What was changed
After Lehman Brothers failed in September 2008, Goldman Sachs and Morgan Stanley were the last major independent US investment banks, under intense market pressure. On September 21 Goldman converted into a bank holding company to access Federal Reserve liquidity.
Two days later it announced a private offering to Berkshire Hathaway: $5 billion of perpetual preferred stock paying a 10 percent dividend, callable at a 10 percent premium, plus warrants for $5 billion of common stock at $115 per share. The deal was framed as a validation of the franchise, and Goldman also raised at least $2.5 billion in common equity.
The vote of confidence worked. Goldman repaid the $10 billion TARP preferred in June 2009; cumulative payments to the Treasury totaled $11.42 billion including dividends and the warrant repurchase. For full-year 2009 it reported net earnings of $13.39 billion, above its prior 2007 peak of $11.6 billion.
What it achieved
2009 net earnings $13.39B, above the prior 2007 peak of $11.6B, and $11.42B repaid against a $10B TARP infusion, after the Berkshire deal stabilized confidence.
Why it worked
Buffett's endorsement signaled to the market that the franchise was sound at the worst moment.
The 10% coupon was expensive but small beside the cost of a government rescue or a run.
Raising common equity alongside the preferred shored up the capital base.
Repaying TARP fast removed compensation limits and political overhang.
What can be applied
In a confidence crisis, expensive capital from a trusted name can be cheaper than waiting for a rescue: the 10% preferred sale steadied the market and bought time to repay public money with a profit.
Aftermath
Goldman's 2009 results were its most profitable ever to that point, and the rapid TARP repayment became a template for how banks exited government support. The Berkshire preferred was later redeemed at its 10 percent premium, paying Buffett handsomely for the confidence he supplied in September 2008.
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