Wednesday, September 24, 2008

Warren Buffett to inject up to $10bn into Goldman Sachs

“Start of the Super Banks ...”

Lloyd Blankfein, chief executive of Goldman Sachs, last night said he planned to raise up to $12.5 billion (£6.74 billion) of new funds by selling a stake to Warren Buffett and tapping other institutional shareholders.

The bank, which this week abandoned its investment bank status to become a traditional financial institution, is seeking to bolster its balance sheet with new cash as the US Federal Reserve, its new regulator, demands that it reduces its borrowings. Last night, Goldman Sachs said it had agreed to sell $5 billion worth of preferred shares to Berkshire Hathaway, the investment group controlled by Mr Buffett. Berkshire Hathaway has also secured an agreement to buy another $5 billion worth of stock. At the same time, Goldman said it was planning to raise $2.5 billion from other investors.

While banks such as Goldman Sachs do not need to raise the capital, it is seeking to address anxieties on Wall Street about the long-term future of financial institutions. However, Goldman is paying a hefty price for Mr Buffett’s stake, having agreed a 10 per cent coupon on the preferred stock. It is understood that Goldman can repurchase the shares from Mr Buffett at any time, but at a 10 per cent premium

In a statement, Mr Blankfein said:

“We are pleased that given our longstanding relationship, Warren Buffett, arguably the world’s most admired and successful investor, has decided to make such a significant investment in Goldman Sachs.”

This week Morgan Stanley and Goldman Sachs got approval from the US Federal Reserve to turn themselves into traditional banks, relinquishing their investment bank roles. The difference in definition has two key implications. The first is that it allows Goldman Sachs the right to access emergency funds from the Federal Reserve’s lending facility on the same terms as retail banks, and the second is that it comes under the scrutiny of America’s central bank, which demands much more benign levels of debt.

Source: Times Online

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