Goldman Sachs raises $5 Billion from Warren Buffet

What do you do when you are down in the dumps and no one will lend you capital? Well, you can either start selling your assets or you can lean on the shoulder of your richest friends who were sceptical of the entire mortgage market. That’s what Goldman Sachs has managed to do and thus enter Warren E. Buffet – the world’s most famous investor. Buffet has plowed $5 Billion into Goldman Sachs in a move that has been long awaited in Wall St primarily because of Buffets consistent hesitation to become embroiled in investment banks.

Buffet has always had a keen eye for killer investments when they are at rock bottom prices. His view of the world, from what I have read, is that now is the time to buy and to buy up big – this is true if you have a spare $47 Billion in cash on your balance sheet such as Berkshire Hathaway has. Funnily enough, Buffets investment strategy has always been to investment in rock solid “moat surrounding the castle” businesses who have a sustainable business model that he can clearly understand and comprehend. His view is that “businesses who can extend the moat, and build the castle bigger are where you want your money to sit.” He once famously said that “The World loves Coke. It always has and always will, so that’s why I bought into the business – it’s not exactly rocket science”.

However, the move into the investment and financial banking world does go against some of his ideologies. Buffet has always attempted to steer clear of financial derivatives suggesting they are a “financial train wreck” primarily due to his past experience from the acquisition of General Re, an insurance company, which was completely ruined because of complex derivative instruments which were taken out by the company – unclear to Buffet at the time.

The newest investment into Goldman Sachs will give Buffet approximately a 10% annual dividend which is around $500 million in cash per year. The dividends are attached to preference shares and take precedence over common stock holders. It will also get $5 Billion in warrants over common stock struck at $115 a share which can be exercised at any time in the next five years. It would seem according to Goldman Sachs closing price yesterday of $125.05 USD – this is a very good buy (they made it to $134.75 USD in after hours trading – *cha ching*). Goldman’s shares this time last year where riding around $247 USD – more than 40% higher than what they are now.

Is this a safe investment? Well, as a federally regulated bank holding company – Goldman Sachs cannot take the risks that some of the other investment banks on Wall St have taken which lead to the huge and spectacular bonuses seen in recent years. After the current market nightmare, you would perceive this as a good thing and probably one of the strongest reasons as to why Buffet purchased such a large stake in the company.

Buy low, sell high? Buffet certainly hopes so.