Sep 25th 2008
Warren Buffett's return to Wall Street raises hopes
IN 1998 Goldman Sachs was looking for help in bailing out Long-Term Capital Management, a sickly hedge fund to which it was exposed. It sought a contribution from Warren Buffett. But the Oracle of Omaha was on holiday (with Bill Gates, of course) and as the deadline approached his boat drifted out of mobile-phone range. This time there were no communication problems. Mr Buffett has answered Goldman's latest call with a $5 billion infusion from his cash pile.
Goldman could not have wished for a more credible vote of confidence, albeit at a steep price: Mr Buffett's holding company will receive $500m a year in dividend payments on its preferred stock. Mr Buffett knows from experience that it pays to negotiate hard with investment bankers. His only previous foray on Wall Street, a $700m bet on Salomon Brothers, went badly awry, though it eventually turned a profit.
He is, he says, betting "on brains"--and, implicitly, that Goldman's profits will not be hit too hard by becoming a regulated bank. Some also see the move as a vote of confidence in financial firms, which Mr Buffett has thus far avoided in this crisis, preferring the relative calm of energy, railroads and chewing gum.
That may be hoping for too much. Mr Buffett made clear that he considers Goldman's management a cut above. And he drew a contrast between its cautious valuation of illiquid assets and more "fanciful"
marks at some other firms. Moreover, for all his hardheadedness he has a soft spot for Goldman, having befriended its one-time boss, Sidney Weinberg, as a young man and stayed close to the firm ever since
In any case, Mr Buffett's skill lies more in picking undervalued stocks with strong brands than in timing market bottoms--indeed, he bought into Salomon only weeks before the 1987 crash. Even when it comes to individual holdings, he is not flawless. He held Moody's, a rating agency, for too long.
Still, it is heartening that such a shrewd investor is beginning to spy opportunities in the rubble of a crisis he has dubbed "an economic Pearl Harbour." He confirmed this week what must already have been
obvious: that he has been approached by almost every big financial institution in recent months. After Goldman, he can expect the phone to ring off the hook