Buffett's paper profits wiped out

Billionaire investor Warren Buffett's instant paper profits on Goldman Sachs Group and General Electric have been wiped out amid the stock market's worst yearly slump since 1937.


Goldman, the most profitable Wall Street firm, fell 7.3 per cent on Tuesday in New York trading to US$115, the price at which Mr Buffett can buy US$5 billion of shares at any point in the next five years. When the deal was announced last month, Goldman closed at US$125.05, meaning Mr Buffett was US$437 million ahead.

Goldman and GE also sold Mr Buffett a combined US$8 billion in preferred shares that pay a 10 per cent dividend, allowing his Berkshire Hathaway to earn US$800 million a year without the warrants unless the companies collapse.

In exchange, the firms got Berkshire's cash and the endorsement of the 'Oracle of Omaha' at a time when stock prices are falling on concern that a tightening credit market may hobble even the largest companies.

Mr Buffett 'doesn't have a two-week time horizon', said Frank Betz, a partner at Warren, New Jersey- based Carret Zane Capital Management, which holds Berkshire and GE shares.

'Just because these prices drop below the strike price, it doesn't suggest that either of them are not exceptionally good investments.'

GE, the world's biggest maker of jet engines, agreed on Oct 1 to give Berkshire warrants to purchase US$3 billion in shares at US$22.25 apiece. The stock, which closed at US$24.50 that day, dropped to US$20.30 on Tuesday.

'You've got to pick them and hold them,' said Gerald Martin, a finance professor at American University's Kogod School of Business in Washington. 'He admits that he can't time markets, and he takes a very long time horizon.'

Mr Buffett, heralded as the world's best stock picker, agreed to the investments while some rivals find themselves with a cash shortage.

The worst housing slump since the Great Depression has resulted in record mortgage defaults in the US and a yearlong contraction in global credit markets, driving down stock prices and sending firms like Goldman and GE in search of funds.

Goldman has fallen 47 per cent this year through Tuesday in New York Stock Exchange composite trading. GE has declined 45 per cent. -- Bloomberg