Sep 25, 2008 Thursday

Buffett pumps $7b into Goldman Sachs

NEW YORK: The world's most famous investor, Mr Warren Buffett, is investing US$5 billion (S$7.1 billion) in embattled Wall Street titan Goldman Sachs, in a move that could bolster confidence in financial markets.

Likening the market turmoil to an 'economic Pearl Harbour', the billionaire told CNBC that his investment was also a vote of confidence in the Treasury's US$700 billion bank rescue plan.

'I am betting on Congress doing the right thing for the American public and passing this Bill,' he said. 'I certainly have a vote of confidence in Goldman and vote of confidence in Congress.'

Until now, Mr Buffett, 78, who has navigated the stock market with legendary prowess, has largely refrained from investing in the stricken financial industry, saying repeatedly that things could get worse.

Thousands of people on and off Wall Street follow his moves, so his decision to invest in Goldman through Berkshire Hathaway immediately heartened investors.

But world stocks were generally muted yesterday, with investors on edge as United States lawmakers clashed over the proposed US$700 billion financial rescue plan, outweighing stronger bank shares that advanced on the Buffett move.

In addition to raising money from Mr Buffett, Goldman yesterday raised US$5 billion of common stock with the public, the firm's first common stock offering since 2000.

Goldman priced 40.65 million common shares of stock at US$123 apiece, a slight discount to the stock's US$125.05 closing price on Tuesday. An additional 6.1 million shares may be sold to cover over-allotments, potentially boosting proceeds by US$750.3 million.

Japanese media also reported yesterday that Sumitomo Mitsui Financial Group (SMFG), Japan's No. 3 bank, plans to invest billions of yen in Goldman.

SMFG said the bank had no deal in place at the moment, but media reports said it wanted to join the list of Japanese financial firms using the upheaval in the US to aggressively expand abroad.

The decision to seek a cash infusion marks a reversal for Goldman, which this week transformed itself from the biggest US investment bank to the nation's fourth-largest bank holding company.

Less than a year ago, Goldman was posting record profits and awarding record bonuses. Then came the US sub-prime credit crisis.

Despite remaining profitable, the viability of Goldman and Morgan Stanley, Wall Street's last two major standalone investment banks, was put into question by the fall of Lehman Brothers and the forced marriage of Merrill Lynch to Bank of America.

Even after the government proposed late last week its massive rescue plan to mop up bad debts, investors feared that continuing write-downs of such assets could deplete the capital of even the strongest bank.

Mr Lloyd Blankfein, Goldman's chief executive, said the firm considered Mr Buffett's capital infusion 'a strong validation of our client franchise and future prospects. This investment will further bolster our strong capitalisation and liquidity position'.

Mr Buffett's move on Goldman recalls an earlier bad experience. In 1987, he paid US$700 million for a 12 per cent stake in what was then Wall Street's largest investment bank - Salomon.

That investment wound up putting him through the wringer, after the government in 1991 accused Salomon of trying to corner government securities markets. Mr Buffett had to step in as chairman to save its reputation and get it back on track. The firm was later acquired by Travelers Group, predecessor of Citigroup.

But Goldman is a classic Buffett play: It is a blue-chip institution with a long, successful history, which has been beaten down in the stock market, and one that he is investing in on very favourable terms.

Meanwhile, merger talks between Morgan and regional bank Wachovia have ended as Morgan focuses on a partnership with Japan's Mitsubishi UFJ Financial Group, said sources familiar with the situation.

Morgan had been engaged in merger talks with North Carolina-based Wachovia last week, when investor fears about the viability of the Wall Street broker-dealer model slashed Morgan's stock price and prompted some of its customers to flee.

At the time, merging with a commercial bank was viewed as a way for Morgan to increase its financial stability and reassure jittery investors.