Buffett's $5bn infusion seen as boon for financial system

GOLDMAN SACHS quickly followed a $5 billion investment by Warren Buffett's Berkshire Hathaway conglomerate with a separate fund-raising manoeuvre yesterday in which it raised another $5 billion in a public placing, twice the amount it originally sought.

The $5 billion cash infusion from Berkshire was widely interpreted to be a vote of confidence in the financial system from Mr Buffett, long considered the pre-eminent US investor.

In addition to this investment, executed through the acquisition of perpetual preferred stock, Berkshire will receive warrants to buy $5 billion of ordinary stock at any time in the next five years.

Goldman's raising of capital swiftly followed its decision last weekend to change its status to become a bank holding company, empowering the storied institution to take deposits and acquire deposit-makers.

That move, made alongside a similar change of status at Morgan Stanley, brought to an end the investment banking model that has dominated Wall Street for generations.

It followed the bankruptcy of Lehman Brothers and emergency sale of Merrill Lynch, increasing fears about the vulnerability of companies which need to constantly replenish their short-term funding on the capital markets.

"This is a marriage of two incredibly intelligent, attractive partners," said Michael Holland, a money manager at Holland & Co in New York. "Buffett is saying about the top management of Goldman Sachs that they're distinct and different from their competitors and it's a vote of confidence which is gold plated. You don't get better than this," Mr Holland said.

The perpetual preferred stock carries a 10 per cent dividend, generating $500 million a year for Berkshire even if Goldman shares fall. In addition, the securities can be repurchased by Goldman at any time in return for a 10 per cent premium.

The common stock warrants are priced at $115 per share. Goldman shares closed on Tuesday, before the deal was made public, at $125.05. This means Berkshire gained an instant $437 million paper profit on the warrants.

The stock gained some 4 per cent to trade around $130.15 at lunchtime yesterday in New York.

It was worth more than $250 last October, before sliding amid concerns about the impact of the credit crunch on Wall Street investment banks.

"Goldman Sachs is an exceptional institution," Mr 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."