Buffett investment boosts financials

Battered financial stocks gained strength yesterday after legendary investor Warren Buffett bought a $5bn stake in US investment bank Goldman Sachs, but overall sentiment in beleaguered share markets remained downbeat amid concern that the US government's $700bn rescue plan for Wall Street may be derailed by opposition in Congress.

In another worrying sign for investors, the interbank cost of borrowing three-month money in London jumped yesterday, indicating that lending between banks remains strained because of a lack of confidence.

Buffett's Berkshire Hathaway investment vehicle said from its base in Omaha, Nebraska, that it will invest at least $5bn in Goldman's preferred stock, a huge vote of confidence for one of the survivors of the credit crisis that brought down two of its investment banking peers - Bear Stearns and Lehman Brothers Holdings.

In addition to preferred stock, Berkshire also got warrants to buy another $5bn in Goldman's common stock. Buffett said Berkshire would consider buying some units of American International Group, the big insurer bailed out by the US Government.

Goldman also said it would raise another $2.5bn in its own public stock offering. The warrants can be exercised at any time over the next five years.

Goldman chief executive Lloyd Blankfein said Buffett's cash injection is part of a plan to shore up the firm's capital base and restore market confidence.

The decision to seek a cash infusion marks a reversal for Goldman, which less than a year ago was posting record profits and paying record bonuses. Blankfein and his two top deputies reaped payouts totaling more than $67m in 2007.

The firm, while suffering from a drop in trading and investment banking revenue, has booked $4.9bn of losses on devalued assets, a fraction of the writedowns taken by rivals such as Citigroup, Merrill Lynch and Morgan Stanley.

The news of Buffett's investment sent shares of Goldman Sachs higher on the New York Stock Exchange and lifted financial stocks in London and other European centres.

Halifax Bank of Scotland, Royal Bank of Scotland and Lloyds TSB all made gains. Barclays was the exception, closing lower after buy-to-let specialist Bradford & Bingley announced the bank was acting as interest rate swap provider for its covered bond programme.

Bradford & Bingley, which has renegotiated the terms of an onerous deal under which it buys mortgages from US financial services firm GMAC, edged higher.

The FTSE-100 index ended the session down 40.6 points to 5095.6, marking three straight days of losses. Most bourses on mainland Europe also closed lower.

Goldman Sachs' shares had been tumbling ahead of the announcement of the government rescue plan last Friday as investors feared it could face the same kinds of squeeze on funds that brought down Bear Stearns and Lehman.

Treasury Secretary Henry Paulson, former co-chief executive of Goldman Sachs, and Federal Reserve chairman Ben Bernanke returned to Congress yesterday, urging that quick action on the federal government's bailout measure for financial services firms was needed to prevent economic choas. They faced a mainly cold reception from several sentators and members of the House of Representatives on Tuesday.

Appearing before the congressional Joint Economic Committee yesterday, Bernanke said the worsening financial crisis could prove a major weight on US business growth and pledged to "act as needed" to brace the fragile economy.

Bernanke, who is fighting the biggest financial debacle since the Great Depression of the 1930, faced a second straight day of tough questioning on Capitol Hill about the Bush administration's proposed bail-out scheme.

Politicians once again voiced scepticism about the plan aimed at shoring up troubled financial institutions and markets.

Bernanke has been trying to reassure the country that the Fed will do what it can to provide relief. Some analysts think interest rates might be lowered again soon.

The Fed chief appeared much more concerned about the stumbling economy right now, than about the prospects of inflation getting out of control. The slowing economy should cause inflation to moderate later this year and next, he said.