Buffett Banks Billions from Bullish Bets on the Financial Industry

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Berkshire Hathaway (NYSE:BRKA)(NYSE:BRKB) Chairman and CEO Warren Buffett is once again queued up to make billions off of a white-knight investment he made in a major financial institution during the late-2000s crisis. The firm is expected to receive approximately 13.2 million shares of Goldman Sachs (NYSE:GS) stock worth about $2 billion through the exercise of warrants acquired in return for a $5 billion loan made to the bank in 2008.

The deal came in the wake of the collapse of Lehman Brothers, once the fourth-largest investment bank in the United States, and was just one of several that Buffett made with top Wall Street banks. All told, Berkshire Hathaway extended a lifeline worth about $24 billion spread throughout the financial industry, establishing what has been one of the boldest and most successful bets on the U.S. financial sector. Bank of America (NYSE:BAC) and General Electric Capital (NYSE:GE) were among those who received support from Buffett.

Buffett’s deal with Goldman was very similar to the ones he struck with Bank of America and GE Capital. The basic structure was that Berkshire Hathaway would make a loan in exchange for preferred stock (which paid out a handsome dividend) and warrants to buy additional stock at a fixed price until some future date.

Goldman Sachs redeemed the $5 billion in preferred shares at a 10 percent premium in 2011. The warrants — due to expire on October 1 — state that Buffett can purchase up to $5 billion worth of Goldman stock at $115 a piece. That’s about 43.5 million shares. Closing Friday at $159.85, this is a bargain, and nets Buffett about $2 billion. He will receive the payment itself in stock, about 13.2 million shares.

Goldman Sachs, Bank of America, and GE Capital were all dragged through the dirt during the financial crisis and lost billions. While it is easy (and sometimes appropriate) to dismiss their losses as justified, the collapse of America’s financial industry would have had catastrophe effects. The intervention of white knight lenders like Buffett was critical toward stabilizing the system and patching the reputation of major players within the industry.

Buffett’s bets on the financial industry have largely paid off, and he has pocketed billions from his bullish position in the banks in the wake of the crisis. Just two years after Buffett extended a hand to Bank of America, for example, Buffett was able to report to Berkshire Hathaway shareholders that he had booked a paper profit of $5.27 billion from the deal.

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