Berkshire Hathaway Inc. sold 84% of its Goldman Sachs stock in the first quarter, marking a reversal for an investor who generally holds large stakes in the banking sector. It was one of the most notable changes in Berkshire’s more-than $180 billion portfolio in the period, as the bank underperforms the broader U.S. market.
Buffett traces his relationship with Goldman Sachs back to a meeting with the bank’s longtime head, Sidney Weinberg, in 1940. The billionaire investor routinely praised former Chief Executive Officer Lloyd Blankfein as he led the Wall Street firm through the last financial crisis. Then Berkshire started paring its stake during the last few months of 2019 -- after David Solomon had succeeded Blankfein as CEO -- and deepened that cut in the first quarter, nearly bringing the investment to an end.
“He has this historical relationship with Goldman, so maybe there’s some sentimental value," said David Kass, a professor of finance at the University of Maryland’s Robert H. Smith School of Business. “But of course, Buffett’s primary concern is efficient allocation of capital."
Buffett’s set-up is different this time around. During the 2008 crisis, Goldman Sachs tapped Berkshire to invest in preferred stock, offering a 10% annual dividend and warrants. Buffett said in 2009 that, while he had a good relationship with the bank, it was primarily the terms that attracted him.
Those preferred shares are long gone. Berkshire now holds only common stock in the lender, a stake that dwindled to 1.92 million shares at the end of the first quarter, from a high of more than 18 million shares. It’s not known if or how the stake may have changed since then.
Buffett’s retreat followed Solomon’s rise to the top job in October 2018. An investment banker by trade, Solomon has been pushing the firm deeper into less-familiar terrain with transaction banking and deposit gathering, making it look more like its rivals. Buffett has rarely discussed Solomon in public.
Solomon’s style may clash with that of the famously frugal CEO of Berkshire. The bank ordered a pair of Gulfstream private jets late in 2019 to ferry executives around the globe, after years of using Berkshire’s own NetJets business.
Berkshire didn’t respond to a message seeking comment and Goldman Sachs declined to comment.
Buffett’s dealings with investment banks in general may make him more cautious toward the sector. He had a tumultuous ride with a bet on Salomon Inc., where he had to step in as interim chairman in 1991 and appear before Congress after the company admitted to violating Treasury auction rules. Buffett’s longtime business partner, Berkshire Vice Chairman Charlie Munger, put it more succinctly around four years ago: The pair tends to fear investment-banking business more than they love it.
“He’s always been a little skittish about investing in investment banks after getting somewhat burned in the Salomon experience," Kass said.
Still, Buffett has been willing to praise investment bankers he admires. He frequently turned to Byron Trott, a former Goldman Sachs banker who later founded BDT Capital Partners, for acquisitions, noting that Trott “earns his fee."
Buffett, 89, has been bullish on the banking sector. He’s the largest investor in Bank of America Corp. and has praised its CEO, Brian Moynihan. Berkshire has continued to be the biggest shareholder in Wells Fargo & Co. as it worked through the fallout from a sales scandal. And while Berkshire trimmed its stake in JPMorgan Chase & Co. in the first quarter, it boosted a holding of PNC Financial Services Group Inc.
Berkshire and Goldman Sachs are gearing up for the worst economic landscape in recent years. Buffett signaled caution at his annual meeting earlier in May, saying that his record cash pile of $137 billion wasn’t that huge when he looked at worst-case possibilities. He even dumped Berkshire’s stakes in four major U.S. airlines.
Meanwhile, Goldman Sachs suffered an almost $900 million hit on its investment portfolio in the first quarter, normally a lucrative business in better economic conditions.
“Historically, the banks have been a bellwether for the good and the ill of external events, because ultimately it’s kind of the choke point for the financial system," Blankfein said Monday in a Bloomberg TV interview.
Investors, at least “since the financial crisis have had an arched eyebrow when approaching investments in banks," Blankfein said.