Patrick Hosking and Leo Lewis
Get 20% off your bill at Pizza Express
Within hours of revealing his dramatic, confidence-boosting investment in Goldman Sachs yesterday, Warren Buffett had made a $783 million (£424 million) notional profit.
The Wall Street investment bank astounded its rivals by raising $10 billion in fresh capital — $5 billion from Berkshire Hathaway, Mr Buffett’s main listed company, and $5 billion through a public share offering. Shares in Goldman rose 6 per cent to $133.00, giving Berkshire an instant theoretical profit on a side deal, under which it has warrants to buy up to $5 billion of new Goldman shares at $115 a share at any time in the next five years.
Analysts said that the decision by Mr Buffett, widely regarded as one of the world’s most astute long-term investors, to take the plunge in financial stocks — having passed on previous capital-raisings by banks — might come to be seen as the turning point in the financial crisis.
In a separate public offering, Goldman raised $5 billion through the issue of new shares at $123 a share.
The Berkshire deal appears to have derailed an alternative capital-raising plan, under which Sumitomo Mitsui Financial Group, the Japanese bank, would have sunk $2.5 billion in Goldman.
Berkshire wrested attractive terms from Goldman. The perpetual preference shares will pay out an interest rate of 10 per cent. Goldman can call these in at any time, but has to pay a 10 per cent penalty to Berkshire.
Mr Buffett has a relationship with Goldman going back to 1940, when, aged 10, he was taken by his father, a stockbroker, to meet Sidney Weinberg, the senior Goldman partner of the day.
Mr Buffett has had an uneasy relationship with Wall Street, mistrusting its analysts and deriding its short-term ethos, while occasionally investing in it. “Goldman Sachs is an exceptional institution,” he explained yesterday. “It has an unrivalled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance.”
Until now, Berkshire, which has about $50 billion in cash available for investment, has resisted the blandishments of banks desperate for rescue capital, happy to see sovereign wealth funds and others take the plunge and, in many cases, lose money.
“We had a lot of cash and we are now seeing things that give us a chance to use that cash sensibly,” Mr Buffett told CNBC television.
Isabel Schauerte, an analyst with Celent, a consultancy in Boston, said: “Buffett’s actions should boost the mood on Wall Street. This is a win-win situation. It is a formidable deal for Buffett, as Goldman has taken a beating in the market lately. It is also a sound seal of approval for Goldman.”
Goldman regards the deal as a two-way bet, helping it whether Congress approves a $700 billion bank bailout plan or rejects it. If the plan is passed, the fresh equity gives Goldman the firepower to buy back distressed assets from the Government. If it is rejected, a financial panic could ensue, during which banks will need as much capital as possible.
Goldman shares were hammered last week after the Lehman Brothers bankruptcy. Goldman, with Morgan Stanley, abandoned its investment banking model to become a bank holding company supervised by the Federal Reserve and eligible to apply for Fed funding. Exercising the warrants would give Berkshire about 7 per cent of the newly enlarged Goldman.
Mitsui Sumitomo has been discussing an injection of about $1 billion into Goldman in exchange for a more modest stake.
A sage's guide to investment
Breaking his own rules?
— Learn from experience. On his previous investment in an investment bank, Salomon Brothers: “I felt like the drama critic who wrote: ‘I would have enjoyed the play except that I had an unfortunate seat. It faced the stage'”
— Be suspicious of the motives of people on Wall Street: “Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those who take the subway”
— Don't be blinded by the past performance of a company. “The investor of today does not profit from yesterday's growth”
— Don't buy into industries whose future performance is difficult to forecast: “I look for businesses in which I think I can predict what they're going to look like in ten to fifteen years' time. Take Wrigley's chewing gum. I don't think the internet is going to change how people chew gum”
— Shun any business that is complex and hard to understand: “I want to be able to explain my mistakes. This means I do only the things I completely understand”
— Be suspicious of any deal that is widely applauded at the time: “You pay a very high price in the stock market for a cheery consensus”
Or abiding by them?
— Exploit freak conditions that lead to even great companies being marked down: “Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised”
— Buy when others are too terrified to: “I buy stocks when the lemmings are headed the other way”
— Harness the imperfections and inefficiencies of the stock market, which occasionally underprices assets dramatically: “I'd be a bum on the street with a tin cup if the markets were efficient”
— When you do take a bet, have the courage to do it with meaningful amounts of money: “I can spend money faster than Imelda Marcos when things are right”
— Buy good businesses at sensible prices: “Our method is very simple. We just try to buy businesses with good-to-superb underlying economics run by honest and able people and buy them at sensible prices. That's all I'm trying to do”
Industry sectors news at a glance. Interactive heatmap, video and podcast
The inside track on current trends in the charity, not for profit and social enterprise sectors
Explore your passion for food with the delights of Thai, Indian & Chinese cooking
Read our exclusive 100 Years of Fleming and Bond interactive timeline, packed with original Times articles and reviews
Everything the Business Traveller needs to know to make a better trip
Shortcuts to help you find sections and articles
05/2005
£13,500
08/2008
£109,950
2006
£10,750
Great car insurance deals online
£100k
The National Skills Academy for Social Care
London
£49,229 - £62,035 pro rata
Charity Commission
London/Liverpool/Taunton
£75k - £85k
Confidential
London
Six Figure
Rolls Royce
Midlands/Europe
From £89,950
Great Investment, River Views
$3.5 million
Also avaliable for rent
Times Online Property Search will help you find it
Amazing Far East Offers - Visit Hong Kong
from £499pp
Cruise the Islands of Hawaii - Pride of America
List your property with two leading travel websites
Great travel insurance deals online
Contact our advertising team for advertising and sponsorship in Times Online, The Times and The Sunday Times, or place your advertisement.
Times Online Services: Dating | Jobs | Property Search | Used Cars | Holidays | Births, Marriages, Deaths
News International associated websites: Globrix | Property Finder | Milkround
Copyright 2008 Times Newspapers Ltd.
This service is provided on Times Newspapers' standard Terms and Conditions. Please read our Privacy Policy.To inquire about a licence to reproduce material from Times Online, The Times or The Sunday Times, click here.This website is published by a member of the News International Group. News International Limited, 1 Virginia St, London E98 1XY, is the holding company for the News International group and is registered in England No 81701. VAT number GB 243 8054 69.
Every Bank that is supported by US taxpayer bailout cash should be covered by a new tax regime which subjects future banks profits/ bankers bonuses to a super tax until the cost to the taxpayer is satisfied in full. Otherwise, bankers will be on a one-way bet with risk.
stephen, jersey, uk
Lawrence in London - You clearly have no idea who Warren Buffett is or how much he's worth. $5B is pocket change.
Thomas, Austin, TX, USA
I own BH and admire WB for what he has accomplished over his career. However, I think this action shows again, that if you have money, you can make money. Only a few people/companies are in the position that WB is in. The rest of us 9 - 5 ers, get to feed on the scraps.
s castle, PV Bch, USA
This Bail Out is just a David Rockefeller Ploy; let each Western Government Take Over Each of the privately held Central Bank; Expropriate them with out compensation. They have had enough compensation for the privilege the government's should not have given them.
Xeno77777, Saint Petersburg, Florida USA
You guys overseas know nothing about Buffet. He invests on the long term. He will never have to eat at a soup kitchen. The financial markets are bad but Buffet knows what he is doing.
Joe , Dallas , USA
Perhaps it will offset his loses on AIG...
Patrick Bateman, London,
Disgusting. He should be forced to donate that instant profit towards charity.
Farrukh, Woking,
paulson does not own any goldman shares. he was required to sell them before he took the post of treasury secretary.
he can than the government for saving him a fortune. as he was taking a government post he also benefited from not having to pay capital gains on his shares.
eb, London, UK
This is how capitalism is supposed to work. Buy low sell high. What is wrong with that? What happend to the mortgate industry was that Congress mandated that they make loans that they otherwise wouldn't under the threat of litigation.
Jeff, Frisco, TZ, USA
Do you clowns even know who Buffett is? Vulture? Too big to fail? Nice buzzwords, but not really applicable. Do some research. Don't fault the man just because he has more sense in the end of his little finger than any of us can ever dream of possessing.
Dan, Boston, USA
Jane- I bet Goldman's thousands of secretaries and janitors and their families who will now continue to have health insurance, food to eat and homes to live in do not think Mr B is a vulture.
The vultures are those who didn't build honest reputations to led honest men to trust them with their cash.
Lizzie, New York,
The guy is a piece of work..he "helps" GS by buying their shares, knowing full well that there is a government bailout there to enrich his welfare arce, now surprise surprise he's made almost 20% in a day....a common thief is all he is, no wonder he's a Democrat - as most biggies on Wall street are.
Paul wellstone, St.Paul, MN, USA
Robert - how exactly is that money laundering?
Kate, Sydney, Australia
A bunch of today's wealthy families are the ones who were middle-class during the Great Depression, but saw tremendous opportunities with the devalued stock market. They risked all they had to buy shares that appeared to have long-term promise... and now they're rich.
Buffet is wise.
Chris, San Diego, USA
If you don't think this guy is an "insider" then you must have an IQ = your hat size.
Read where he met the owner of Goldman-Sachs when he was 10 yo.
He's not a genius, just a "made guy". Like Soros.
He has enough money to throw around and influence things too.
It's basically money laundering.
Robert Krohn, LA, Calif, USA
The shame of it is that much of this mess could've been avoided if the bill McCain co-sponsored in 2005 re: Freddie/Fannie had been passed. Three years of warnings before the place goes belly up would be enough for most people. Seems politicians don't like regulating their PAC contributors...hmm.
Mike T, Lynchburg, VA,
He must have known a lot more from his friends that the deal was hatched before he spent the money. I give him no credit for anything, he is the ultimate insider trader!
Who is going to stop a guy with 63 billion!
JOHN C, CHICAGO, USA
Aware that the cronyism of this administration knows no bounds, maybe Buffett is betting on G. Sachs simply because he knows that Paulson, as former chairman and major shareholder, will use his now copious power to make sure G. Sachs profits even if the rest of Wall Street goes to hell? Thoughts?
Amanda, Toronto, Canada
What is defined as "notional profit"? Is it the same as the notional profit that people would have had if they sold their houses 3 years ago ("my house is worth 200K more today" they said!) but now is turned to notional ( and sometimes actual) loss?
Good move but he still needs an economy to stand!
Alex K, Manchester, UK
Government has gotten in the way of capitalism and set them up to fail by allowing them to leverage themselves 30:1. Had the regulations stayed in place and the SEC refused to allow the old ibanks to go from 12:1 to 30:1 this wouldnt have happened! Greed is the problem...
TheFinanceDude, St Louis, MO , USA
Buffet is an honest and wise "American" investor. Regardless of his personal gain, investing in Goldman Sachs was a "good" move. As for corporate hucksters who've swindled millions off the 'little" guy, let honest Americans demand their "dirty" money be returned to those they've stolen from!
Mary Sheckler, Cary, NC
Berkshire Hathaway has a very large position in reverse puts and Buffett is only trying to save his ass. He hopes his GS 5 Billion will Pop the market long enough for him to get out or they expire. He is as much a con man as the swindlers in Washington and Wall St.
Buy Gold Save Yourself.
Peter Courtenay Stephens, Gloucester, U.S.A.
Only £424 million notional profit? Beat that day traders.
Farrukh, Woking,
I think Warren Buffet has called this one completely wrong. The $700bn bailout is like giving aspirin to revive a dying man. It's not enough.
I hope there is a soup kitchen near Buffet's office. He will need one in a year's time.
Lawrence, London, UK
It's hard to fault Buffet in this and claim he's a vulture - look at the man. He still lives in his dowdy Midwestern home and wears similarly dowdy clothes. The man is a rare figure of honesty and earnest living in a portrait littered with scummy personas - that's why people think he's a 'savior'.
Evan, Philadelphia, U.S.A.
profit on a side deal - look who profits in vengeance capitalism - and their system wants more than 700 billion to balance the books. Why not approach Buffet and other vultures to give the money back?
jane, Whittlesey, UK
Warren Buffet & Goldman Sachs built reputations, capitalists betted capitalism & the world's money on those reputations. So much money that they will do everything to HIDE THIER LOSSES. Because they've become "TOO BIG TO FAIL". And according to Murphy's law they will fail. ...Buffoons.
Oilthieves, Versailles, France
"The Wall Street investment bank astounded its rivals by raising $10 billion in fresh capital "
I think you'll find it there are no Investment Banks as of last week.
Bob Mills, Tokyo, Japan