Buffett: Helping hand

New York, Sept. 24 (Reuters): Warren Buffett’s Berkshire Hathaway will invest $5 billion in Goldman Sachs Group. The move comes as a major boost for the Wall Street bank.

“It’s a vote of confidence which is gold-plated,” said Michael Holland, a money manager at Holland & Co in New York. “You don’t get better than this,” he said.

Shares of Goldman rose 8.1 per cent after the announcement, while Standard & Poor’s 500 futures gained 15 points. Goldman also announced plans to sell $2.5 billion of common stock.

Buffett is adding Goldman to a portfolio of investments at Berkshire that includes large stakes in a handful of major US commercial banks.

On Sunday, Goldman won the US Federal Reserve’s approval to become a bank holding company, giving it easier access to financing and adding to speculation it might buy another bank.

This came after many investors questioned its business model amid this month’s market turmoil, causing shares to fall 50 per cent from their record set last October 31.

“Goldman Sachs is an exceptional institution,” Buffett said. “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,” he said.

Buffett is the second-richest American, according to the Forbes magazine, and built Berkshire into a $199-billion conglomerate by investing in undervalued companies with strong management.

According to Lloyd Blankfein, Goldman’s chief executive, the investment was “a strong validation of our client franchise and future prospects. This investment will further bolster our strong capitalisation and liquidity position”.

Berkshire will buy $5 billion of Goldman’s perpetual preferred stock that carries a 10 per cent dividend.

It also will receive warrants to buy $5 billion of common stock, or 43.5 million shares, at $115 per share, within five years, which can give it around a 9 per cent stake in Goldman. Last week, Goldman said it averaged 448.3 million common shares in the quarter ended August 29.

On Sunday, Goldman and rival Morgan Stanley said they would become bank holding companies, enabling them to accept deposits and killing the investment bank model that dominated Wall Street for decades.

The next day Morgan Stanley said it would sell up to a 20 per cent equity stake worth $8.5 billion to Japan’s largest bank — Mitsubishi UFJ Financial Group.

Goldman and Morgan Stanley announced the investments barely a week after upheavals at the two other major Wall Street investment banks. Merrill Lynch & Co agreed to sell itself to Bank of America, while Lehman Brothers Holdings filed for bankruptcy protection.

Sumitomo fund

Sumitomo Mitsui Financial is set to invest several billion dollars in Goldman Sachs, becoming the latest Japanese bank to come to the rescue of a troubled Wall Street giant. Sumitomo Mitsui Financial Group, one of Japan’s top three banks, is expected to invest “several hundred billion yen” in Goldman, the Kyodo News agency reported, citing unnamed sources familiar with the matter.