Goldman Sachs has announced that the Federal Reserve has granted approval for the company to redeem Berkshire Hathaway’s $5 billion investment in Goldman’s 10% cumulative perpetual preferred stock. The investment was made on October 1, 2008 at the height of the financial crisis. Read this article for more details.
Despite paying the largest penalty ever assessed against a financial firm by the Securities and Exchange Commission, Goldman Sachs is still an attractive target for government panels investigating the financial crisis. Goldman agreed to pay a $550 million settlement on July 15 in connection with the Abacus case in which the SEC alleged that Goldman failed to disclose key information regarding the portfolio selection process. Today, the Financial Times reported that Goldman is facing a separate inquiry by the Financial Crisis Inquiry Commission (FCIC) regarding the company’s use of derivatives.
Berkshire Hathaway’s investment in Goldman Sachs at the height of the financial crisis represented a major vote of confidence that enabled Goldman to raise additional equity from investors. The September 2008 deal involved $5 billion in Goldman Sachs perpetual preferred stock along with five year warrants to purchase approximately 43.5 million shares of Goldman common stock at $115 per share. The preferred stock carries a dividend rate of 10% and is callable at any time at a 10% premium. Despite the recent drop in Goldman Sachs common stock, Berkshire’s warrants remain in the money. While Goldman could almost surely refinance Berkshire’s $5 billion investment at a lower rate, having Warren Buffett’s endorsement in the current environment may be priceless. Read this article for more details.
Goldman Sachs has served as a political piñata for so long that many observers may be tempted into believing that Friday’s fraud charges brought by the Securities and Exchange Commission should be viewed as just another part of the political process. This would be a grave mistake. While much of the rhetoric regarding the company remains overheated, the complaint brings forward several charges that point to serious ethical breaches. Goldman Sachs relies on its reputation for client service to justify much of its economic goodwill. Billions of dollars of goodwill could evaporate if the situation is not skillfully handled. Read this article for more details.
Yesterday, we discussed a number of lessons that must be learned from the financial crisis. In a “Tea with The Economist” interview shown below, a Goldman Sachs board member provides his insights regarding leadership during a crisis and financial reforms that are needed to stabilize the overall system. Bill George also comments on a variety of other topics regarding politics, business, and leadership. Read this article to view the video.