NEW YORK (TheStreet) — Buffett’s name made its way through the media wires during this shortened week after it was announced that Goldman Sachs(GS) had bought back the $5.5 billion in preferred shares it sold to Berkshire Hathaway(BRK.A) during the dire depths of the financial crisis.
Although Goldman Sachs currently reigns as king of Wall Street, this was not the case in 2008 when the financial industry stood on the brink of collapse. In the midst of the credit crisis, as Lehman was collapsing and Merrill Lynch was going through an emergency takeover, Goldman Sachs sought help from Warren Buffett.
Given his positive outlook for the U.S., Oracle of Omaha was willing to step in and provide Goldman with a $5 billion fund to save the firm from ruin. The deal came with conditions. In return for the funding, Buffett received preferred shares promising a 10% annual dividend, and warrants to purchase $5 billion worth of Goldman common stock at $115 per share.
At the time, the deal was viewed as excessively risky. However, as the financial industry has risen from the ashes and returned to strength, Buffett has maintained a front row seat to the recovery, and an ideal opportunity to profit.
For most, a $5.5 billion check would be welcomed. However, for Buffett, the news is likely unwelcome. In fact, as CNBC pointed out, in the past the investor has joked that if he knew that the firm was calling to pay him back, he would not answer his phone.
Losing the Goldman shares will mean losing the substantial dividend. Additionally, as many have pointed out, the $5.5 billion will likely not be utilized immediately. Rather, it will be added to Buffett’s already heavy cash reserves.
Looking ahead, it will be interesting to see what is next for the Buffett-Goldman relationship. The warrants included in Buffett’s deal are not set to expire until 2013. With Goldman shares trading well above $115, the investor appears set to profit handsomely from them.
This event, however, also brings to light Buffett’s other notable crisis-era investments. Aside from Goldman Sachs, the Nebraska native also proved to be a saviour for U.S. conglomerate General Electric(GE). In the firm’s time of need, Buffett swooped in, providing it with a $3 billion injection.
As with the Goldman deal, in return for the injection of funds and confidence, Buffett received $3 billion in preferred shares that offer a 10% yield. Additionally, Buffett received warrants to purchase GE common stock at $22.25 per share at any time over the next five years.
In late 2010, GE stated that it intends to repurchase the preferred shares from Buffett in October 2011. Fans of the investor will be sure to have their sights set on GE and Berkshire Hathaway when this time comes.
In discussing these deals in his 2010 annual letter to shareholders, Buffett pointed out that preferred share redemptions will significantly impact Berkshire Hathaway’s earning power.
Now that Goldman has repurchased its shares and GE looks set to follow suit later this year, are you concerned about the future strength of Buffett’s firm? Feel free to leave a comment in the space below.