Warren Buffett said Goldman Sachs Group Inc. will probably win Federal Reserve approval this year to repay the $5 billion he injected in the bank, pressuring investment income at his Berkshire Hathaway Inc.
The Goldman Sachs stake and a $3 billion investment in General Electric Co., each of which pay 10 percent annual interest to Berkshire, will likely be terminated by Dec. 31, Buffett said Feb. 26 in his annual letter. While the Fed has held back Goldman from repaying, the regulator “will likely give Goldman the green light before long,” Buffett wrote.
GE and Goldman Sachs turned to Buffett in 2008 to bolster their capital and increase confidence in the firms as borrowing costs surged after the collapse of Lehman Brothers Holdings Inc. Goldman and GE are each required to pay a 10 percent premium to Omaha, Nebraska-based Berkshire to redeem the investments.
“The redemptions are nevertheless unwelcome,” Buffett wrote. “After they occur, our earning power will be significantly reduced.”
Michael DuVally, a spokesman for New York-based Goldman Sachs, declined to comment. David Skidmore, a spokesman for the Fed, didn’t return calls outside of normal business hours.
Dividends from GE, Goldman Sachs and Swiss Reinsurance Co. helped bolster investment income at Buffett’s insurance units when fixed-income yields declined and Wells Fargo & Co. slashed its dividend. Berkshire is the largest investor in the San Francisco-based bank, with more than 340 million shares. Swiss Re struck a deal in November to repay Berkshire.
‘Whether Strong or Weak’
Wells Fargo cut its dividend in 2009 to 5 cents a share from 34 cents and said in October that boosting the payment is a priority for the company. The Fed issued guidelines in November on how it will decide whether large U.S. banks may increase dividends and buy back shares, requiring the lenders to submit to stress tests of capital levels.
“The Federal Reserve, our friend in respect to Goldman Sachs, has frozen dividend levels at major banks, whether strong or weak,” Buffett said. “Wells Fargo, though consistently prospering throughout the worst of the recession and currently enjoying enormous financial strength and earning power, has therefore been forced to maintain an artificially low payout.”
Buffett said the Fed acted appropriately during the financial crisis in enforcing limits across the banking industry and that Wells Fargo will be permitted “probably soon” to boost its payment.
Wells Fargo has gained about 19 percent in the past year through Feb. 25 on New York Stock Exchange, valuing Berkshire’s holding at more than $11 billion.
As part of Buffett’s 2008 deals, Berkshire has warrants giving him the option to buy $5 billion of Goldman Sachs stock for $115 a share and $3 billion of Fairfield, Connecticut-based GE for $22.25 a share. Goldman Sachs closed at $165.12 on Feb. 25 and GE at $20.82. GE has stated its intention to call the preferred stake in October, Buffett said.
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