The Sage of Omaha is famous for his nose for a bargain, and has experience in the securities industry thanks to his rescue of Salomon Brothers in the wake of its early 1990s Treasury bond scandal. While Goldman has a storied name, great relationships, and has fared better than any other securities firm in the credit crunch, it has become more hedge fund with some customer businesses attached than a traditional investment bank or securities trading firm. And now that Goldman could in theory raise deposits to fund that activity, it would have an insurmountable cost advantage. Buffett is acutely aware of the value of cheap funding; it’s one of the reasons he entered the insurance business.
From the Wall Street Journal:
Warren Buffett’s Berkshire Hathaway announced plans to invest $5 billion in Goldman Sachs Group Inc., which recently changed its structure to a bank-holding company from an investment bank.
In addition to the $5 billion from Berkshire Hathaway, which comes in the form of perpetual preferred shares, Goldman will raise at least $2.5 billion in common equity in a public offering.
Berkshire Hathaway will have warrants to buy another $5 billion in common stock with a strike price of $115 a share, which are exercisable at any time for a five-year term. The perpetual preferred stock will have a dividend of 10%.
Bloomberg comes up with a bigger number, per its headline, “Goldman to Raise $7.5 Billion From Berkshire, Public,” because a public stock offering is also in the works:
Goldman Sachs Group Inc. will raise at least $7.5 billion from Warren Buffett’s Berkshire Hathaway Inc. and public investors in a bid to quell concerns that pushed up the Wall Street firm’s borrowing costs and hurt its stock.
Berkshire is buying $5 billion of perpetual preferred shares, New York-based Goldman said today in a statement. Goldman, which this week transformed itself from the biggest U.S. securities firm to the fourth-largest bank by assets, also plans to raise at least $2.5 billion by selling common stock in a public offering.
Goldman Chief Executive Officer Lloyd Blankfein is turning to Buffett, the billionaire investor and second-wealthiest American, to boost market confidence even though Goldman hasn’t reported a quarterly loss since it went public in 1999. The bankruptcy of Lehman Brothers Holdings Inc. and emergency sale of Merrill Lynch & Co. to Bank of America Corp. on Sept. 15 have fueled fears about firms that rely on bond markets for funding.
“At this point you’re better safe than sorry, I think that’s the moral of Lehman,” said David Hendler, an analyst at CreditSights Inc. in New York. “Everything’s different because of the extraordinarily weak market conditions, as vividly described by our Treasury Secretary and Fed Chairman” in congressional testimony today, Hendler said.
Update 8:15 PM Reader Scott Frew went through the economics of this fundraising in comments, and this is pretty pricey capital. What has me puzzled is that Goldman should be required as a bank to delever. That will make this equity even more costly (lower leverage means lower ROE). One would also think that being supervised as a bank would constrain their risk-taking (I’m assuming, perhaps too optimistically, that regulators will become a tad more aggressive).
Thus a Goldman that would be permitted to raise deposits would presumably be a very different Goldman…..or if not, we are back to a variant of what lead to the S&L crisis, where deposits were used to fund risky investments.