Has Warren Buffett seen the bottom of the free-falling market?
Buffett, who generally knows a deal when he sees one, announced yesterday that his company, Berkshire Hathaway, would invest $5 billion in beleaguered Goldman Sachs.
Buffett had avoided investment in the troubled financial sector, saying the situation could worsen.
With the Goldman Sachs investment, “Buffett is saying he’s confident,” Brad Hintz, an analyst at Sanford C. Bernstein & Company, told The New York Times.
Warren Buffett
The Times called the news “a classic Buffett play,” because Goldman Sachs is an established institution with a well-known brand and a depressed stock price. Company shares have dropped by half over the past year.
In a statement, Buffett said Goldman Sachs “has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance.”
The deal gives Berkshire Hathaway preferred stock, at $115 per share.
As the Wall Street Journal notes today, Buffett is a friend of Byron Trott, head of Goldman Sachs’ Chicago office. Earlier this year, Trott brought Buffett into Mars Inc.’s acquisition of Wm. Wrigley Jr. & Co. Both Berkshire Hathaway and Goldman Sachs were investors in the deal.
It was unclear, the Journal reported, whether Trott also played a role in the Goldman Sachs deal.
Investors closely follow Buffett’s every move, so his interest in Goldman Sachs was seen by many as a ray of light in otherwise cloudy skies.
The announcement came after a day of dramatic hearings on Capital Hill, where Treasury Secretary Henry M. Paulson Jr. and Fed Chairman Ben S. Bernanke pushed their $700 billion plan to save the financial sector.
Buffett told CNBC today that the Goldman Sachs deal was predicated on his confidence that Congress would approve the bailout.
Buffett also praised Paulson and recommended that the next president keep him in the job for another year.
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