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Goldman Sachs Group, Inc. (GS) Gets $5 Billion from Buffett

Goldman Sachs Group, Inc. (NYSE:GS), one of only two major Wall Street investment banks left standing (the other being Morgan Stanley), has attracted the interest of one of the world’s top investors, Warren Buffett, to the tune of $5 billion. On Wednesday, Buffett agreed to purchase $5 billion in preferred Goldman stock. Buffett also secured the right, not the obligation, to purchase $5 billion more in common stock. In a CNBC interview, Buffett said that he’d been approached by Lehman and other investment banks over the past few months, but decided to go with what he considered the best firm on Wall Street, Goldman Sachs.

But exactly how much can this move be considered a vote of confidence? In terms of management and reputation, Goldman Sachs has long been considered a breed apart from the rest of the investment banking world, a world Buffett has often criticized and avoided. Although every investment involves risk, and even Goldman faces some nasty weather, especially if the passage of the Treasury’s $700 billion bailout falters, Goldman’s survival is not an issue.

In addition, although Goldman share prices plummeted by almost 50% over the summer, Buffett was able to negotiate an even better deal. Buffett’s $5-billion block of preferred shares carry a hefty 10% interest rate. Moreover, even though Goldman has the right to call back the preferred stock, they would have to pay a 10% penalty to do so. Plus, Buffett has the option to purchase another $5 billion in common stock at a price 15% below the current level.

Viewed this way, Warren Buffett’s infusion of cash is not an indication that the oracle of Omaha has confidence in the financial sector, but simply a shrewd investment, the kind of thing the Berkshire Hathaway chairman does best.

What Buffett’s move does signal is his confidence that Goldman, unlike Lehman Brothers, will ultimately survive the current turmoil, and make his bargain-basement price a sure winner. But perhaps the most important thing to remember when evaluating his thumbs-up to a Wall Street bank is that Buffett traditionally thinks long term; very long term.

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