Warren Buffett Invests $5 Billion in Goldman

Although a small fraction of the investment the American taxpayer is about to make, the Berkshire Hathaway deal is a respected signal that opportunity may be in the rumble of the credit crisis.

Berkshire/Goldman Deal

Structured as a combination of preferred, non-convertible stock that pays a 10% dividend and warrants that give Berkshire the right to buy $5 billion in common stock at an 8% discount to Tuesday's closing price. If exercised this purchase would give Berkshire a 10% ownership in the strongest of the remaining investment banks.

Goldman is also likely to turn to the public markets to raise another $2.5 billion through the first issuance of common stock since 2000. If Berkshire exercises the warrants and approves this additional stock issuance Buffett's stake will be diluted to about 7%.

Goldman also retains the right to repurchase the preferred stock at any time at a 10% premium.

Trusted Relationship Helps Bring Deal

The execution of this important deal is thought to have been assisted by a strong trust-based relationship with Byron Trott, head of Goldman's Chicago office. Trott brought Buffett to the table of the Mars $23 billion acquisition of Wrigley earlier this year, contributing $6.5 billion to that deal.

Buffett sums up his confidence in Trott in one of his famous annual letters to investors, "Byron is the rare investment banker that puts himself in the clients shoes, I trust him completely."

Buffett Just Starting to Move on Value

Notably silent through much of the mortgage meltdown and ensuing credit crisis, Buffett seems to be on the hunt for valuable companies at discounts. Last week Berkshire announced a deal to buy Constellation Energy, a Baltimore utility for $4.7 billion.

He is also rumored to be quietly buying additional shares in one of his two major financial services investments--Wells Fargo and American Express. Although he will not disclose which speculation is that it is American Express, which is trading at a discount.

Goldman Deal is Unexpected Return to Wall Street

The investment in Wall Street was an unexpected move as Buffett's only other foray into Wall Street investment banks was a trying ordeal. Following a $700 million investment in Salomon Brothers in 1987 to prevent a potential a take-over challenge by Revlon's Ron Perelman, Buffett went on a roller coaster ride that thrust him into the position as interim Chairman, following a Treasury-auction bidding scandal that forced the step-down of John Gutfreund.

After cleaning house and restoring clients, investors, and legislators trust he stepped down from that post and is credited with saving the firm.

Buffett Brings Confidence

For all of these examples, Warren Buffett and Berkshire Hathaway represents a smart, trustworthy, value-based investor that injects public confidence in not only Goldman Sachs, but the capability of our financial services market to return long-term value.