Berkshire Profit on Goldman - $2 Billion

July 23 (Bloomberg) -- Warren Buffett’s option to buy shares of Goldman Sachs Group Inc., part of an agreement reached at the depths of the credit crisis, has earned a profit on paper of about $2 billion, a return of more than 40 percent.

Goldman Sachs today passed $162 in New York trading for the first time since rival Lehman Brothers Holdings Inc. collapsed in September. Buffett’s Omaha, Nebraska-based Berkshire Hathaway Inc. has warrants to buy $5 billion of Goldman common stock for $115 a share any time in the next four years.

“It must feel good to be Warren Buffett,” said Gerald Martin, a finance professor at American University’s Kogod School of Business in Washington, who has studied the billionaire’s investing history. “That number just flies in the face of people who like to say he’s lost a step.”

The difference between the strike price and the share value translates into a $2.09 billion paper profit for Berkshire. The U.S. government got a 23 percent annualized return for its investment in the firm after an agreement yesterday by the bank to repay $1.1 billion to settle warrants.

Goldman Sachs turned to Buffett in September, agreeing to sell $5 billion in preferred shares paying 10 percent interest, after Lehman’s bankruptcy and the emergency takeover of Merrill Lynch & Co. by Bank of America Corp. Amid the crisis, Goldman earned an explicit endorsement from Buffett, the so-called “Oracle of Omaha” who is celebrated for his investing savvy.

The warrants, Buffett said, were tacked on to give him an incentive to sell some of Berkshire’s existing stock holdings to fund the deal at a time when he had an increasing number of investment opportunities as the economy froze and markets plummeted.

Berkshire Profit on Goldman Sachs Passes $2 Billion (Update3) - Bloomberg.com