Warren E. Buffett, the country’s most famous investor and one of the world’s richest men, announced on Tuesday that he would invest $5 billion in Goldman Sachs, the embattled Wall Street titan, in a move that could bolster confidence in the financial markets.
Until now, Mr. Buffett, who has navigated the stock market with legendary prowess, has largely refrained from investing in the stricken financial industry, saying repeatedly that things could get worse.
Thousands of people on and off Wall Street follow Mr. Buffett’s moves, so his decision to invest in Goldman immediately heartened investors. After falling nearly 1.5 percent during the day, the Standard & Poor’s 500-stock index erased half its loss in after-hours trading Tuesday evening on news of the investment.
“Buffett is saying he’s confident,” said Brad Hintz, an analyst at Sanford C. Bernstein & Company.
Mr. Buffett’s conglomerate, Berkshire Hathaway, unveiled the move only days after Goldman, long the premier investment house on Wall Street, embarked on a radical plan to transform itself into a traditional bank to ensure its survival. Goldman, which examined various options over the last week as its shares tumbled and some clients abandoned the firm, also said Tuesday it would sell at least $2.5 billion of common stock to the public.
Since credit markets tightened more than a year ago, Mr. Buffett had stayed his hand even as other investors, including government-controlled funds from the Middle East and Asia, poured money into American financial companies like Citigroup and Merrill Lynch, only to see their investments plunge in value.
Such wariness is a hallmark of Mr. Buffett’s investing style, and many on Wall Street have wondered when he might jump in. Over the last four decades, he has built Berkshire, which is based in Omaha, into one of the world’s largest and most successful insurers. Along the way, he has also assembled a stable of holdings in widely known companies like Coca-Cola and the Washington Post Company, and more recently has increased his stakes in energy concerns and railroads.
Mr. Buffett, who plans to donate the vast majority of his fortune to charity, is known for his folksy guidelines for proper corporate governance and his investment expertise. His annual meetings are fondly referred to as the Woodstock of American capitalism by his many acolytes.
But Mr. Buffett, 78, has also learned from past mistakes in the financial sector. For instance, Berkshire’s 1998 acquisition of General Re, the insurance company, was marred by a portfolio of complex derivative securities and state and federal investigations into reinsurance policies written by the company. Salomon Brothers, the Wall Street firm that Mr. Buffett was pressed by the government to lead in the early 1990s amid a trading scandal, was another taxing experience.
But Goldman is a classic Buffett play: It is a blue-chip institution, with a premier brand and long, successful history, that has been beaten down in the stock market, and one that he is investing in on very favorable terms. Goldman’s share price has fallen nearly 42 percent this year, and reached a peak of $247.92 less than a year ago.
Mr. Buffett, in the statement, called Goldman Sachs an exceptional institution.
“It has an unrivaled global franchise,” Mr. Buffett said, “a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance.”
Still, Mr. Buffett is not taking big risks based on the structure of the investment.
Berkshire Hathaway will receive perpetual preferred shares in Goldman, which will pay a 10 annual percent dividend, or $500 million a year. Those dividends take precedence over other payments to common shareholders. Goldman has the right to buy back the shares at any time for premium of 10 percent.
In addition, Berkshire Hathaway will receive warrants to buy $5 billion in common stock at a strike price of $115 a share, which can be used at any time in a five-year period. Those warrants are already in the money: Goldman shares closed Tuesday at $125.05, up $4.27, and rose to $134.75 in after-hours trading after Mr. Buffett’s investment was announced.
While Mr. Buffett’s risks may be limited, he is investing in Goldman at a time when many fear the bank’s long-run of soaring profits may be coming to an end. As a federally regulated bank holding company, Goldman may not be able to take the kind of risks that have yielded profits and bonuses that defined Wall Street’s latest Golden Age.
Goldman’s move came a day after a rival investment bank, Morgan Stanley, raised about $8 billion by selling up to a 20 percent stake to Mitsubishi UFJ Financial Group, Japan’s largest commercial bank. Goldman was widely expected to follow suit.
“We are pleased that given our longstanding relationship, Warren Buffett, arguably the world’s most admired and successful investor, has decided to make such a significant investment in Goldman Sachs. We view it as a strong validation of our client franchise and future prospects,” the chief executive of Goldman, Lloyd C. Blankfein, said in the statement. “This investment will further bolster our strong capitalization and liquidity position.”
For Mr. Buffett, the move is a long-awaited investment in a big financial firm. Though he has struck several deals since the credit market tightened — and in two deals actually provided financing — he has not invested heavily in the financial services sector. He has been approached several times, including by the American International Group, the giant insurance company the government has since rescued.
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