The Oracle of Omaha’session $5 billion cash infusion may save Goldman Sachs, but the tottering beam’s health and prospects have lost their shine

by the agency of Joseph Weber

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Warren Buffett has powerful coattails. Within 14 hours of Buffett’s ride to the rescue of Goldman Sachs (GS), by a $5 billion cash infusion and wealthy praise towards the struggling investment banking titan, Goldman on Sept. 24 form in a mould other investors to seize up $5 billion worth of its stock. The outfit’session rapid-fire handle oblation, for 40.65 a thousand thousand shares at $123 each, raised twice what Goldman managers originally expected.

But the deal is but just a glowing statement about Goldman’s health and upbeat prospects. Some analysts say both the Buffett investment and the offering are highly costly to the not fluid, what one. is likely to have existence facing years of trouble, retrenchment, and subpar returns as it struggles through the financial crisis. Looking at the furnish sacrifice, Oppenheimer (OPY) analyst Meredith Whitney told clients in a note, "For GS, the blue chip of financials, the stipulations of this degree strike one as being exorbitantly expensive and provide insight into how truly challenging now passing market conditions are."

Goldman did the offering at smaller quantity than half the price per share that the firm was worth only a year agone. It will sharply dilute the value of its outstanding shares, some 16%, during the time that a result of the offering and the Buffett investment, Whitney calculates. The initial warmth for the deal among investors has been cooling as they’ve sorted disclosed the implications: The shares climbed beyond 133 in after-hours trading on Sept. 23, upon the body the Buffett information, but they slipped slightingly after provisions of the public offering were announced. In afternoon trading Sept. 24, the pillar was up 6%, to 132.

Goldman and Morgan Stanley (MS), the other big investment bank left standing after the financial tornado in the chinese seas that has swept up Merrill Lynch (MER), Bear Stearns (JPM), and Lehman Brothers, stunned investors over the weekend when they announced plans to convert themselves into commercial banks. The move, done in conjunction with the Federal Reserve, will compel them under more cruel regulation and is expected to force them to layer back on risky businesses, multiplied of which—such as the underwriting of mortgage-backed securities—have already shriveled away. They are not expected to effect through anywhere near the high debt levels they have in the past.

Both banks now can count on hefty cash infusions. While Goldman collected $10 billion from public investors and Buffett, Morgan has garnered more than $8 billion from Japanese megabank Mitsubishi UFJ (MTU) in exchange for a imperil of up to 20%. Yet they are hardly out of the woods. "They’re going to have to retrench and lay off a lot of people, and it’s not due to the bank holding company charters," says Ladenburg Thalmann analyst Richard Bove. "It’s due to the real existence that the business has changed. In my view, it’s going to take three to four years to work out the financial crisis."

Buffett, Bove says, got an outstanding deal in his investment in Goldman. He is taking $5 billion worth of perpetual preferred stock and getting a 10% dividend and warrants to buy $5 billion of common stock by a strike price of 115 a share. He’ll be able to exercise the warrants at any time over five years.