Buffetts gamble

Buffett Drove Hard Bargain With Goldman

For six months, as the credit crisis deepened, billionaire investor Warren Buffett turned away a string of Wall Street firms that came hat in hand looking for help.

On Tuesday, Mr. Buffett says, he was sitting with his feet on his desk in Omaha, drinking a Cherry Coke and munching on mixed nuts, when he got an unusually candid call from a Goldman Sachs Group Inc. investment banker. Tell us what kind of investment you'd consider making in Goldman, the banker urged him, and the firm would try to hammer out a deal.

Warren Buffett

That midday call from Goldman's Byron Trott, who had done deals with Mr. Buffett for years, touched off a rapid chain of events. Within hours, Goldman had announced that Mr. Buffett's Berkshire Hathaway Inc. would invest $5 billion in Goldman -- a move viewed by many investors as a vote of confidence in the nation's reeling financial system.

The swiftness of the deal underscores the intense pressure now faced by Goldman, long regarded as one of the most financially secure firms on Wall Street. Over a 10-day stretch this month -- amid federal bailouts of Fannie Mae, Freddie Mac and American International Group and a bankruptcy filing by Lehman Brothers Holdings Inc. -- Goldman shares dropped 36%. Investors began asking questions about whether it had the capital to survive. On Sunday night, Goldman secured federal approval to become a bank holding company, ending 139 years as a securities firm.

On Wednesday, Goldman said it had completed a separate $5 billion stock offering, double the size of the offering announced on Tuesday. Its shares jumped $7.95 to $133 in 4 p.m. New York Stock Exchange trading, although they remain far below their 52-week high of more than $250. The deal with Mr. Buffett and the stock offering means Goldman shareholders could eventually have their stake diluted by as much as 20%.

Mr. Buffett's decision to invest now in Goldman gives an indication of how the famed investor believes the financial crisis might shake out. At a minimum, he regards Goldman as a survivor, although the firm's profits could be pinched as it adjusts to life as a banking holding company, taking fewer risks and facing heightened regulation.

In a telephone interview Wednesday morning from his office in Omaha, Mr. Buffett said he believes the proposed federal bailout will be approved by Congress and that it will succeed. "The government has a great opportunity," he says. "If they buy things at market prices with the government's cheap funding, they should make a lot of money."

If Congress fails to approve the bailout, Mr. Buffett says, all bets are off. His investment in Goldman will "get killed, and so will all our other investments."