Honestly, IC Capital's participation in this meeting, as the youngest and smallest investment firm, seems a bit far-fetched.
However, nothing happens without reason.
The main theme of this meeting is how these investors can withstand the subprime mortgage crisis, with the primary focus being on securing capital injections.
Wall Street firms like Goldman Sachs, Citigroup, and Morgan Stanley, at the center of the subprime crisis, are particularly concerned. Besides securing loans from the government and the Federal Reserve, external capital injections are crucial.
Banks like JPMorgan Chase, Bank of America, and Wells Fargo, hoping to capitalize on the subprime mortgage crisis to expand through acquisitions, are also concerned about raising capital from both domestic and international investors.
IC Capital is currently in talks with Goldman Sachs, preparing to provide up to $5 billion in funding.
Initially, Goldman Sachs sought assistance from Warren Buffett's Berkshire Hathaway, hoping to sell at least $2.5 billion in common stock.
However, Buffett rejected the offer and instead proposed a different plan: he wanted to purchase Goldman Sachs' perpetual preferred stock with a 10% dividend for $5 billion.
Furthermore, as an additional condition of this investment, Berkshire Hathaway also needed permission to purchase $5 billion worth of Goldman Sachs common stock at any time within five years, at a price of just $115 per share.
It's important to note that Goldman Sachs' stock price currently trades around $125...
In Baron's previous life, Goldman Sachs was forced to agree to Buffett's terms.
This meant that when Goldman Sachs eagerly redeemed its preferred stock from Berkshire Hathaway for $5.5 billion in April 2011, it paid Berkshire Hathaway approximately $1.75 billion in dividends and premiums alone...
The agreement stipulated that the Goldman Sachs preferred stock Buffett purchased pay a fixed 10% annual dividend, equivalent to $500 million per year.
Furthermore, Goldman Sachs would have to pay an additional 10% premium upon redemption, amounting to $500 million.
Two and a half years of dividends plus a $500 million premium equals $1.75 billion.
If we also factor in the Goldman Sachs options Buffett received, allowing him to purchase 43.5 million shares at $115 per share before October 1, 2013.
Based on the closing price of $154 per share when Goldman Sachs redeemed the $5 billion in preferred stock, if Buffett had exercised these options that same day, he would have made a guaranteed profit of approximately $1.65 billion.
In total, Buffett earned $3.4 billion on his $5 billion investment in Goldman Sachs in just two and a half years!
Furthermore, he didn't rush to exercise his options, waiting until the options expired and then redeeming the proceeds for Goldman Sachs common stock.
This resulted in Buffett receiving 9.2 million shares of Goldman Sachs common stock, representing 2% of the company's outstanding shares, without spending a penny.
It's no wonder Buffett has publicly stated his desire to hold his Goldman Sachs preferred stock investment for as long as possible.
In his 2009 and 2010 shareholder letters, he emphasized this point. Undoubtedly, the returns on this investment were very attractive, with Buffett pocketing approximately $1.4 million per day in dividends alone.
At the 2010 shareholder meeting, Buffett calculated this in front of 40,000 shareholders:
"Goldman Sachs pays us $15 per second..."
Buffett said: "Tick, tick, tick... the sound of the watch has become so melodious."
...
In Baron's previous life, Goldman Sachs was desperate for funds and had no choice but to agree to Buffett's terms.
Now, they had a better option.
While IC Capital couldn't compare to Berkshire Hathaway in terms of investment weight, and its investment in Goldman Sachs didn't have the same stabilizing effect on the market...
the terms IC Capital offered were very appealing to Goldman Sachs!
Instead of earning a high 10% annual dividend on preferred stock, IC
Capital was willing to directly purchase the company's common stock—at a discount, of course. Ultimately, Goldman Sachs signed an agreement to sell 43.5 million shares of Goldman Sachs to IC Capital at $115 per share. This brought IC Capital's stake in Goldman Sachs to 9%, making it one of Goldman Sachs' largest shareholders.
IC Capital was also allowed to appoint a director to the Goldman Sachs board, with one vote.
While IC Capital's investment won't yield the same high returns as Buffett's $5 billion investment in the original universe, it
's still very satisfying to Baron and Ivanta. Not only will investing in Goldman Sachs shares now yield lucrative returns over the long term, but joining the Goldman Sachs board will also greatly benefit both IC Capital and Ivanta's future development. Furthermore
, leveraging Goldman Sachs' extensive resources will further facilitate IC Capital's future acquisitions and the growth of its subsidiaries.
This is Goldman Sachs' first financing transaction since its transformation from an investment bank to a bank holding company.
Goldman Sachs and Morgan Stanley chose to transition from investment banks to bank holding companies because the primary regulator for investment banks is the Securities and Exchange Commission, while the primary regulator for bank holding companies is the Federal Reserve. This transition allows Goldman Sachs and Morgan Stanley, while under Fed regulation, to obtain loans directly from the Fed, thereby reducing the risk of short-term bank runs.
In addition to investing in Goldman Sachs under IC Capital's name, Baron's other funds will also participate in investments in other Wall Street firms.
After all, Standard Chartered Bank had already rapidly acquired significant portions of the assets of Northern Rock, Merrill Lynch, and IndyMac.
It could be argued that after becoming Standard Chartered-Merrill Lynch, its size had more than doubled.
The most pressing task for Standard Chartered-Merrill Lynch now was to complete the integration of these acquisitions and digest their newly acquired assets. Failure to do so would easily create significant challenges for future development.
Not counting other funds, the British Fortune (BFT) Fund alone held over $40 billion in assets.
With the successive crises of major Wall Street financial institutions—Lehman Brothers, Merrill Lynch, and AIG—panic erupted, coupled with a drying up of liquidity in the financial markets, causing not only the US stock market but also global stock markets to fall steadily.
The funds and investment companies controlled by Baron, who had long been shorting global stock markets, naturally reaped the rewards.
A portion of these profits could be used to invest in bargain-hunting acquisitions and investments.