In 2008, Warren Buffett — or more specifically, his firm Berkshire Hathaway (NYSE:BRK.A, BRK.B) — put his money where his mouth was on his whole “be fearful when others are greedy and greedy when others are fearful” philosophy. As the market was melting down, he threw $5 billion at Goldman Sachs (NYSE:GS) to add liquidity and credibility to the struggling investment bank.
Of course, Buffett and Berkshire exacted a pretty price from Goldman for the bailout. The terms of the deal added up to $1.4 million in dividends daily from the financial stock. During the past four-and-a-half years, it has added up to roughly $2.3 billion in dividends on that investment. Not bad!
But now, Buffett has made the investment even more lucrative for Berkshire Hathaway by exercising an option deal granted to him along with the initial investment. In a nutshell, Berkshire will receive 9.2 million Goldman shares worth roughly $282 million based on Monday’s closing price — and make the Omaha-based investment firm one of the 10 largest Goldman Sachs stakeholders with roughly 2% ownership.
In case you were worried, Goldman isn’t exactly hurting from this rich deal. The bottom line is that without Warren Buffett’s cash and respectable image, it was a very real possibility that GS stock might have gone the way of Bear Stearns or Lehman Brothers during the financial crisis. And whether it was a government bailout like the one forced upon Citigroup (NYSE:C) and Bank of America (NYSE:BAC) or a private bailout from Buffett, remember that there weren’t a lot of alternatives thanks to the credit freeze that threatened all major financials in late 2008.
So is Goldman Sachs a buy with Buffett’s big stake? Maybe.
Buffett’s moral standing could help the “vampire squid” shake some of the scandals like Abacus credit derivatives that have tarnished the bank’s image and held back GS stock. Plus, Goldman has been laying off employees regularly since the downturn as it has fought against continued revenue declines and the threat of stricter regulation.
Perhaps the worst is over now that Berkshire is a major stakeholder and the stock is up 30% in the last six months to triple the S&P 500’s returns.
On the other hand, the best days of GS might be in the past. As David Weidner puts it:
“The trick for Goldman will be for it to produce the sort of profits it used to and shed its scandal-plagued past. In turn, the stock price should rise and benefit Buffett. If it doesn’t, you can bet he will leave. For as beloved as he is, Buffett can be ruthless. The irony is that’s the game Goldman usually plays.”
In other words, a company that made a name for itself with admittedly greedy tactics might have a hard time making as much money if it stays honest … and if it doesn’t stay honest, it might have a hard time keeping Berkshire on board.
- Vintage GS: Were suckers sucked in by the Abacus scandal “fools or victims?” (Breaking Views via Reuters)
- What ever happened to the Greg Smith tell-all that told little? (NYT)
- Good news or a contrarian sign? Goldman is partying again. (New York Mag)
- If you still have a job on Wall Street, at least the pay is still good … (Dealbook via NYT)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing he did not own a position in any of the stocks named here.