Sept. 29 (Bloomberg) -- Warren Buffett, the billionaire who decried Wall Street's ``casino'' mentality, is back at the table 11 years after his last bet ended.

This time he has put down more money -- $5 billion for a stake in New York-based Goldman Sachs Group Inc., compared with a $700 million investment in Salomon Inc. in 1987. And this time he has made sure his odds are even better.

Taking advantage of fragile markets, his sterling reputation and Wall Street's thirst for cash, the 78-year-old chief executive officer of Berkshire Hathaway Inc. extracted a 10 percent dividend on his preferred Goldman shares and made an instant paper profit of $437 million from warrants. That's better than Salomon, which returned 9 percent on his preferred shares and where Buffett had to step in as interim chairman to guide the securities firm through a government investigation.

``He heaped scorn on Wall Street the whole time he was investing in Salomon,'' said Alice Schroeder, a former Morgan Stanley analyst and author of ``The Snowball,'' a new biography of Buffett. ``He owned the preferred, and he'd say, `Hold your nose and go to Wall Street.' There's always a tug between his desire to make money and his high-minded principles.''

The Goldman deal followed the bankruptcy of Lehman Brothers Holdings Inc. and the emergency takeover of Merrill Lynch & Co. by Bank of America Corp. on Sept. 15. Goldman's decision last week, along with Morgan Stanley, to convert itself into a bank holding company supervised by the Federal Reserve may have made Buffett's second Wall Street investment more palatable, after he passed on opportunities to buy into Lehman and Bear Stearns Cos.

Goldman Deal

While Buffett stayed away from Wall Street, he invested in bank stocks. Berkshire is the largest shareholder in Wells Fargo & Co., the biggest bank on the U.S. West coast, and U.S. Bancorp, the largest bank in Minnesota. The company also owns shares in Charlotte, North Carolina-based Bank of America, SunTrust Banks Inc. of Atlanta and M&T Bank Corp. in Buffalo, New York, in which Buffett first took a stake by acquiring preferred shares, said Gerald Martin, a finance professor at American University's Kogod School of Business in Washington, D.C.

``It makes sense that he'd pick Goldman from whatever offers he had,'' said Thomas Russo, a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania, which manages more than $3 billion, including Berkshire shares. ``Goldman is the best of the breed, and the federal oversight ensures that they have a stable funding base. What we've seen lately shows that capital could be a challenge for even the most stalwart of investment banks.''

Adding Up

Goldman Sachs spokesman Michael Duvally declined to comment. Jackie Wilson, a spokeswoman for Omaha, Nebraska-based Berkshire, didn't return messages seeking comment.

The Salomon investment returned about 279 percent while Buffett held his stake, said Martin, who has studied Buffett's investment history. Martin's pretax calculation includes dividends and returns from Travelers Group Inc., which acquired Salomon in 1997, and Citigroup Inc., which bought Travelers in 1998. That's less than the fivefold return, including dividends, in the benchmark Standard & Poor's 500 Index over about the same span.

``He got a nice healthy return,'' said Bruce Greenwald, a professor at the Columbia Business School in New York. ``The upside didn't materialize, but, hey, not every bet works out.''

Salomon Investment

The Goldman and Salomon deals both involved Wall Street firms willing to pay for the imprimatur of the ``Oracle of Omaha,'' according to Greenwald, who runs the Heilbrunn Center for Graham & Dodd Investing, named in part for Buffett's mentor, value-investing pioneer Benjamin Graham.

``It's exactly the same deal,'' said Greenwald. ``They both wanted and needed his name, and in both cases, he ends up with a heads-I-win-tails-I-win deal.''

Buffett's investment in Salomon followed a call from Chief Executive Officer John Gutfreund, who was searching for funds to help the securities firm buy out its largest shareholder at a premium. South African mining firm Minerals and Resources Corp. was considering selling the stake to Revlon Inc. CEO Ron Perelman. Buffett demanded, and got, preferred shares in the firm, once Wall Street's biggest bond dealer, guaranteeing at least a 9 percent return.

`Casino Society'

``He has always wanted a usurious return,'' said David Carr, chairman of Durham, North Carolina-based Oak Value Capital Management Inc., which holds Berkshire shares. ``There's nothing more exciting in his mind than being the lender of last resort, being in a situation where they have to have the capital, they don't have anywhere to go, and there aren't a thousand people at an auction.''

Buffett's agreement with Salomon included a provision allowing him to convert the preferred shares to common stock if the price reached $38 -- it was at $32 at the time -- or return the stock and get his money back. The interest on the preferred shares earned him $63 million a year. It was the biggest bet he had made, and it followed a December 1986 op-ed piece he wrote for the Washington Post criticizing the ``casino society'' that was making Wall Street corporate raiders rich.

The Goldman deal is even more favorable, Carr said. In addition to the preferred shares, Berkshire received warrants to buy $5 billion of Goldman common stock for $115 a share at any time in the next five years. Based on the closing price on the day of the deal, Buffett had a paper profit of $437 million on the warrants that day.

Perpetual Preferred

``Before a nickel has been transferred from point A to point B, Buffett had a gigantic paper profit,'' said Frank Betz, a partner at Warren, New Jersey-based Carret Zane Capital Management, which holds Berkshire shares. ``It's vintage Buffett. With Salomon and Goldman, both of them needed his cash and his cache, and I'm not sure which one was pre-eminent.''

Buffett's $5 billion in the firm's perpetual preferred stock can be repurchased by Goldman at any time in return for a 10 percent premium. In contrast, the dividend yield on the firm's common stock, based on a $1.40 annual payout, is about 1 percent.

The Goldman investment doesn't include any seats on the firm's board, unlike the Salomon deal that made Buffett and Berkshire Vice Chairman Charlie Munger directors. In 1991, after the firm admitted violating bidding rules for U.S. Treasury auctions, Buffett was asked to step in as chairman.

He pledged full cooperation with investigators, steered the firm away from investments he thought ethically dubious and testified before Congress about the Salomon's failure to report bids to regulators.

Haircuts, Manicures

``I want to find out exactly what happened in the past so that this stain is borne by the guilty few and removed from the innocent,'' he told Congress. He testified that he told his employees: ``Lose money for the firm, and I will be understanding. Lose a shred of reputation for the firm, and I will be ruthless.''

Salomon later paid $290 million to settle the charges.

Buffett also cut bonuses and perks for executives, including complimentary haircuts and manicures, he said in one of his yearly messages to shareholders. In another such letter, he described his experience atop Salomon as ``far from fun,'' yet still ``interesting and worthwhile.''

While running Salomon, Buffett ``spent as little time in New York as he possibly could,'' said Schroeder, preferring his office at Berkshire's headquarters in Omaha. ``He was rarely sighted in the halls of Salomon. When he had to go to New York, his secretary said his feet dragged down the hallway when he left.''

Gauging Risk

Buffett's bet on Goldman is not without risk, said Martin, the American University professor. If the proposed $700 billion plan by the U.S. government to buy bad debts from financial companies isn't approved, or if Goldman were to go bankrupt even with a federal rescue, Buffett's preferred shares would plummet in value, he said.

``He'd only receive a dividend as long as they could pay it,'' Martin said. ``If Goldman were to go the way of Bear Stearns or Lehman, than the preferred shareholders are only slightly better protected than the common shareholders.''

Goldman fell $17.29, or 13 percent, to $120.70 at 4:05 p.m. in New York Stock Exchange composite trading. Berkshire fell $1,200, or 0.9 percent, to $133,800. Goldman has fallen about 44 percent this year, while Berkshire has slipped 5.5 percent. The S&P has fallen 28 percent.

To contact the reporter on this story: Erik Holm in New York at eholm2@bloomberg.net.

Last Updated: September 29, 2008 16:12 EDT