Goldman Gets Buffett Investment, Goes Shopping

Goldman Sachs Group Inc. (GS), the former invesmtment bank turned into commercial bank, won a key investment from world-reknowned investor Warren Buffett on Tuesday, according to a statement released by the firm after U.S. markets closed. The deal involves an agreement to sell $5 billion of perpetual preferred stock to Buffett’s Berkshire Hathaway, Inc. in a private offering; the preferred stock has a dividend of 10 percent and is callable at any time at a 10 percent premium, Goldman said. Berkshire Hathaway will also receive warrants to purchase $5 billion of common stock with a strike price of $115 per share, which are exercisable at any time for a five year term; given that Goldman’s stock closed Monday at $125.05, Buffett’s getting quite a deal. The famed investor is known for picking winners, so the firm’s announcement of the investment likely will provide some bounce for the stock — but it also has fueled speculation among Wall Street insiders, as well. Some of HW’s key sources suggested, tongue only half in cheek, that the investment came not only because Goldman managed to avoid much of the subprime mess, but because of a widely-held Wall Street belief that the former investment bank has strong connections to current Treasury chief Henry Paulson, a former Goldman executive. “There are plenty on the Street that are convinced that Paulson has a red phone in his office direct to Goldman’s board room,” said one source, an ABS analyst that asked not to be named. A ‘head fake’ on deposits? Reports also surfaced on Tuesday suggesting that Goldman is looking to raise a deposit base as part of its new existence as a commercial bank; JP Morgan Chase & Co. (JPM) analyst Steven Alexopoulos suggested in a note Monday that regional banks would be “lunch” for many of the larger institutions now looking for deposits, Bloomberg reported. “We plan to build our banking business organically and by buying retail deposits and bank assets in the wholesale market, not through opening branches,” a Goldman Sachs spokesman told various media outlets. “For example, the FDIC is selling IndyMac assets and those might be the sort of thing we’d be interested in looking at.” That statement spawned plenty of predictable news reports suggesting that Goldman was looking to buy IndyMac, as a result. But sources that spoke with HW suggested Goldman has little interest in snapping up IndyMac’s deposit base. “No way a press person would have knowledge of something like that,” said one senior bank executive that commented under condition of anonymity. “It’s a pretty good fake to get people looking one way while they’ll likely move in another.” Goldman will certainly have its share of banks to look at as potential targets, too, including troubled thrift Washington Mutual (WM) and option-ARM heavy Wachovia Corp. (WB) (although the newly-minted bank holding company hasn’t reportedly been pursuing an acquisition of either firm). Disclosure: The author held no relevant positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.