Going to the Oracle: Goldman Sachs, September 2008
1. Description of the situation
Goldman Sachs, one of the most important financial institutions in the US suffered from the historic financial crisis in 2008, particularly because of the demise of insurer AIG given the systemic disruption in the markets and the collateral damage provoked by trading operations with AIG.
Even if the company had a strong record in risk management avoiding market downturns, this situation caused Goldman Sachs stock price to to decrease and banks stopped lending money even among them.
The company raised $5 billion from Warren Buffett through Berkshire Hathaway, which triggered the influx of $5.75 more in common stock from the public market.
2. Why did Goldman raise capital when it did?
Goldman Sachs decided to convert to a banking holding company, which would allow it to have more stability and liquidity through the Federal Reserve, with more regulations and protection. Goldman was short in capital supply and it needed to increase its capital base to improve the liquidity of the company at the time of the crisis and the weak market conditions. Very importantly, they needed to restore market confidence and getting the capital from Warren Buffett, easily the most respected investor, would give an endorsement and validation from the ‘Oracle of Omaha’, diminishing any doubt about Goldman Sachs liquidity position.
3. At the end of Q3 2008 was Goldman over or under capitalized?
At the end of Q3 2008, the company was Over-Capitalized.
4. Who got the better deal? Buffett or Goldman?
Warren Buffett got the better deal 50,000 shares of cumulative perpetual preferred stock with a liquidation value of $100,000 per share and a 10% annual dividend. He got the option to buy stock at a discounted price: warrants to buy $5 billion of common stock for $115 a share at any time in the next five years. Basically, just by buying stock he would be able to get his...
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