Published on March 18, 2011

“Goldman Sachs has the right to call our preferred on 30 days notice, but has been held back by the Federal Reserve (bless it!), which unfortunately will likely give Goldman the green light before long.”

— Warren Buffett, 2010 Letter to shareholders dated February 26, 2011

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.

Goldman Sachs will have to pay Berkshire a 10% premium and is required to provide 30 days notice of its intent to redeem.  As a result, the redemption will take place on April 18, 2011.  Berkshire Hathaway will retain the Goldman Sachs warrants that were issued as part of the deal. Berkshire has the right to purchase 43,478,260 shares of Goldman Sachs at $115 per share.  The warrants expire on October 1, 2013.  Based on Goldman’s closing price of $159.96 today, Berkshire would hypothetically earn a profit of nearly $2 billion if the warrants were exercised today and the shares sold at the closing price.

In Mr. Buffett’s recent letter to shareholders, he predicted that both Goldman Sachs and General Electric would redeem the preferred stock investments Berkshire made during the darkest days of the financial crisis.  General Electric is contractually prevented from initiating the redemption until October 2011.  Berkshire’s highly successful investment in Swiss Re was recently redeemed.  Mr. Buffett warned that it would be difficult for Berkshire to replace the lucrative income streams from these investments which were made on very favorable terms during the financial crisis.

Mr. Buffett has stated that he is on the hunt for acquisitions due to the need to allocate Berkshire’s large cash position as well as the cash that will be coming in due to repayment of the financial crisis era investments.  On Monday, March 14, Berkshire Hathaway announced plans to acquire Lubrizol in a deal worth $9.7 billion.

The Rational Walk’s recently published report, Berkshire Hathaway:  In Search of the “Buffett Premium” contains a section that covers Berkshire’s financial crisis investments in more detail.  That section of the report is included as part of the free sample which may be downloaded in PDF format or viewed in Scribd format through the viewer the appears below.  RSS Feed readers may view the file on Scribd by clicking on the link.

In Search of the “Buffett Premium” — Free Sample

Disclosure: Long Berkshire Hathaway

Goldman Sachs Plans to Redeem Berkshire Hathaway’s Investment
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