Buffett may be lured by stabilized business model of Wall Street firm
SAN FRANCISCO (MarketWatch) -- In a dramatic move that's pumped some life back into the financial sector, billionaire investor Warren Buffett's Berkshire Hathaway late Tuesday said it would invest as much as $10 billion in Goldman Sachs Group as the venerable Wall Street firm transforms itself into a more-stable banking business.
"Warren Buffett is the ultimate stamp of approval," analysts at UBS said in a Wednesday research report. They concluded that, "Given Buffett's track record, we think his 10% to 20% stake in Goldman Sachs lends credibility to the firm's business model, client franchise, risk-management capabilities, and its its balance sheet."
"the insurance-focused conglomerate run by Buffett, will invest at least $5 billion in Goldman by buying perpetual preferred stock issued by the investment bank. The securities pay a dividend of 10% and are callable anytime at a 10% premium, meaning Goldman can buy them back at the higher price.
"Buffett did this after Goldman converted to a bank holding company," said Pat Dorsey, director of equity research at Morningstar. This means the Federal Reserve will be Goldman's new regulator, so Buffett "has people looking over their shoulder," he added. "Buffett is saying that, with less leverage and more stable sources of funding, this is an institution worth investing in," according to Dorsey. "From Buffett's perspective, you have a world-class firm in a less-competitive landscape with a hopefully less-risky business model."