Goldman Gets Buffett Boost Amid Bailout Worries

HONG KONG (Reuters) – Warren Buffett’s $5 billion investment in Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz) brought good news to global markets worried that architects of a $700 billion bailout plan would not be able to convince U.S. lawmakers to move swiftly.

Sumitomo Mitsui Financial Group (8316.T: Quote, Profile, Research, Stock Buzz) also plans to invest in Goldman, Japanese media reported on Wednesday, in what would be the country’s third big investment on Wall Street this week as its well-capitalized banks take advantage of global upheaval to expand aggressively abroad.

SMFG, which is Japan’s third-largest bank and has a long relationship with Goldman, said the bank had no deal in place.

Stocks in Asia gained slightly and U.S. Treasury yields rose after news of the Goldman stake purchase by one of the world’s most respected investors.

CNN reported that the FBI was investigating Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz), Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz), Lehman Brothers Holdings Inc (LEHMQ.PK: Quote, Profile, Research, Stock Buzz) and insurer American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz) and their senior executives for potential mortgage fraud.

The bureau was trying to determine whether anyone in those financial institutions had any responsibility for providing “misinformation,” CNN reported.

A new Washington Post-ABC News poll, meanwhile, showed that Democrat Barack Obama has opened a 9-point lead over Republican John McCain in the U.S. presidential race amid turmoil in the financial system and growing pessimism about the economy.

The MSCI index of Asian shares outside Japan .MIAPJ0000PUS edged up 0.16 percent, and Tokyo .N225, which was closed on Tuesday for a public holiday, rose 0.2 percent. Stocks in Europe were set to open slightly higher.

“We’ve still got plenty of uncertainty ahead of U.S. Congress approving the rescue package,” said Sarah-Jane Wagg, president director of UBS Securities Indonesia in Jakarta.

Globally, investor nerves are frayed by two weeks of unprecedented financial markets turmoil.

In Hong Kong, Bank of East Asia (0023.HK: Quote, Profile, Research, Stock Buzz) was forced to deny rumors questioning its stability, which had sent its shares down as much as 11 percent and drew hundreds of customers to at least one of its branches. The bank said its capital adequacy ratio of 14.6 percent was well-above international requirements.

Buffett’s Berkshire Hathaway (BRKa.N: Quote, Profile, Research, Stock Buzz) <BRKb.

Treasury Secretary Henry Paulson told lawmakers during five hours of hearings on Tuesday that the bailout was “sad” and “embarrassing,” but needed to stave off a deep recession and restore confidence in markets.

Andrew Barrett, managing director and strategist with Citi Private Client Investment in Hong Kong, said there is sufficient political will in Congress to approve the plan.

“We believe the buyout package that has been proposed by the Treasury and the Federal Reserve will be passed, and we hope it will be passed by the end of this week. Markets will need to see this happen or we will have another leg down in the major global indices,” he said.

While Paulson spoke, the U.S. Federal Reserve was forced to inject another $2 billion into the troubled financial system to help mutual funds that were scrambling to raise cash to meet heavy withdrawals by rattled customers.

After lawmakers scoffed at the proposed bailout’s enormous size and the lack of detail, U.S. stocks closed down about 1.5 percent on uncertainty over when and how Washington would act.

U.S. House Financial Services Committee Chairman Barney Frank warned the plan might not pass until Monday, adding that the Democrat-controlled Congress needed limits on compensation for executives of firms offloading bad assets.

“We still expect the plan to be approved by this weekend, but the likelihood of such an outcome declined, and the size of the bailout might be curbed,” Dariusz Kowalczyk, chief investment strategist at CFC Seymour in Hong Kong, said in a note.


Once thought untouchable, Goldman was shaken last week by a sudden slide in its shares. Goldman and rival Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) secured approval this week to become commercial banks.

With Japanese banks investing in western peers, speculation has swirled that SMFG might invest in Goldman, but SMFG spokeswoman Chika Togawa said: “At this point it is not true that we’ve decided to invest in Goldman Sachs.”

A Goldman spokesman said he could not confirm a Kyodo news agency report of an investment by SMFG.

Berkshire will buy $5 billion of Goldman perpetual preferred stock that carries a 10 percent dividend. It also will receive warrants to buy $5 billion of common stock, or 43.5 million shares, at $115 per share, within five years, which could give it a roughly 9 percent stake in Goldman.

Late on Tuesday, top Japanese brokerage Nomura Holdings Inc (8604.T: Quote, Profile, Research, Stock Buzz) agreed to buy bankrupt Lehman’s Europe and Middle East operations.

That came on the heels of Japan’s top bank, Mitsubishi UFJ Financial Group Inc (8306.T: Quote, Profile, Research, Stock Buzz), agreeing to buy up to 20 percent of Morgan Stanley.


The financial crisis has become the No. 1 issue leading up to the November 4 U.S. presidential election, and many lawmakers seeking re-election to Congress want to appear vigilant.

The bailout, potentially the United States’ biggest ever, could cost every American man, woman and child $2,300.

Even for the world’s richest country, $700 billion would be a huge budget drain. Since 2003, the Iraq war has cost about $550 billion, or a little more than $100 billion annually.

Starting two days of hearings, Paulson and U.S. Federal Reserve Chairman Ben Bernanke said the plan might cost less once the government is able to resell toxic mortgage securities.

Paulson said the government would buy the securities in a reverse auction in which the roles of buyer and seller are reversed to ensure the lowest price is paid.

U.S. Securities and Exchange Commission Chairman Christopher Cox urged Congress to plug a regulatory hole in the $58 trillion market for credit default swaps, insurance-like products that many say pose a systemic risk.

President George W. Bush promised in his last speech to the United Nations that markets would stabilize, but faced criticism over the excesses of what some have described as a culture of greed.

By Tony Munroe
(Additional reporting by David Dolan and Taiga Uranaka in TOKYO; Harry Suhartono in JAKARTA, and James Pomfret in HONG KONG; Editing by Jean Yoon)