-- In a move it hopes will ease concerns about its liquidity, Goldman Sachs gs said Tuesday that it would raise at least $7.5 billion by selling stakes in the company to famed investor Warren Buffett and to the public.
That comes two days after Goldman Sachs and Morgan Stanley ms— which were the last big investment banks standing — received permission to convert to bank holding companies partly to gain more access to customer deposits, long considered a stable source of funding for financial institutions.
Under the agreement, Goldman will sell $5 billion of preferred stock to Buffett's company, Berkshire Hathaway, brkb giving it 10% of total shareholders' equity. Separately, Goldman expects to raise at least $2.5 billion by selling stock in a public offering.
Joseph Mason, a banking professor at Louisiana State University, said that Buffett buying the stake means that "either Goldman is a great investment on its own, or the (contemplated government) bailout is so valuable that it makes sense to invest in banks" that may benefit.
Lloyd Blankfein, CEO of Goldman, said in a statement that the firm views the investment as "strong validation" of its business prospects.
Buffett, meanwhile, said in a statement that Goldman has an "unrivaled global franchise, a proven and deep management team" and the financial strength to outperform the industry.
The investment gives Goldman flexibility to grow its business, says Tom Marsico, founder of Marsico Capital Management — which owns 4% of Goldman on behalf of its clients — by giving it a "cushion of capital to buy distressed (financial) assets."
Berkshire will receive warrants it can exercise within five years to buy $5 billion of common stock at $115 a share. Berkshire's preferred stock carries a dividend of 10%.
Goldman's stock rose $4.27 to $125.05 ahead of news of the investment late Tuesday, then topped $135 in after-hours trading. Last week, the stock hit a four-year low of $85.88 before rebounding, amid the bankruptcy filing of rival Lehman Bros. and the hasty sale of Merrill Lynch to Bank of America.
Less than a year ago, Goldman was posting record profits and paying record bonuses: Blankfein and his two top deputies reaped payouts totaling more than $67 million for 2007.
The company, while suffering from a decline in trading and investment banking revenue, has booked $4.9 billion of losses on devalued assets. That's a fraction of the write-downs taken by rivals such as Citigroup, Merrill Lynch and Morgan Stanley.
Morgan got its own cash infusion Monday, agreeing to sell a 20% stake for more than $8 billion to Mitsubishi UFJ Financial of Japan.