Goldman Sachs and Buffett

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Trust Goldman Sachs to do it differently. Instead of a humdrum injection from a sovereign wealth fund, Wall Street’s best and brightest have reeled in the big one: Warren Buffett. But the sharp dealmakers at Goldman have met their match in the Sage of Omaha.

Unlike the wealth funds that put money into Citigroup and others over the past year, Mr Buffett’s downside is protected. His $5bn of perpetual preferred stock is essentially permanent capital, but with a cushion of Goldman’s $50bn of shareholders’ equity beneath it. It carries a sweet 10 per cent yield, which Goldman can only put an end to by buying Mr Buffett out at a 10 per cent premium. It is basically one very big insurance premium against another vicious leg-down in the capital markets. Throw in Mr Buffett’s warrants to buy $5bn in Goldman’s common stock at a price that is already well in the money, and he looks to have played a blinder.

Goldman Sachs gets the Buffett seal of approval in return. That is not intangible. It surely contributed to the bank’s ability to pull off, separately, a daring $5bn stock offering on Wednesday. Mr Buffett’s move may surprise, given his critiques of excessively risky, complex companies, and Goldman’s image as the ultimate black box. But the more one thinks about it, the more compatible the two cultures actually are. Goldman Sachs is, in fact, paranoid about risk. Its boss, Lloyd Blankfein, used to say in bull markets that he’d never felt this good since the month before Russia’s default.

The extra capital will soothe investors fixated by leverage ratios. It should bring down Goldman’s cost of funding. It might even be deployed in expanding the business – unlike most of Wall Street’s capital raisings in the past year, many of which were put to use offsetting the billions of dollars of writedowns.

The last word, though, goes to Mr Buffett. “We [Berkshire Hathaway] have occasionally been quite successful in purchasing fractional interests in easily-identifiable princes at toad-like prices.” This looks like one of them.

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