Video: Buffett on the meltdown

msnbc.com news services
updated 9/24/2008 10:11:39 AM ET 2008-09-24T14:11:39

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 late 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.

In an interview with CNBC Wednesday, Buffett said he understands the anger over Treasury Secretary Hank Paulson’s bailout plan, but said action is needed to avert a economic calamity, noting that the nation is in the midst of financial “Pearl Harbor.”

Buffett’s move 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 Sachs said Wednesday it will sell $5 billion worth of common stock to the public as part of a capital-raising plan that also includes Buffett’s investment of at least $5 billion. Goldman said it has priced the offering of 40.65 million common shares at $123 apiece.

The Buffett news, which broke late Tuesday, sent shares of Goldman Sachs and stock index futures higher in electronic trading, after the Dow Jones industrial average posted a triple-digit decline for the second day in a row.

Goldman Sachs’ shares had been tumbling ahead of the announcement of the government rescue plan last Friday as investors feared it could face the same kinds of funding squeezes as Bear Stearns and Lehman.

Treasury Secretary Paulson, a former co-CEO of Goldman Sachs, and Federal Reserve Chairman Ben Bernanke told Congress hours earlier that quick action on a $700 billion bailout measure for financial services firms was needed to prevent economic havoc.

Buffett, one of the most successful investors in history, heaped 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.”

On Sept. 14, the No. 4 investment bank, Lehman Brothers, filed for the largest bankruptcy in U.S. history, weighed down by fouled commercial real estate holdings and a loss of faith from investors and other banks it did business with. On the same day, ailing Merrill Lynch & Co. arranged a hasty deal to be bought by Bank of America Corp.

Wall Street’s troubles came as a freeze-up in credit markets threatened to clog the global financial system. The U.S. government arranged an $85 billion loan last week to rescue the huge insurer American International Group Inc. and is seeking approval from Congress to buy back some $700 billion in bad mortgages and other toxic debts from financial institutions.

A message left for a Berkshire spokeswoman seeking further comment on the transaction wasn’t immediately returned Tuesday. Berkshire officials do not typically comment on its stock investments beyond what they are legally required to disclose.

A spokeswoman at Goldman Sachs said no one was immediately available to talk about the deal.

At last report, Berkshire had total assets of nearly $278 billion, including significant stakes in companies such as Wells Fargo & Co., American Express and the Washington Post Co.

The Associated Press and Reuters contributed to this report.

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