Warren Buffett’s Berkshire Hathaway Inc. (A:US) will get more than $2 billion in Goldman Sachs Group Inc. stock through warrants acquired during the depths of the 2008 financial crisis.
Berkshire will receive about 13.1 million shares in Goldman Sachs, according to an agreement that uses the average closing price on the 10 trading days through today to calculate Buffett’s stake. The bank fell 1 percent to $158.21 at 4:15 p.m. in New York, valuing the holding at $2.07 billion.
Goldman Sachs turned to Omaha, Nebraska-based Berkshire in 2008 to bolster capital (GS:US) and shore up market confidence when shares plunged following the collapse of Lehman Brothers Holdings Inc. Buffett, Berkshire’s chairman and chief executive officer, invested $5 billion for a preferred holding and got warrants to buy $5 billion of stock for $115 a share.
“Buffett used his position as a white knight and his reputation to prop up an institution at a time of crisis,” said Richard Cook, co-founder of Cook & Bynum Capital Management LLC. “Goldman Sachs is almost certainly better off for it, even though it was very expensive. And certainly Berkshire shareholders are better off.”
Goldman Sachs CEO Lloyd C. Blankfein, 59, redeemed the preferred stake in 2011 at a 10 percent premium. Buffett agreed in March to exercise the warrants through a cashless transaction, in which he passed on a chance to spend $5 billion for stock at below-market prices. He instead gets an amount of stock equivalent to his paper profit, based on closing prices.
Goldman Sachs shares dropped each of the last six trading days, making it the worst-performing stock in the 81-company Standard & Poor’s 500 Financials Index in the period. The lower the share price, the less stock Buffett gets.
The revised agreement reduced the dilution for Goldman Sachs holders and let Buffett profit without deploying more funds (2FA:US). It also allowed Berkshire to focus on its top holdings, including Wells Fargo & Co. and Coca-Cola Co.
Such investments, along with acquisitions, have been more important to Berkshire’s success than bets on New York-based Goldman Sachs and General Electric Co., Buffett, 83, said in 2012. Still, the capital injections helped bolster Berkshire’s reputation as “the 800-number when there’s really sort of panic in the markets,” he said in May, referring to digits used in toll-free telephone calls in the U.S. Buffett got a 10 percent annual dividend on the preferred shares.
The Goldman Sachs investment was a wager that Federal Reserve Chairman Ben S. Bernanke and then-Treasury Department Secretary Henry Paulson would do whatever it took to stabilize the economy, Buffett told the Financial Crisis Inquiry Commission. The government was willing to add leverage at a time when the rest of the world was deleveraging, he said.
“It was a bet essentially on the fact that the government would not really shirk its responsibility,” he said in the interview, which was released in 2011. “I made the fundamental decision that we had the right people, in Bernanke and Paulson, in there with a president that would back them.”
Goldman Sachs’s business model and access to credit were under threat in September 2008 after Lehman Brothers collapsed and Merrill Lynch & Co. agreed to sell itself to Bank of America Corp. Buffett’s investment, along with funds from the U.S. government, helped Blankfein stabilize his firm and boost equity. Goldman Sachs repaid taxpayers in 2009.
“It probably did help draw a line in the sand as far as stemming the panic that was going on at the time,” Cook, whose company holds Berkshire shares (2FA:US) and oversees about $285 million, said of Buffett’s Goldman Sachs investment.
The bank closed at $125.05 on Sept. 23, 2008, the day the deal was announced. Goldman Sachs rebounded to record profit in 2009 as it took advantage of rallying debt markets and weakened competitors. Since then, return on equity has remained less than half of its peak. Blankfein has cut headcount and expenses as trading and investment-banking activity waned and new capital rules depressed returns.
Berkshire agreed later in 2008 to invest $3 billion in General Electric and got warrants expiring Oct. 16 of this year. Buffett struck a deal in the first quarter to provide for cashless exercise of those contracts.
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