Buffett To Buy $5B Stake In Goldman

Warren Buffett is investing $5 billion dollars in Goldman Sachs. His decision comes at a critical time for Goldman. Buffett said he believes Congress will approve a plan to buy up bad mortgage debt from Goldman and other firms.

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When you have $40 billion, you can pretty much buy whatever you want. And what Warren Buffet wanted was a share of the banking company Goldman Sachs. Late yesterday, the legendary investor jolted the financial world by announcing that he was buying $5 billion worth of Goldman stock. The move is being seen as a big vote of confidence in the battered financial sector, but Buffett says he's just trying to make money. NPR's Jim Zarroli reports.

JIM ZARROLI: Like any other big Wall Street company, Goldman Sachs has taken a beating in the mortgage downturn. Its profit is down and so is its share price. There have been doubts about its future. So, Goldman was due for a little good news. Then along came Warren Buffett.

Dr. GERALD MARTIN (Professor of Finance, American University): Here is arguably the greatest investor that ever lived, and he's now stepping up and saying I've now got confidence that I can make a decent return in this company by investing $5 billion.

ZARROLI: That's Gerald Martin, professor of finance at American University, who has studied Buffett's investment style. Martin says that Buffett's acquisition of Goldman shares is likely to be a big boost for the company. It's not just that he's pouring a lot of money into Goldman at a time when it really needs it. Martin says it's also a sign that Buffett has a lot of confidence in Goldman's management.

Dr. MARTIN: When he goes to acquire a company, he wants to acquire a company with good management, management in place. He doesn't want to have to run it. He just simply wants to be the person that provides the capital.

ZARROLI: And Martin says Buffett has a lot of capital right now. Like many investors, he's been sitting on the sidelines, reluctant to invest in this dicey economic climate. So by the beginning of this year, his holding company, Berkshire Hathaway, had amassed $40 billion in cash, and Goldman would seem to make an attractive purchase. This week, the company got permission to become a bank-holding company, which means it can compete with commercial banks for customer deposits. James Ellman, president of the hedge fund Seacliff Capital, says after the demise of Bear Stearns and Lehman Brothers and the acquisition of Merrill Lynch, Goldman is in a pretty good position.

Mr. JAMES ELLMAN (President, Seacliff Capital): When business activity picks back up, one would imagine that Goldman Sachs is going to gain significant market share because many of their competitors have either been destroyed or are significantly damaged. If that's the case, Goldman is a major winner if it survives the current financial storm.

ZARROLI: Whether Goldman survives will depend in part of the fate of the Bush administration's plan to buy $700 billion in distressed securities. The plan has generated a huge amount of public criticism, and members of Congress are raising lots of objections. In an interview on CNBC today, Buffett said he understood people's anger over the deal, but he said it was important to do the right thing for the country. And he said he was confident Congress ultimately will.

Mr. WARREN BUFFETT (Chairman & CEO, Berkshire Hathaway): If I didn't think the government was going to act, I would not be doing anything this week. I might be trying to undo things this week. So I am, to some extent, betting on the fact that the government will do the rational thing and act promptly.

ZARROLI: And even if Goldman doesn't survive, Buffett may still end up doing OK. He's buying $5 billion in preferred shares. That means that if Goldman ever goes bankrupt and its assets are divided, Buffett gets paid before regular shareholders. And if Goldman's fortunes turn around and its stock goes up, Buffett can buy additional shares and make a nice profit. They don't call Warren Buffett the smartest investor in the world for nothing. Jim Zarroli, NPR News, New York.

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