan Stanley, also converted to a bank holding company and said it would sell up to an $8.5 billion stake to Japan's Mitsubishi UFJ Financial Group Inc.
Merrill Lynch & Co took a different route, agreeing to sell itself to Bank of America Corp.
Berkshire already owns stakes in several large financial services companies, including big stakes in American Express Co and Wells Fargo & Co. Buffett has said he added more this quarter in one of these, without saying which.
Buffett has been whittling down Berkshire's year-end $44.33 billion cash pile. This year, he paid $4.5 billion for a majority stake in industrial firm Marmon Holdings Inc, agreed to invest $6.5 billion in Mars Inc's buyout of Wm Wrigley Jr Co , and agreed to spend $4.7 billion on power supplier Constellation Energy Group Inc.
Buffett's most famous foray into Wall Street came in 1991, when as interim chairman at Salomon Inc -- a major Berkshire investment -- he cleaned house after a Treasury bidding scandal that cost chairman John Gutfreund his job. Berkshire's $700 million investment in Salomon, however, is not regarded as one o