Buffett's Berkshire invests $5B in Goldman

In addition to the Oracle of Omaha's Berkshire's stake, Goldman said it is raising $2.5 billion through a sale of common stock.

EMAIL  |   PRINT  |   SHARE  |   RSS
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Tami Luhby, CNNMoney.com senior writer

What's your view about granting taxpayers stock in any company taking part in the proposed $700 billion bailout?
  • It's needed to approve the plan
  • The plan should be approved with no conditions
  • No bailout in any form

NEW YORK (CNNMoney.com) -- In its first big move to raise capital, Goldman Sachs Group announced Tuesday that it will receive a $5 billion infusion from Warren Buffett's Berkshire Hathaway, an investment that could also raise confidence in the venerable Wall Street firm and the financial markets in general.

The firm also increased its common stock offering Wednesday to $5 billion at $123 a share, an increase from the original $2.5 billion offering announced Tuesday evening.

Goldman (GS, Fortune 500) will sell $5 billion of preferred stock to the insurance and investment giant, which will also receive warrants to purchase $5 billion of common stock with a strike price of $115 per share, the company said. Berkshire (BRKA, Fortune 500) has five years to exercise the warrants. Buffett will be paid a 10% dividend on his shares.

Goldman shares rose 3.5% to about $129 in midday trading Wednesday.

The news that Buffett is now willing to invest in Wall Street could prove a big shot in the arm to the financial markets, which have been hammered by the year-long credit crisis.

"Goldman Sachs is an exceptional institution," said Buffett 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."

Bailout a must

But the legendary investor said his faith in the financial markets' recovery is contingent on Congress passing the $700 billion bailout, which would buy troubled mortgage assets from banks.

"If I didn't think the government was going to act, I would not be doing anything this week," Buffett told CNBC Wednesday morning. "It would be a mistake to be buying anything now if the government was going to walk away from the Paulson proposal. Last week will look like Nirvana if they don't do something."

The move by Goldman marks the first major capital raising effort that the company has undertaken since the credit crunch erupted more than a year ago.

Facing devastating writedowns and painful losses, many of Goldman's peers have had to issue shares or sell an equity stake to outside investors.

But investors have shied away from doling out dough to other firms, with devastating consequences. Lehman Brothers (LEH, Fortune 500) was forced into bankruptcy last week, while the federal government had to give an $85 billion loan to insurance titan American International Group (AIG, Fortune 500) to prevent its collapse.

Goldman is now using its relative position of strength to boost its capital levels and mollify investors and regulators.

"This investment will further bolster or strong capitalization and liquidity position," said Lloyd Blankfein, Goldman's chief executive.

By having a conservative and heralded investor like Buffett back Goldman, it signals his faith in the company, analysts said.

"It's a vote of confidence in Goldman," said Nancy A. Bush, founder of NAB Research. "I can't imagine something better than the good housekeeping seal of approval."

With Buffett backing the company, investors are more likely to scoop up shares, said James Ellman, head of San Francisco-based Seacliff Capital, a hedge fund specializing in financial services.

"If you invest alongside Warren, you tend to make a lot of money," he said.

The more capital, the better

While Goldman is already well-capitalized, raising more cash would ease investors' concerns about its relatively high leverage ratio. Investment banks use leverage, or borrowed money, to boost returns.

The investment bank can use the money to scoop up smaller banks at cheap prices, analysts said.

Raising capital will "provide the firm with dry powder for distressed investment opportunities," said Patrick Pinschmidt, a Morgan Stanley analyst.

The announcement follows what has been a tumultuous time on Wall Street.

Late Sunday, both Goldman and Morgan Stanley (MS, Fortune 500) were converted into bank holding companies by federal regulators, effectively closing the book on the stand-alone investment bank business model.

By becoming banks, the firms are subject to greater scrutiny by federal regulators and are required to have more capital and take fewer risks than they did as investment banks.

Just a day earlier, Morgan agreed to sell up to a fifth of the company to Mitsubishi UFJ Financial Group, one of Japan's largest banks.

Last week, Merrill Lynch (MER, Fortune 500) was acquired by Bank of America (BAC, Fortune 500).

Additional reporting on this story by CNNMoney.com's David Ellis To top of page

They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.