Buffett buys $5-billion chunk of Goldman Sachs

Warren Buffett's holding company Berkshire Hathaway Inc. is investing $5 billion US in brokerage-turned-bank Goldman Sachs Group Inc., in a deal that could give other investors renewed confidence in Wall Street.

The so-called "Oracle of Omaha" and one of the richest Americans, Buffett said late Tuesday the agreement gives his company a bigger window onto the quickly-changing investment banking world.

Warren Buffett has bought into Goldman Sachs. (CBC)

“Goldman Sachs is an exceptional institution,” Buffett said. “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.”

In the previous week, Goldman Sachs gave up its investment house status and became the country's fourth largest chartered bank. The company had been staring at possible financial difficulties in the wake of September's bankruptcy of Lehman Brothers and the takeover of insurer American International Group and Merrill Lynch & Co.

In response to the turmoil, Canadian and U.S. stocks markets dropped precipitously as investors worried that the asset-backed commercial paper crisis would claim more victims among America's merchant bank class.

Under the terms of the arrangement, Berkshire is forking over $115 for each preferred share in the new Goldman Sachs which will in turn pay a 10 per cent dividend and can be sold back to Goldman at a 10 per cent premium.

Goldman, which saw its share price plunge more than 27 per cent during Wall Street's financial meltdown, said it raised another $5 billion from other investors with the underlying stock priced at $123 a share.

Stock in the old Goldman peaked at $127 in January.

Rising Wall Street

Some analysts saw Buffett's move as a confidence booster for Wall Street.

"When one of the highly respected value investors puts up that amount of money, it suggests, on the surface, that 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," he said.

In addition, analysts had previously suggested that Goldman was interested in acquisitions among ailing financial institutions.

As an investment bank, goes this line of thinking, Goldman would be prevented from buying well-heeled, but financially troubled lending institutions, such as Wachovia and Washington Mutual.

Changing its status into that of a deposit-taking institution likely gives Goldman the ability to buy these companies without drawing the ire of government regulators, experts noted.

with files from Associated Press

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