Warren Buffett, Goldman's White Knight

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With the stock trading above the strike price, he's already "in the money" for millions of dollars. "It was a great deal, not for Goldman Sachs, but for Warren Buffett," the analyst says. "Goldman basically had to do it. It had no choice." Indeed, Bove argues that Goldman was heading toward bankruptcy without these moves. Lehman Brothers slipped into bankruptcy, while Bear Stearns collapsed and was sold at a fire-sale price to JPMorgan Chase. Merrill Lynch narrowly escaped disaster by selling itself to Bank of America (BAC).

Goldman officials argue they were nowhere near the troubled shape of their investment banking brethren. Lucas van Praag, a spokesman for the firm, says Bove's view that a bankruptcy filing was likely without the bank charter is "ridiculous." The other firms either had excessive concentrations in mortgages or depended too heavily on short-term funding sources, he says. Such businesses as mortgage securities, including subprime mortgages, were among the smallest operations at Goldman. Still, van Praag says the switch to a highly regulated commercial bank structure was needed because "you ignore market sentiment at your peril. It became clear in the increasingly turbulent market that sentiment clearly was moving toward safety and security associated with being regulated by the Federal Reserve."

Leery of Investment Banks

Buffett, nonetheless, could prove just the balm that Goldman needs over time. He has long used the services of the firm, even while disdaining investment bankers generally. When the Oracle of Omaha cut a deal with the Pritzker family last year to buy a $7 billion crazy-quilt of businesses called Marmon Holdings, for instance, he proudly said he and the wealthy Chicago family arrived at a price without the help of advisers, a style that let them avoid "nit-picking." Buffett agreed to shell out an initial $4.5 billion purchase for a 60% stake that is expected to grow over time. But Berkshire Hathaway (BRKA), Buffett's investment company, did have to use Goldman to do some of the heavy lifting to finalize the deal. And the outfit did such a good job of it that in his annual letter to shareholders last year Buffett singled out a banker there, Byron Trott, as "the rare investment banker who puts himself in his client's shoes." Buffett added that he and his partner at Berkshire, Charlie Munger, "trust him completely."

It's not clear whether Trott, who is still associated with Goldman, had anything to do with the deal Buffett just struck to take a big chunk of Goldman. But there's no doubt that Buffett thinks highly of the outfit and partners there return the favor. Lloyd Blankfein, the chief executive of Goldman Sachs Group, was effusive in announcing the deal: "We are pleased that given our longstanding relationship, Warren Buffett, arguably the world's most admired and successful investor, has decided to make such a significant investment in Goldman Sachs."

Calling the move by Buffett "a strong validation of our client franchise and future prospects," Blankfein added that the investment "will further bolster our strong capitalization and liquidity position." For his part, Buffett called Goldman an "exceptional institution." He added: "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."

Profitability May Shrink

Certainly, the operations of both Goldman and Morgan will change as a result of the marketplace shifts and their moves into commercial banking status, but just how much they will be hampered is arguable. Analysts have said their profitability is bound to shrink as they have to move away from some of the risk-taking proprietary trading they have done in the past, which has goosed their results. The banks will be overseen by a coterie of regulators—including the Federal Reserve, the Treasury Dept., and the FDIC—that is sure to rein in some of their more aggressive activities. Some analysts have said their returns on equity, which averaged 22.1% at Goldman and 19.5% at Morgan since 1999, could drop to as little as 13%, closer to those of conventional bank holding companies.

Still, the banks could wind up keeping some of the business operations they have had that are outside of conventional banking and that gin up returns. Both Goldman and Morgan won exemptions that allow them to take possession of oil as part of their commodities trading operations, for instance, and they are likely to try to make those exemptions permanent. Normally, commercial banks don't buy and keep oil or other physical assets. Other outfits, such as Citigroup (C), have won such exemptions.

No doubt Buffett expects Goldman to continue making top-drawer returns—though his backhanded compliments could well continue. In his 2003 letter to Berkshire shareholders, the über-investor saluted Goldman banker Trott for helping arrange a deal with Wal-Mart for Berkshire to buy a subsidiary. While arguing that he and Berkshire officials did no "due-diligence" review of the deal, instead trusting in Wal-Mart's representations after a two-hour meeting, Buffett did say that Trott was instrumental in the deal and in two other Berkshire purchases. "He understands Berkshire far better than any investment banker with whom we have talked and—it hurts me to say this—earns his fee."

Joseph Weber is BusinessWeek's chief of correspondents, based in Chicago.