Tuesday, June 23, 2009
Buffett looms large
Thu Jun 18, 2009 7:14pm EDT
By Steve Eder - Analysis
NEW YORK (Reuters) - Now that Goldman Sachs Group Inc (GS.N) has settled its $10 billion debt with the U.S. taxpayer, investors are wondering about the Wall Street firm's other looming presence -- Warren Buffett.
Last September, shortly after Lehman Brothers Holdings Inc (LEHMQ.PK) went bankrupt, but before the U.S. Treasury unveiled plans to bail out the banking industry, Buffett's Berkshire Hathaway Inc (BRKa.N)(BRKb.N) invested $5 billion in Goldman and acquired preferred shares and warrants to buy common stock.
Goldman, which received $10 billion from the Treasury's Troubled Asset Relief Program, known as TARP, repaid that money on Wednesday. But Buffett's presence is large, not just because of his huge investment, but also given his reputation for integrity and as one of the world's savviest investors.
So what will Buffett, the second wealthiest man in the United States, according to Forbes magazine, do?
"Basically not much," said Vahan Janjigian, author of the book 'Even Buffett Isn't Perfect.'
"He has a history of making fairly large investments in these kinds of companies and sitting back and letting the management team run the company."
Janjigian expects Buffett to sit tight as Berkshire collects $500 million of annual dividends on the preferred shares and earns paper profits on accompanying warrants to buy $5 billion of common stock at $115 per share for up to five years.
Goldman closed on Thursday at $143.09, meaning Berkshire would earn more than $1 billion in profits if it cashed the common stock warrants now. That is in addition to the 10 percent preferred stock dividend, which is twice the 5 percent rate the government was getting from the TARP investment.
A Goldman Sachs spokesman declined to comment and Buffett did not return a message left with his assistant seeking comment.
Despite what Goldman gave up, the Buffett deal was critical at the time, said Marshall Sonanshine, the chairman and managing partner of Sonanshine Partners.
"It was sensible when it was done, but tragic it had to be done the way it was done," said Sonanshine. "The last four months of 2008 were such an extraordinary time of fear and financial collapse one cannot realistically ask: 'Should we have? Might we have? Could we have?' The point is Goldman is a very strong franchise."
INVESTMENT PROSPECTS WERE DIM
Buffett's investment didn't always look so promising.
In November, two months after he made his move, Goldman common shares were as low as $47.44. Some doubted the wisdom of Buffett's investment and began to question his stewardship of Berkshire itself.
But Buffett stuck with Goldman through all the ups and downs -- even after his trusted investment banker, Byron Trott, announced planned to strike out on his own.
Bill Bergman, an equity analyst with Morningstar Inc (MORN.O) in Chicago, recalled an October newspaper column in which Buffett said he planned to buy stock in U.S. companies.
"No one is noticing now that the market is above where it was when he wrote the article," Bergman said.
Bergman initially expected Goldman to be a safe and strong investment for Berkshire.
"That is what it looks like increasingly," he added.
And making the deal even sweeter, Goldman's top executives are publicly committed to protecting Buffett's investment.
In a regulatory filing in October, a group of Goldman executives, including Chief Executive Lloyd Blankfein, agreed not to sell more than 10 percent of their common shares in Goldman until October 2011, or until Berkshire redeems the $5 billion in preferred stock it purchased last year.
Gary Townsend, the president and chief executive of Hill- Townsend Capital LLC, said it was obvious Buffett will stick with Goldman over the long haul.
"Buffett tends to be a long-term holder," Townsend added. "I don't see him quickly leaving."
And with a deal like that, why should he?
(Reporting by Steve Eder; editing by Andre Grenon)