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$5 Billion Raised In Goldman Stock Offer

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By STEPHEN BERNARD The Associated Press

The Tampa Tribune

Published: September 25, 2008

NEW YORK - Goldman Sachs Group, seeking to improve not only its balance sheet but its standing with investors, has undertaken a huge capital-raising program that includes an investment of at least $5 billion from Warren Buffett and a common stock offering for another $5 billion.

The New York-based bank sold 40.65 million shares of common stock at $123 apiece, the firm said in a statement Wednesday. That's a 1.6 percent discount to Tuesday's closing price of $125.05. The company, which underwrote its own offering, has an option to sell an additional 6.1 million shares to cover over-allotments, potentially boosting proceeds by $750.3 million.

Just a week ago, Goldman looked to be on precarious ground as its stock price plunged in response to fears that it could not survive as an independent investment bank. But the company contended Wednesday that the current crisis in the financial markets, which sent rival investment bank Lehman Brothers Holdings into bankruptcy court, was not the catalyst for these deals.

"Although we felt we were under no pressure to raise capital, we've always said if an opportunity arose, we would look at it," Goldman spokesman Lucas van Praag said.

The offering, which doubles what the company said Tuesday night that it would sell, is part of a broader plan that includes Buffett's Berkshire Hathaway buying $5 billion in preferred stock, with an option to purchase an additional $5 billion in common shares.

After conversations with Buffett on Tuesday, Goldman decided to move ahead with the capital raising efforts using Buffett's investment "as an anchor" for the common stock offering.

Wall Street appeared pleased with the moves.

Goldman stock rose $4.85, or 4 percent, to close Wednesday at $130 in trading on the New York Stock Exchange.

"If one thing is for sure, Goldman knows how to reorient itself for a changed environment," Deutsche Bank analyst Mike Mayo wrote in a research note.

Buffett's investment will be his second major foray into Wall Street. In the late 1980s, Berkshire Hathaway invested in Salomon Brothers. When the investment firm admitted wrongdoing in bidding for U.S. Treasury bonds in 1991, Buffett became interim chairman and helped Salomon reach a settlement with the government before stepping down in 1992. Salomon was later sold to what is now Citigroup.

The preferred stock purchase by Buffett will pay a dividend of 10 percent annually and can be repurchased by Goldman at anytime for a 10 percent premium. The warrants to buy common shares are exercisable by Buffett at anytime in the next five years at a price of $115 per share.

The capital raising efforts at Goldman come two days after the company received approval to convert to a bank holding company - similar to commercial banks - from a stand-alone investment banking model, and less than two weeks after the bankruptcy filing of Lehman set off fresh concerns about the fragile credit markets.

After Lehman's collapse, Merrill Lynch & Co. agreed to sell itself to Bank of America Corp. and American International Group was rescued by a government loan of $85 billion that included the government receiving a 79.9 percent ownership stake in the insurer.

Those deals left only Goldman and Morgan Stanley as the remaining major investment banks. Morgan Stanley, like Goldman, is converting to a commercial bank model.

The process to become a bank holding company accelerated at that point, though it was something Goldman had been reviewing with the Fed since spring, van Praag said.

"Market reaction was one of extreme nervousness and borderline panic," van Praag said. "You ignore market sentiment at your peril."

By becoming commercial banks, the two companies avoided the fate of Bear Stearns Cos. and Lehman Brothers - the first was taken over by JPMorgan Chase & Co. in a fire sale - by giving them broader and permanent access to borrow federal money and the ability to build a stable base of deposits.

That change, along with new capital raising measures, are likely aimed at reassuring investors that the banks will not face the liquidity squeeze that helped fell Bear Stearns and Lehman.

Like Goldman, Morgan Stanley is also raising capital to further reassure a nervous market. Morgan Stanley announced plans Monday to raise capital of its own, reaching a nonbinding agreement to sell a 20 percent stake in itself to Mitsubishi UFJ Financial Group, Japan's largest bank.

After Lehman's bankruptcy filing, shares of Goldman tumbled as investors worried that investment banks no longer had the capital resources to handle the liquidity strains of the ongoing credit crisis. Shares then rallied in recent days as the government hammers out a $700 billion bailout plan of the financial markets.

Information from Bloomberg News was used in this report.

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