(By Wall Street Matador)Warren Buffett, one of the world's best known and wealthiest investors, is betting $5 billion that the U.S. financial system is not about to collapse.
Buffett's Berkshire Hathaway Inc. said Tuesday it will invest at least $5 billion in Goldman Sachs Group Inc., a huge vote of confidence for one of the survivors of the credit crisis that felled two of its investment banking peers.
It may be just the shot in the arm that shares needed. Wall Street appeared headed for a higher opening Wednesday, though credit markets remained uncertain about the government's $700 billion bailout plan for banks.
In addition to buying $5 billion in preferred stock, Berkshire also got warrants to buy another $5 billion in Goldman's common stock. Goldman also said late Tuesday it would raise another $2.5 billion in its own public stock offering.
Buffett, one of the most successful investors in history, did not mention what is happening in Washington, but he did heap praise on the New York-based firm.
"Goldman Sachs is an exceptional institution," the chairman and CEO of Berkshire Hathaway said in a news release. "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."
It will be Buffett's second major foray into Wall Street.
In the late 1980s, Berkshire Hathaway invested in Salomon Brothers Inc. When the investment firm admitted wrongdoing in bidding for U.S. Treasury bonds in 1991, Buffett became interim chairman and helped Salomon reach a settlement with the government before stepping down in 1992. Salomon was later sold to what is now Citigroup Inc.
Buffett's latest investment comes two days after Goldman Sachs and Morgan Stanley, the last two independent investment banks on Wall Street, won approval from the Federal Reserve to change their status to bank holding companies.
By becoming commercial banks, the two companies avoided the fate of Bear Stearns and Lehman Brothers — the first taken over in a fire sale and the second now bankrupt — by giving them broader access to borrow federal money and the ability to build a stable base of deposits.
But it also comes with closer regulatory oversight that likely limit its ability to generate the kinds of sky high profits that were topped by few other companies.
The strict rules set by the Federal Reserve will limit opportunities for big payoffs from what is known as proprietary trading, using borrowed funds to place high-octane bets on everything from the price of oil to currencies and other commodities.
Berkshire's preferred stock in Goldman will pay 10 percent and can be bought back any time at a 10 percent premium. The warrants allow Berkshire to buy $5 billion in common stock at $115 per share any time over the next five years.
Morgan Stanley got its own cash infusion on Monday, agreeing to sell a 20 percent stake for more than $8 billion to Mitsubishi UFJ Financial Group Inc., Japan's largest bank.
Mark Lane, an analyst who follows Goldman for William Blair & Co. in Chicago, said he had expected Goldman and Morgan Stanley to raise capital after getting the Fed's approval to become bank holding companies.
Buffett's investment "sends a pretty strong message of support for the independent-bank business model," Lane said. "It sends a stabilizing signal to the market."
Following the announcement, the stock increased by a few percentage points. Recently, Goldman Sachs' stock has been on a decline–along with the rest of the financial industry. However, it's held up far better than its competitors, and with Buffet's latest vote of confidence, Goldman should be able to regain some of the luster that it held only a few months ago.
