Chapter 607 Investing in Goldman Sachs

To be honest, as the investment company with the shortest establishment time and the smallest asset scale, IC Capital's participation in this meeting makes people feel a little far-fetched.

However, nothing is without reason.

The theme of this meeting is how these capitals can resist the subprime mortgage crisis, and what everyone is most concerned about is seeking capital injection.

Especially for Wall Street capitals such as Goldman Sachs, Citigroup, and Morgan Stanley, which are at the center of the subprime mortgage storm, in addition to finding ways to obtain loans from the government and the Federal Reserve, the injection of external funds is also very important.

As for banks such as JPMorgan Chase, Bank of America, and Wells Fargo that hope to use this subprime mortgage crisis to make acquisitions to expand their own scale, raising funds from domestic and foreign capital is also what they are concerned about.

IC Capital is negotiating with Goldman Sachs and is preparing to provide it with up to $5 billion in funds.

At the beginning, Goldman Sachs wanted to seek help from Buffett's Berkshire Hathaway, hoping to sell it no less than $2.5 billion in common stock.

But Buffett rejected the proposal and proposed another plan - he hoped to buy Goldman Sachs' perpetual preferred shares with a 10% dividend for $5 billion.

In addition, as an additional term of this investment, Berkshire Hathaway also needs to obtain permission to purchase Goldman Sachs' common shares worth $5 billion at any time within 5 years, with a price of only $115 per share.

It should be understood that the current share price of Goldman Sachs is around $125...

In Barron's previous life, Goldman Sachs was forced to agree to Buffett's conditions.

This also led to the fact that when Goldman Sachs couldn't wait to pay Berkshire Hathaway $5.5 billion to redeem its preferred shares in April 2011, it paid about $1.75 billion in dividends and premiums to it...

Because according to the agreement at the time, the Goldman Sachs preferred shares purchased by Buffett stipulated that a fixed dividend of 10% would be paid each year, equivalent to $500 million per year.

In addition, when redeeming, Goldman Sachs had to pay an additional 10% premium, which is $500 million.

Two and a half years of dividends plus a $500 million premium equals $1.75 billion.

If we also include the options Buffett received from Goldman Sachs, he could have purchased 43.5 million shares of Goldman Sachs at $115 per share before October 1, 2013.

Based on the closing price of $154 per share when Goldman Sachs redeemed the $5 billion preferred shares, if Buffett had exercised these options on the same day, he could have made a steady profit of about $1.65 billion.

In total, in two and a half years, Buffett earned $3.4 billion from his $5 billion investment in Goldman Sachs!

Moreover, he was not in a hurry to exercise the option at the time, but waited until the option expired and directly exchanged his profit for Goldman Sachs' common stock.

This also allowed Buffett to get 9.2 million shares of Goldman Sachs common stock without spending a penny, accounting for 2% of the total outstanding shares of Goldman Sachs.

It is no wonder that Buffett has publicly stated that he wants to hold Goldman Sachs' preferred stock investment for as long as possible.

In his 2009 and 2010 letters to shareholders, he also emphasized this point - there is no doubt that the return on this investment is very attractive. Buffett earns about $1.4 million a day in dividends alone.

At the 2010 shareholders' meeting, Buffett calculated an account in front of 40,000 shareholders -

"Goldman Sachs pays us $15 every second..."

Buffett said:

"Tick, tick, tick... the sound of the watch has become so pleasant."

...

In Barron's previous life, Goldman Sachs Group was in urgent need of funds and had no choice but to agree to Buffett's conditions.

Now, they have a better choice.

Although IC Capital cannot compare with Berkshire Hathaway in the "heavyweight" of the investment industry, their investment in Goldman Sachs has not had the same "stabilizing effect" on the market as the other party...

But the investment conditions given by IC Capital are very attractive to Goldman Sachs Group!

IC Capital does not need to obtain a high annual interest rate of 10% in the form of preferred shares, but is willing to directly purchase the common shares of the company group - of course, the purchase price needs to be discounted.

Finally, Goldman Sachs signed an agreement with IC Capital to sell 43.5 million shares of Goldman Sachs to IC Capital at $115 per share, which made IC Capital's holdings of Goldman Sachs reach 9%, becoming one of the major shareholders of Goldman Sachs.

And IC Capital was also allowed to send a director to the board of directors of Goldman Sachs with one vote.

Although IC Capital's investment will not have as high a return as Buffett's $5 billion investment in the original time and space.

But it is still very satisfying to Barron and Ivanta, because not only will investing in Goldman Sachs' shares now have a rich return in the long-term holding in the future, and entering the board of directors of Goldman Sachs will be of great benefit to IC Capital and Ivanta himself in their future development.

Moreover, relying on the many resources of Goldman Sachs will also be more conducive to some future acquisitions of IC Capital and the development of its companies.

This is the first financing transaction after Goldman Sachs changed from an investment bank to a bank holding company.

The reason why Goldman Sachs and Morgan Stanley chose to transform from investment banks to bank holding companies is that the main regulator of investment banks is the Securities and Exchange Commission, while the main regulator of bank holding companies is the Federal Reserve. Such a transformation can enable Goldman Sachs and Morgan Stanley to obtain loans directly from the Federal Reserve while being regulated by the Federal Reserve, thereby reducing the risk of short-term fund runs.

In addition to investing in Goldman Sachs in the name of IC Capital, other funds owned by Barron will also participate in investments in other Wall Street capitals.

After all, Standard Chartered Bank has successively acquired a considerable portion of the assets of Northern Rock Bank, Merrill Lynch and IndyMac Bank in a short period of time.

It can be said that after becoming Standard Chartered-Merrill Lynch, its scale has more than doubled.

Now, what Standard Chartered-Merrill Lynch needs to do most is to first complete the integration after this series of acquisitions and digest the "prey" that has just been swallowed, otherwise it will easily leave big problems for future development.

And at present, not counting other funds, there are still more than 40 billion US dollars in the account of the British Fortune Era (BFT) fund alone.

As a series of important companies in the Wall Street financial industry...Lehman Brothers, Merrill Lynch, American International Group and other companies have encountered problems one after another, panic, coupled with the depletion of liquidity in the financial market, affected not only the US stock market, but also the global stock market began to fall continuously.

The funds and investment companies controlled by Barron, who had already arranged to short the global stock market, naturally made a lot of money.

Some of the profits from these funds can also be used for bargain hunting acquisitions and investments.