Finance History | 85 Broad Street, New York, 23 September 2008 — US$5 Billion Bought Crisis Income and Warrants

On 23 September 2008, Goldman Sachs agreed to sell Berkshire Hathaway US$5 billion of perpetual preferred stock in 2008 dollars as financial markets were under severe strain. The preferred shares carried a 10 percent annual dividend and could be called by Goldman at a 10 percent premium. Under the 2008 terms, the dividend promised Berkshire US$500 million per year while the security remained outstanding. Berkshire also received five-year warrants to purchase US$5 billion of common stock in 2008 dollars at US$115 per share in 2008 dollars. That feature preserved equity upside without requiring a second US$5 billion payment in 2008 dollars on the announcement date. The structure separated immediate income from future participation. Preferred stock ranked ahead of common equity for dividends and liquidation value, while the warrants became valuable only if Goldman's common shares recovered above the exercise price. Timing was central to the bargain. Goldman had converted to a bank holding company two days earlier, and the firm said the Berkshire investment would strengthen capital and liquidity during a period when confidence between financial institutions had weakened. Goldman raised another US$5 billion of common equity in 2008 dollars through a public offering announced the next day. Berkshire's negotiated terms therefore operated beside, rather than in place of, a wider recapitalization available to public investors. The transaction also exposed Berkshire to a concentrated financial counterparty during a crisis. A high coupon could not eliminate credit risk, and the warrants would have had little value if the franchise or the financial system had deteriorated further. Goldman later redeemed the preferred shares in 2011 after receiving Federal Reserve approval, paying the contractual 10 percent premium. Berkshire retained the warrant, allowing the income instrument and equity option to end on different schedules. The former Goldman headquarters at 85 Broad Street gives the deal a precise public address. Its tower represents the institution seeking durable capital, while the preferred-and-warrant package shows how liquidity, seniority and time can be priced separately. Photo: Paulo.belli, CC BY-SA 4.0, via Wikimedia Commons.