Buffet Boosts Goldman Sachs

News came yesterday that billionaire Warren Buffet’s Berkshire Hathaway Inc. has invested $5 billion into the investment bank Goldman Sachs in a purchase of preferred stock. As we watched Buffet secure the tidy deal the investment has also warranted Berkshire to buy 10% of Goldman’s common stock at a discounted price of $5 billion. In what we can only describe as a ‘win win’ situation for Berkshire Hathaway and Buffet, the deal carries a tidy 10% yield on the investment. It looks like Goldman have got the short end of the deal as they can only end it by buying Buffett out at a 10 per cent premium.

Director of Packaged Property Investments, Matthew Banks commented "This may well be a vote of confidence for the financial markets from the world's most respected investor. Warren is betting that congress will approve the $700bn bail out of the financial institutions in US. In my view this is by no means a quick fix for the problems in the market, but it may well prove to be the catalyst that allows the issues in the system to work themselves out."

Things are looking rather more positive for Goldman Sachs, one of the only remaining investment banks in the US. The support by the ‘Oracle of Omaha’ has already given a much needed boost to the investment bank as they have already pulled off a $5bn public stock offering on Wednesday. The extra capital the deal generated will bring down Goldman’s cost of funding, and will enable them the option of expansion.

Buffets investment has also warranted Berkshire the right to pay $115 a share for Goldman’s common stock any time between now and five years from now. Buffet commented that Goldman is an "exceptional institution".

Although expensive money to Goldman Sachs, the vote of confidence couldn’t have come at a better time. We’ve already seen the collapse of Lehman Brothers this week, along with the takeover of Merrill Lynch by The Bank of America. The US investment banking system has taken a tough blow in the wake of the credit crunch, and Buffet's move has, according to news reports, heartened investors when it was announced.