Goldman Sachs Will Pay $5.65 Billion to Repay Buffett for 2008 Investment

Goldman Sachs Group Inc. (GS), the fifth-biggest U.S. bank by assets, will pay $5.65 billion to redeem preferred stock sold to Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) at the depth of the 2008 financial crisis.

The purchase includes a 10 percent premium on Buffett’s original $5 billion investment, a $125 million first-quarter dividend, and $24 million in accelerated dividends, said Stephen Cohen, a spokesman for the New York-based company. The redemption will cut first-quarter earnings per share by $2.84, the bank said in a statement today.

“Berkshire Hathaway’s 2008 investment in Goldman Sachs was a major vote of confidence in our firm and we are very appreciative of it,” Cohen said.

Goldman Sachs had been awaiting Federal Reserve approval to buy back Buffett’s investment, which gave him $500 million a year in dividends. In his annual letter to shareholders last month, Buffett said he expected the regulator “will likely give Goldman the green light before long.”

The Federal Reserve also approved a plan for Goldman Sachs to buy back company stock and potentially increase the common stock dividend, the firm said in today’s statement. Cohen declined to comment on the buyback or dividend plans.

Unlike other banks that reduced their dividends after the financial crisis, Goldman Sachs never changed its 35-cent a share quarterly payout to shareholders. David A. Viniar, Goldman Sachs’s chief financial officer, told analysts on Oct. 19 that the firm prefers repurchasing stock to raising its dividend.

‘Better Way’

“Buying back shares is a better way to give it back to our shareholders,” Viniar said at the time. “But that’s not to say that we wouldn’t raise our dividend going forward.”

Buffett, the second-richest American and a cult figure in the investing world, helped Goldman Sachs shore up the investment bank’s capital and restore market confidence after its stock tumbled and borrowing costs jumped following the Sept. 15, 2008, collapse of Lehman Brothers Holdings Inc. (LEHMQ)

News of Berkshire’s investment on Sept. 23, 2008, also helped Goldman Sachs raise $5.75 billion from a stock offering a day later.

On March 1, the SEC accused former Goldman Sachs board member Rajat K. Gupta of passing confidential information about the firm, including Buffett’s planned investment, to Galleon Group founder Raj Rajaratnam. Gupta, the former worldwide managing director of consulting firm McKinsey & Co., served on Goldman Sachs’s board from 2006 until last year. Gary Naftalis, Gupta’s attorney, has called the SEC’s allegations “totally baseless.”

SEC Case

Goldman Sachs Chief Executive Officer Lloyd Blankfein, 56, has repeatedly invoked the deal with Buffett as evidence that Goldman Sachs wasn’t relying on government funds received from the U.S. Treasury Department a few weeks later. Buffett, 80, has praised Blankfein’s leadership after Goldman Sachs was sued for fraud by the SEC in April. The case was settled in July for $550 million.

The repayment to Buffett will also free Goldman Sachs’s top executives from a requirement that they retain 90 percent of their stock.

Under the terms of Berkshire’s investment, Blankfein, Chief Financial Officer David Viniar and Co-Presidents Gary Cohn and Jon Winkelried were named in the “material definitive agreement” that prevents them, their families and their estates from selling more than 10 percent of the common stock they own until Oct. 1, 2011, or until Berkshire redeems its $5 billion in preferred stock, whichever comes soonest. Winkelried left Goldman Sachs in March 2009.

The agreement pertained to stock owned by the executives as of Sept. 28, 2008.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.

Enlarge image

Warren Buffett

Nelson Ching/Bloomberg

Warren Buffett, chairman of Berkshire Hathaway Inc.

Warren Buffett, chairman of Berkshire Hathaway Inc. Photographer: Nelson Ching/Bloomberg

2:38

March 18 (Bloomberg) -- The Federal Reserve said some of the 19 largest U.S. banks will be able to restart dividend payments, buy back shares or repay government capital after “significant improvement” in their capital positions and the economy. Peter Cook reports on Bloomberg Television's "InBusiness With Margaret Brennan." (Source: Bloomberg)