Goldman says goodbye to Buffett

March 18, 2011, 11:23 PM UTC

Warren Buffett’s Goldman gravy train has lurched to a halt.

Goldman Sachs (GS) said Friday it will pay Buffett’s Berkshire Hathaway (BRKA) $5.6 billion to redeem the loan the investment bank took from Berkshire at the height of the financial crisis.

I'm sad to see you go, money

That’s good news for Goldman, which paid Buffett’s company more than $1 billion* in preferred stock dividends over two and a half years. It is bad news for Buffett, who will get a big check next month — but faces reinvesting it at a time when short-term Treasury securities yield next to nothing.

“Every day that Goldman doesn’t call our preferred is money in the bank,” Buffett said at last year’s annual Berkshire shareholder meeting. He estimated the Goldman dividends rolled in at about $15 a second,* which is a pace most of us would accept. 

But that golden flow will end April 18. Goldman said it will pay $5 billion to cancel the preferred shares, plus a $500 million prepayment fee and $149 million in accrued dividends.

But the firm, which made $8 billion last year, isn’t hurting for cash. Goldman said it plans to step up stock buybacks and may raise its quarterly common stock dividend. Goldman shares rose 3%.

The announcement comes on the day the Fed announced the completion of its latest round of stress tests, which cleared the way for some of the biggest banks to start giving shareholders the money they had set aside for a deeper economic downturn.

Goldman’s move severs one of its last links to the financial crisis, which saw the ranks of big standalone U.S. investment  banks shrink from five to zero in the space of six months.

Bear Stearns, on the verge of failure, was sold to JPMorgan (JPM) for a song; Merrill Lynch was sold at a hard-to-explain price to Bank of America (BAC); Lehman Brothers collapsed, nearly bringing down the financial system with it; and Goldman and Morgan Stanley (MS) both converted to Fed-regulated bank holding companies.

But the crisis ties continue to bind to Goldman. The Securities and Exchange Commission recently charged a former Goldman director, Rajat Gupta, with insider trading for allegedly ratting out the details of Goldman board meetings – including the one in September 2008 at which the board approved the Berkshire investment.

Gupta not only denies wrongdoing, he is also suing the SEC, for whatever that is worth.

That drama aside, Goldman said it will take a $1.6 billion hit to its first-quarter earnings, due out next month, to square the cost of the preferred stock payoff with its books. That move will slash earnings for the quarter by $2.80 a share.

But Goldman fans will more than make that back over time, they hope. Goldman said the preferred dividends took 85 cents a share out of last year’s earnings of around $13 a share. So it will take a shade over three years to make back the first-quarter charge.

And of course there is the prospect that Goldman wouldn’t have made it at all if it hadn’t been for the emergency loan. But Goldman lived on, thanks to Buffett and the government, and now it is free of its costly dividend obligation — leaving Buffett with plenty of cash to take on his next elephant hunt.

*Originally I wrote $2 billion in dividends and $15 a minute. Buffett would have liked the former but not the latter. In any case my apologies for getting it wrong.

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