Goldman Sachs
Company Overview
Goldman Sachs is one of the world's most prominent investment banks, advisory firms, and asset managers. During the September 2008 financial crisis, Buffett agreed to invest $5 billion in Goldman Sachs — providing a critical confidence signal at the moment of maximum systemic panic. The investment demonstrated both Berkshire's unique 'shock absorber' role in financial crises and Buffett's ability to negotiate exceptional terms for crisis capital.
Investment Story
September 23, 2008: The crisis investment. One week after Lehman Brothers' bankruptcy, Goldman CEO Lloyd Blankfein called Buffett. The market turmoil was severe: credit markets had effectively frozen, and Goldman's stock had fallen sharply amid speculation about its viability. Goldman needed $5 billion in capital. Buffett agreed — under terms that no other investor could secure.
The terms. Berkshire received: $5 billion in perpetual preferred stock paying 10% annual dividend ($500 million annually); warrants to purchase $5 billion of Goldman common stock at $115 per share exercisable within 5 years; and the ability to redeem at a 10% premium ($5.5 billion), which Goldman did in 2011.
The signaling value. Buffett's investment was announced the same day it closed — providing Goldman with an immediate, public vote of confidence from the world's most respected investor. Goldman's stock, which had been falling, stabilized. Several similar transactions (Berkshire in GE, Warren Buffett funds) provided psychological anchoring to markets questioning whether any financial institution was safe.
The financial return. Goldman redeemed the preferred at 110% ($5.5 billion) in 2011. Berkshire exercised the warrants in 2013, receiving Goldman shares worth approximately $2 billion more than the $5 billion exercise price. Total return on the $5 billion crisis investment: approximately $3.7 billion in dividends and warrant profits over 5 years.
The relationship. Berkshire holds some Goldman common stock as a normal portfolio position. The relationship formalized Goldman's role as one of the institutions Berkshire can reliably partner with for large, complex transactions.
Buffett's Own Words
*In early spring, Byron Trott, a Managing Director of Goldman Sachs, told me that Wal-Mart wished to sell its McLane subsidiary. McLane distributes groceries and nonfood items to convenience stores, drug stores, wholesale clubs, mass merchandisers, quick service restaurants, theaters and others. It’s a good business, but one not in the mainstream of Wal-Mart’s future. It’s made to order, however, for us. McLane has sales of about $23 billion, but operates on paper-thin margins – about 1% pre-tax – and will swell *
*In early spring, Byron Trott, a Managing Director of Goldman Sachs, told me that Wal-Mart wished to sell its McLane subsidiary. McLane distributes groceries and nonfood items to convenience stores, drug stores, wholesale clubs, mass merchandisers, quick service restaurants, theaters and others. It’s a good business, but one not in the mainstream of Wal-Mart’s future. It’s made to order, however, for us. McLane has sales of about $23 billion, but operates on paper-thin margins – about 1% pre-tax – and will swell *
November, Eitan, Jacob and ISCAR’s CFO, Danny Goldman, came to Omaha. A few hours with them convinced me that if we were to make a deal, we would be teaming up with extraordinarily talented managers who could be trusted to run the business after a sale with all of the energy and dedication that they had exhibited previously. However, having never bought a business based outside of the U.S. (though I had bought a number of foreign stocks), I needed to get educated on some tax and jurisdictional matters. With that
*Take a look at their ITW record; you’ll be impressed. Byron Trott of Goldman Sachs – whose praises I sang in the 2003 report – facilitated the Marmon transaction. Byron is the rare investment banker who puts himself in his client’s shoes. Charlie and I trust him completely. You’ll like the code name that Goldman Sachs assigned the deal. Marmon entered the auto business in 1902 and exited it in 1933. Along the way it manufactured the Wasp, a car that won the first Indianapolis 500 race, held in 1911. So this *
Wrigley, Goldman Sachs and General Electric. We very much like these commitments, which carry high current yields that, in themselves, make the investments more than satisfactory. But in each of these three purchases, we also acquired a substantial equity participation as a bonus. To fund these large purchases, I had to sell portions of some holdings that I would have preferred to keep (primarily Johnson & Johnson, Procter & Gamble and ConocoPhillips). However, I have pledged – to you, the rating agencies and mysel
Investment Lessons
Berkshire's balance sheet is itself a competitive advantage. Buffett could write a $5 billion check in September 2008 because Berkshire had maintained excessive cash and liquidity when every conventional financial institution was fully deployed. This 'excess' cash — which earns below-market returns during normal periods — provides Berkshire with unique access to the most attractive crisis investments that come available only during maximum fear. The long-term returns from these crisis investments far exceed the opportunity cost of holding cash during the interim.
Crisis premiums are real and calculable. The 10% preferred dividend and warrants represent a calculable premium for providing capital in a crisis rather than in normal markets. Goldman would have paid 6-7% for the same capital in 2006; paying 10% plus warrants in 2008 reflected the genuine scarcity of willing capital providers. Buffett's ability to price this scarcity correctly — and to credibly commit to deploying the capital — is itself a proprietary advantage.
Preferred stock in financial crises is a recurring Berkshire pattern. Goldman Sachs (2008, $5B), General Electric (2008, $3B), Bank of America (2011, $5B), Occidental Petroleum (2019, $10B) — each of these crisis or strategic financings followed the same template: large, permanent capital at high dividend rates plus equity participation through warrants or common shares. The pattern works because the counterparty needs certainty and speed that only Berkshire can provide at the required scale.