Buffett buys into Goldman Sachs

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Buffett buys into Goldman Sachs

US tycoon Warren Buffett's Berkshire Hathaway has agreed to invest billions in Goldman Sachs, and could double its stake within five years.

Under the terms of the agreement, Berkshire Hathaway is buying $US5 billion worth of perpetual preferred stock bearing a 10% annual interest rate, the Wall Street bank said in a statement.

Buffett, through his holding company, will have the option of buying $US5 billion worth of common stock priced at $US115 a share "at any time for a five-year term,'' the company added.

Goldman Sachs, until Monday one of the last two major Wall Street investment banks, with Morgan Stanley, said it also plans to raise "at least'' $US2.5 billion in common equity in a public offering.

Index futures surged in extended trading on the news, which came after the close of the US share market.

Goldman Sachs shares shot up 8.4% after the news, while futures pointed to a sharply higher open of Wall Street on Wednesday. Shares of other banks also jumped. Morgan Stanley was up 9.5% in electronic trade.

"It's clearly a positive when Warren Buffett sees value in a company,'' said Richard Sichel, chief investment officer of Philadelphia Trust Co.

"Buffett is so highly regarded as an intelligent value investor, if he's putting a lot of money into a company that's been beaten down, it sends a message to the market that maybe not every financial company should be ignored at this point.''

Goldman chief executive is taking action to boost market confidence even though the firm hasn't reported a quarterly loss since it went public in 1999.

The bankruptcy of Lehman Brothers and emergency sale of Merrill Lynch to Bank of America last week have fuelled fears about firms that rely on bond markets to finance themselves.

"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. "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.

Federal Reserve chairman Ben Bernanke joined Treasury Secretary Henry Paulson in urging skeptical lawmakers yesterday to quickly pass a $US700 billion rescue for financial institutions, saying the US economy will shrink if markets don't begin functioning normally.

The decision to seek a cash infusion marks a reversal for Goldman, which less than a year ago was posting record profits and paying record bonuses: Blankfein and his two top deputies reaped payouts totaling more than $US67 million for 2007.

The company, while suffering from a decline in trading and investment banking revenue, has booked $US4.9 billion of losses on devalued assets, a fraction of the writedowns taken by rivals such as Citigroup, Merrill Lynch and Morgan Stanley.

Both Goldman and Morgan Stanley said this week that they are converting to bank holding companies supervised by the Federal Reserve, a move that allows them permanent access to borrowing from the Fed and permits more flexible accounting for some assets.

Morgan Stanley agreed yesterday to sell as much as 20% of the firm for about $US8.4 billion to Mitsubishi UFJ Financial Group, Japan's largest bank.

Goldman's stock has dropped 42% since the start of 2008 and 19% since the beginning of last week.

The cost of credit default swaps, contracts used to insure against a default in the firm's debt, jumped 0.9 percentage points to 3.8 percentage points today, according to broker Phoenix Partners Group in New York. That means it costs $US380,000 a year to protect $US10 million of Goldman debt for five years. Last week the price reached a record $US685,000.

One concern for investors has been the firm's leverage, or the amount of assets held with every dollar of shareholder equity. Goldman owned $US23.7 of assets for every dollar of shareholder equity at the end of August, making the firm dependent on raising debt in the markets to help finance its $US1.08 trillion balance sheet.

BusinessDay, with wires

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