Buffett to Invest $5bn in Goldman Sachs

Warren Buffett has agreed to invest $5bn in Goldman Sachs, giving the bank a strong vote of confidence after the tumultuous events on Wall Street of the past few weeks.

Goldman said it would also raise another $2.5bn in a public offering of shares.

The investment follows the decision over the weekend by both Goldman and Morgan Stanley to change their status from investment banks to more traditional banks, ending an era on Wall Street.

Buffett, one of America's richest men, is widely admired for his astute, common sense approach to investment and the annual meetings for his company Berkshire Hathaway in his hometown of Omaha, Nebraska draw huge crowds. His decision to invest in Goldman will likely be received as a welcome backing for the broader financial markets, which have been devastated by mortgage-related securities that turned sour.

Treasury secretary Henry Paulson was in Washington yesterday defending a planned $700bn bailout of Wall Street.

Earlier this week, rival Morgan Stanley raised about $8bn by selling a 20% stake in the firm to the largest Japanese commercial bank, Mitsubishi UFJ Financial.

Both Goldman and Morgan Stanley maintained their businesses were sound in recent weeks even as Lehman Brothers went bankrupt and Merrill Lynch sought shelter by selling itself to Bank of America for $50bn. Goldman has remained profitable, although its earnings have taken a hit.

But the fear in the markets put Goldman and Morgan Stanley under pressure regardless of any reassurances.

Goldman's shares jumped more than 8% in after hours trading on Wall Street when the deal with Buffett was disclosed. Buffett described Goldman as an "exceptional institution".

Lloyd Blankfein, Goldman's chairman and chief executive said he viewed the deal with Buffett "as a strong validation of our client franchise and future prospects. This investment will further bolster our strong capitalization and liquidity position."

Berkshire Hathaway will take preferred shares in return for the investment and will have the right to buy a further $5bn in ordinary shares at $115 a share at any time over the next five years.

Tim Ghriskey, chief investment officer at Solaris Asset Management in New York, said; "It is certainly a vote of confidence in Goldman and their new structure. Any time Warren Buffett and Berkshire Hathaway step in and invest in something, everybody takes notice."

Under their new status, Goldman and Morgan Stanley will have to reduce the amount they can borrow relative to capital ratios and will be subject to greater regulation. But they will also be able to borrow money from the central bank, the Federal Reserve.

Anton Schutz, a portfolio manager at Mendon Capital Advisors in Rochester, New York, said the government bailout for the financial sector meant it was a "great time to be buying".