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Buffett invests in Goldman Sachs

Warren Buffett, known as the Oracle of Omaha, had maintained that problems on Wall Street could get worse before he agreed yesterday to invest in Goldman Sachs. Warren Buffett, known as the Oracle of Omaha, had maintained that problems on Wall Street could get worse before he agreed yesterday to invest in Goldman Sachs. (Nati Harnik/associated press)
By Ben White
New York Times News Service / September 24, 2008
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Warren Buffett, America's most famous investor and one of the world's richest men, said yesterday he would invest $5 billion in Goldman Sachs in a move that could bolster confidence in the financial markets.

Until now, Buffett, who has navigated the stock market with legendary prowess, has largely refrained from investing in the stricken financial industry, saying repeatedly that things could get worse.

Thousands of people on and off Wall Street follow Buffett's moves, so his decision to invest in Goldman immediately heartened investors. After falling nearly 1.5 percent during the day, the Standard & Poor's 500 index erased its loss in after-hours trading on news of the investment.

Buffett's conglomerate, Berkshire Hathaway, unveiled the move only days after Goldman, long the premier investment house on Wall Street, embarked on a radical plan to transform itself into a traditional bank in order to ensure its survival. Goldman, which examined various options over the past week as its shares tumbled and some clients abandoned the firm, said it would sell at least $2.5 billion of common stock to the public.

Since the credit crisis flared more than a year ago, Buffett had stayed his hand even as other investors poured money into ailing American financial companies like Citigroup and Merrill Lynch, only to see their investments wither.

Such wariness is a hallmark of Buffett's investing style, and many on Wall Street have wondered when he might jump in.

Buffett, in the statement, called Goldman Sachs an exceptional institution.

"It has an unrivaled global franchise," Buffett said, "a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance."

Berkshire Hathaway will receive perpetual preferred shares in Goldman, which will pay a 10 percent annual dividend, or $500 million a year.

Those dividends take precedence over other payments to common shareholders. Goldman has the right to buy back the shares at any time for a premium of 10 percent.

Berkshire Hathaway will receive warrants to buy $5 billion in common stock at a strike price of $115 a share, which are exercisable at any time in a five-year period. Those warrants are already in the money: Goldman shares closed yesterday at $125.05, up $4.27, and rose to $133 after hours.

Also yesterday, the FBI said it is investigating four major US financial institutions whose collapse helped trigger a $700 billion bailout plan by the Bush administration.

Two law enforcement officials yesterday said the FBI is looking at potential fraud by mortgage finance giants Fannie Mae and Freddie Mac and insurer American International Group Inc. , A senior law enforcement official said Lehman Brothers Holdings Inc. also is under investigation.

The inquiries will focus on the institutions and the individuals that ran them, the senior law enforcement official said.

Over the past year, as the housing market cratered, the FBI has opened a wide-ranging probe of companies across the financial services industry, from mortgage lenders to investment banks that bundle home loans into securities that are sold to investors. FBI director Robert Mueller has previously said the bureau's hunt for culprits in the nation's subprime mortgage crisis focused on accounting fraud, insider trading, and failure to disclose the value of mortgage-related securities and other investments.

Officials said the new inquiries bring to 26 the number of corporate lenders under investigation over the past year.

Spokesmen for AIG, Fannie Mae, and Freddie Mac did not immediately return calls for comment. A Lehman spokesman did not have an immediate comment.

Material from the Associated Press was used in this report.

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