KEY POINTS:
Billionaire investor Warren Buffett's instant paper profits on Goldman Sachs Group and General Electric have been wiped out amid the stock market's worst yearly slump since 1937.
Goldman, the most profitable Wall Street firm, fell 1.7 per cent yesterday in New York trading to US$113 ($187). That leaves
Goldman, for the first time, below the price at which Buffett can buy US$5 billion of shares. When the deal was announced last month, Goldman closed at US$125.05, meaning Buffett was up US$437 million.
Goldman and GE also sold Buffett a combined US$8 billion in preferred shares that pay a 10 per cent dividend, allowing his Berkshire Hathaway to earn US$800 million a year without the warrants unless the companies collapse. In exchange, the firms got Berkshire's cash and endorsement by the "Oracle of Omaha" at a time when stock prices are falling on concern that a tightening credit market may hobble even the largest companies.
Buffett "doesn't have a two-week time horizon," said Frank Betz, a partner at Warren, New Jersey-based Carret Zane Capital Management, which holds Berkshire and GE shares. "Just because these prices drop below the strike price, it doesn't suggest that either of them are not exceptionally good investments."
GE, the world's biggest maker of jet engines, agreed on October 1 to give Berkshire warrants to purchase US$3 billion in shares at US$22.25 apiece. As with the Goldman deal, Buffett's warrants for GE stock are good for five years. The shares, which closed at US$24.50 the day of the agreement, have for five days ended trading below Buffett's strike price. They rose 1.7 per cent to US$20.65 yesterday in New York Stock Exchange composite trading.
Buffett, heralded as the world's best stock picker, agreed to the investments while some rivals find themselves short of cash. The worst housing slump since the Great Depression has resulted in record mortgage defaults in the US and a year-long contraction in global credit markets, driving down stock prices and sending firms like Goldman and GE in search of funds.
For Buffett, whose Berkshire had US$44.3 billion in cash at the start of the year, it's also been a call to action. He's committed at least US$28 billion this year to acquire companies, finance buyouts and purchase securities. Buffett is Berkshire's chairman.
Goldman has fallen 47 per cent this year in New York Stock Exchange composite trading; GE has declined 44 per cent.
"Top-quality, well-managed firms like Goldman and GE are getting to the point where the values are beginning to scream," Betz said. "Those are the sorts of companies that will continue to earn money and continue to function well."
Buffett, ranked the second-richest man in the US by Forbes magazine, transformed Berkshire from a failing textile maker into an enterprise with businesses ranging from icecream and underwear to corporate jet leasing and insurance.
- BLOOMBERG