Goldman Sachs Group, Inc. (GS), Bank of America Corp (BAC): Buffett’s Appetite for US Banks

Warren Buffett’s endless appetite for money took another turn when Bloomberg reported that he agreed to convert his Goldman Sachs Group, Inc. (NYSE:GS) warrants into common shares after the contract expires in October this year. The conversion would make Buffett the bank’s largest shareholder, leaving behind the 4.18% owner, Capital World Investors.

Goldman Sachs will be the latest in Berkshire’s US banks holdings, which already include Wells Fargo & Co (NYSE:WFC) and US Bancorp (NYSE:USB) . Buffett is currently the largest shareholder in Wells Fargo, owning over 8.3% of the company, while he owns around 3.3% of US Bancorp’s common shares. Buffett believes the banks these days have huge capital bases and will not get this country in trouble.

Buffett’s Goldman Sachs Group, Inc. (NYSE:GS) warrants give him the right to buy the bank’s common shares at a price of $115. Considering yesterday’s price of $146 for the shares of Goldman Sachs, Buffett has already pocketed $1.35 billion profits on paper. According to the deal, Goldman Sachs would give him 43.5 million shares in return for Buffett’s injections in 2008, when the bank’s cost of borrowing had spiked and the stock tumbled. Besides, his 2008 investments in the bank included preferred stocks that paid him $500 million in dividends each year. According to Reuters, Buffett is expected to make profit of around $4.7 billion on his original investment of $5 billion investment.

In similar deal, Buffett made investments worth $5 billion in America’s second largest bank, Bank of America Corp (NYSE:BAC) in August 2011. Buffett received preferred shares and warrants that give him the right to purchase the bank’s 700 million common shares at a price of $7.14 over the next 10 years period.

Wells Fargo has long been Warren Buffett’s favorite bank. In my article on Buffett’s addiction to Wells Fargo, I noted that the bank has a strong performance track record with improving asset quality and capital. While Buffett is addicted to the bank because of its exceptionally low cost of funds, the imbalance in the supply and demand of mortgage is Wells Fargo’s biggest catalysts going forward. Therefore, I believe Buffett’s affinity for Wells Fargo has some value for you.

Buffett has held share in US Bancorp even before 2008. However, he increased his shares significantly in 2009 when he added 1.5 million shares after the share price plunged to $15. Since then, he has been reducing his holdings of US Bancorp. US Bancorp is considered to have a solid capital base with a Tier 1 capital ratio of 10.9% at the end of the most recent quarter. The bank has been able to improve its credit quality as its non-performing assets decreased to $2.19 billion from the third quarter’s figure of $3.04 billion.


I believe Buffett’s selection of US banks’ has value for you. The banks he owns are considered to have strong capital and liquidity positions coupled with a good performance track record. Besides, US Bancorp and Wells Fargo are major players in the US mortgage market. The imbalance in the US mortgage markets is bound to lead these two banks higher. Therefore, I recommend you follow Buffett.

The article Buffett’s Appetite for US Banks originally appeared on and is written by Adnan Khan.

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