Goldman Sachs Group Inc. (GS), the fifth-biggest U.S. bank by assets, will buy back $5 billion of preferred stock sold to Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) at the height of the 2008 financial crisis.
The purchase will result in a one-time cost to New York- based Goldman Sachs of $1.64 billion and reduce earnings per share in the first quarter by $2.80, the company said today in a statement. The redemption will also cut earnings per share in the first quarter by 4 cents because it accelerates the payment of $24 million of preferred dividends, Goldman Sachs 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.”
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.
The repayment will also free Goldman Sachs’s top executives from a requirement that they retain 90 percent of their stock.
Rajat Gupta
On March 1, the SEC accused former Goldman Sachs board member Rajat 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.”
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.
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.
