In the holiday classic, Bedford Falls banker, Mr. Potter, takes advantage of the depression and a run on the bank to add to his empire. Although the storyline (via George Bailey) criticizes his opportunism, Mr. Potter saw value in a troubled but valuable business and made a wise investment. Today, Old Man (Warren Buffet) made what I believe to be a wise choice and invested $5 billion in Goldman Sachs. The investment is via the purchase of perpetual preferred stock. The public will have the opportunity to invest as $2.5 billion worth of this perpetual preferred stock will be made available to the public.
Mr. Buffet had invested in Salomon Brothers, beginning in 1987 (just before the crash) and although the road was rocky for some time. Mr. Buffet reaped the rewards of his investment when he sold his shares to Citi in 2002. Mr. Buffet also owns significant states in Wells Fargo and American Express.
Goldman is considered to be the best manager of risk on the street. The firm was an early player in the mortgage frenzy, but was one the first firms to exit that sector. Therefore, it has avoided the problems which have plagued other firms. However, Goldman has seen its revenues decline and was caught in the global squeeze on the financial sector. However, when other people were panic selling, Mr. Buffet comes in and buys.
The challenge facing Goldman is how to make money without leverage. With astute investors such as Mr. Buffet providing capital and (in theory) Goldman's ability to accept bank deposits, the firm will be able to earn enough revenue to keep the shop profitable. Or maybe its just a stop gap until things settle down. Only Lloyd Blankfein knows for sure.
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