Buffett Makes $1.7 Billion on Goldman "Rescue"

March 21, 2011Investingby EW News Desk Team

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Goldman Sachs has said it will pay off an expensive 2008 investment from Warren E. Buffett,

hoping to put one of the most difficult periods in its history behind it.

In total, the investment netted the billionaire investor $1.7 billion, or roughly $190,000 a day.

The Federal Reserve on Friday blessed the balance sheet of the Wall Street firm,

paving the way for it to pay back the $5 billion investment,

made during the darkest days of the Black September financial crisis.

The deal was a lifeline for Goldman — but it came at a hefty price,

namely a 10 percent annual dividend that amounted to about $500 million a year.

Goldman’s payoff means that Mr. Buffett will get his principal back and a $500 million bonus
because the firm is paying back the investment early.

It was due to expire in 2013.

He will also receive dividends earned in recent months for a total payment of $5.64 billion.

Still, he stood to make much more without an early redemption.

Indeed, Mr. Buffett often joked that should Goldman call to let him know it wanted to pay off the investment early, he would dodge the call.

When the call eventually came on Friday, Mr. Buffett did in fact take it.

Lloyd C. Blankfein, Goldman’s chief executive, was the one to reach out, telling Mr. Buffett, “We’ll pay you in one-dollar bills.”

Mr. Buffett said that he replied, “That’s fine as long as the dividends keep accruing until I’m finished counting them all.”
On Friday, the Fed released the results of the second round of stress tests, which assessed the capital levels of the nation’s largest banks.

The news set off a spate of announcements by big banks, moving to show their financial strength by raising dividends and disclosing plans to buy back shares.

Goldman said it would redeem the preferred shares on April 18 and take a one-time charge of $1.64 billion that will reduce earnings per share in the first quarter by $2.80.

While the redemption comes at a price, it frees Goldman and signals its financial strength to the market.

“Today was as expected, but in a good way,” said Glenn Schorr, a financial analyst who follows Goldman for Nomura Securities.

He predicted that the Fed’s approval would “without question” prompt Goldman to use some of its excess capital to buy back common shares within a matter of months.

And Mr. Buffett may reap further gains from his Goldman investment.

When the deal was struck, Mr. Buffett picked up warrants giving Berkshire the right to buy $5 billion in stock with a strike price of $115.

Those warrants are still outstanding.

Shares of Goldman surged 2.7 percent on Friday, to $159.96,

valuing Mr. Buffett’s unrealized profit on the warrants at approximately $2 billion.

Repaying the $5 billion investment also lifts restrictions that prohibited Goldman’s senior executives, including Mr. Blankfein,

from selling more than 10 percent of their shares in the firm.

Mr. Buffett insisted on the curbs when the deal was struck.

Mr. Buffett has expressed his delight publicly with the investment in Goldman.

In his latest annual letter, he lamented that the bank “unfortunately” would soon be able pay off the investment.

“Goldman Sachs has the right to call our preferred on 30 days’ notice, but has been held back by the Federal Reserve (bless it!),

which unfortunately will likely give Goldman the green light before long,” he wrote in a newsletter quoted by the New York Times.