Warren Buffett invests $5bn in Goldman Sachs

Warren Buffett today agreed to invest $5bn (£2.7bn) in Goldman Sachs, giving the bank a strong vote of confidence following the tumultuous Wall Street events of the past few weeks.

Analysts hailed the move by Buffett - known as the Sage of Omaha - as a sign that some stability could be returning to the markets. UBS called it "the ultimate stamp of approval".

Buffett, the world's second-richest man, acted after Goldman and Morgan Stanley changed their status from investment banks to more traditional banks, ending a Wall Street era.

After the wild swings in shares over the past fortnight, news of his investment calmed the London stock market today. The FTSE 100 was up just 2.8 points at 5138.9, sparking a late overnight rally on Wall Street.

Shares in Goldman were expected to surge by at least 20% when New York trading resumed. Wall Street was expected to be boostede, with the Dow Jones industrial average tipped to jump by 128 points.

Buffett is widely admired for his astute, common sense approach to investment, and the annual meetings for his Berkshire Hathaway company in his hometown of Omaha, Nebraska, draw huge crowds.

Earlier this year, he toured Europe looking for acquisition targets. Until now, he had held off buying stakes in any of the financial companies hit by the credit crunch, instead favouring a deal for the chewing gum maker Wrigley's.

"Goldman Sachs is an exceptional institution," Buffett said yesterday, citing its "unrivalled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance".

Lloyd Blankfein, the Goldman's chairman and chief executive, said he viewed the deal as "a strong validation of our client franchise and future prospects".

Goldman is also planning to raise $2.5bn in a public offering of shares, with the capital-raising plan coming as the US treasury secretary, Henry Paulson, visited Washington to defend a planned $700bn bailout of Wall Street.

In a separate move, the Japanese financial powerhouse Sumitomo Mitsui was also reported to be planning a large investment in Goldman Sachs.

Earlier this week, Morgan Stanley raised around $8bn by selling a 20% stake to Japan's largest commercial bank, Mitsubishi UFJ Financial.

Both Goldman and Morgan Stanley maintained that their businesses were sound in recent weeks even as Lehman Brothers went bankrupt and Merrill Lynch sought shelter by selling itself to Bank of America for $50bn.

Goldman has remained profitable, although its earnings have taken a hit. However, the fear in the markets put both Goldman and Morgan Stanley under pressure, regardless of any reassurances.

Berkshire Hathaway will take preferred shares in return for the investment, and will have the right to buy a further $5bn in ordinary shares at $115 a share at any time over the next five years.

Analysts said the deal had been structured in such a way as to protect Buffett's investment from being wiped out.

Tim Ghriskey, the chief investment officer at Solaris Asset Management in New York, said; "It is certainly a vote of confidence in Goldman and their new structure. Any time Warren Buffett and Berkshire Hathaway step in and invest in something, everybody takes notice."

Under their new status, Goldman and Morgan Stanley will have to reduce the amount they can borrow relative to capital ratios.

They will be subject to greater regulation, but will also be able to borrow money from the Federal Reserve.