The Wall Street Journal reports that Goldman Sachs (GS) is considering paying back a $5 billion investment it got from billionaire investor Warren Buffett at the height of the credit crisis in September, 2008.
The Journal said Goldman Sachs is “looking closely at whether to use a small chunk of the firm’s $173 billion in excess liquidity to unwind [Buffett’s] investment”. Before deciding to invest in Goldman, Mr. Buffett, who received warrants to purchase $5 billion of Goldman’s common stock with a strike price of $115 per share, which are exercisable at any time for a five year term, negotiated tough terms in exchange for his money, including an annual dividend payment of 10 percent.
Now that the crisis has eased, Goldman has the option to redeem the preferred shares held by Berkshire for $5.5 billion.
The Journal notes that one reason for the potential move — besides the fact that GS could now replace the costly capital from Berkshire Hathaway (BRK.a) (BRK.b) with much cheaper funding now available in the debt markets — is the “hefty dividend payments of $500 million a year on Berkshire’s “perpetual” preferred shares which have cost Goldman about $1 billion so far. The payout is equivalent to more than $1.3 million a day—or $15 a second.”
The Journal however, points out that Goldman would need permission from the Fed to pay back its loan.
It is unclear yet at this point if the firm has made a formal request for a go-ahead from the Fed.