The name Goldman Sachs (GS) has been one of the premiere names in investment banking in America since the 1800s. However, its sterling reputation did not prevent the company from being involved in the subprime mortgage crisis that threatened to sink the global economy. Goldman was bailed out by the U.S. taxpayers and Warren Buffett, founder of investment firm Berkshire Hathaway (BRK.A, BRK.B). These two great names in American investing came together at a critical time in history to produce a partnership that helped to stabilize one and enrich the other.
The origins of Goldman's problems began in 2006 and 2007 when the credit default swap frenzy created the meltdown in the American housing market. Questions about the company misleading homeowners and setting up the conditions to allow mortgages to fail swirled through the financial industry. Top executives and shareholders began to sell off their stock dropping prices to historic levels. Trouble spread to the company's dealing in the United Kingdom as well, and it became clear that the company was teetering on the brink of collapse.
WARREN BUFFETT TAKES AN INTEREST
In the midst of the financial maelstrom of 2008, Goldman Sachs was in the eye of the storm with a variety of fiscal woes that caused them to teeter on the edge. Warren Buffett stepped in as the ultimate hard money lender to offer the company a $5 billion dollar loan at 10 percent interest plus kickers to get the company back on steady footing. This money helped Goldman to restore stability to its accounts and reputation. It could be argued that the confidence that Buffett showed in the company also played a part in helping it to weather its fiscal storms. Goldman repaid the loan in 2011, leaving other conditions in place until a later period.
GOLDMAN FINALLY PAYS OFF
The deal allowed Buffett's investment firm Berkshire Hathaway to purchase 43,478,260 shares of stock in the company at $.01 per share with an exercise price of $115. The calculations of the stock's price were based on a formula using an average of the last 10 days preceding the October 1, 2013 cut-off date. This transaction now makes Warren Buffett the 9th largest shareholder in Goldman and assures the company of Buffett's continued influence in the company. In many ways, this can work to Goldman's benefit, as Buffett is widely known to be among the savviest investor's on the planet and is sure to make money on the company's success in the future.
WAS IT FAIR?
Whether Buffett took advantage of Goldman's temporary weakness is a point of controversy. Buffett is known for his "value investing" and was willing to bet on the company's recovery at an extraordinary time in history. When Buffett stepped in to offer the loan, it is said he did for sentimental reasons, because his first trade was with Goldman 50 years ago. However, it is more likely that Buffett saw the company foundering and understood its potential for the future. In fact, he has spoken on Goldman's behalf a number of times when the company was investigated for SEC violations. His support continues to add reliability and stability to its image and should help this stock going forward.