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As Wall Street melts, the rich go bargain shopping

October 01, 2008 08:57 IST

After one of the most disastrous weeks in the history of Wall Street, Warren Buffett decided to invest $5 billion there.

In an investment heard round the financial world, the oracle of Omaha revealed he was buying into Goldman Sachs. The deal came despite a growing list of the mishaps of Goldman's rivals. Lehman Brothers declared bankruptcy last week. Merrill Lynch and Bear Stearns have both rushed into sales to avoid similar fates.

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It's a sector that almost nobody wants to touch, but Buffett was never one for conventional wisdom. He's not alone either. The world's wealthiest businesspeople are still wheeling and dealing even as President Bush warns "our entire economy is in danger."

With tumult comes opportunity. Buffet drove a hard bargain with Goldman, which was eager for capital. Buffett's Berkshire Hathaway is paying $5 billion for Goldman preferred shares that pay a lush 10 per cent dividend. Berkshire also gets the right to pay $5 billion more in Goldman common shares at $115 each. At least today, that deal looks like a winner since those shares are trading near $135 each.

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Joining Buffett in the hunt for financial sector deals is Hong King's richest person. On Wednesday, Li Ka-Shing bought shares in the Bank of East Asia. He's another who's defying the conventional wisdom. Li is getting in while others are rushing to get out.

The same day of Li's investment, depositors swarmed the bank's branches to yank their money. Rumors erupted about the bank's financial footing because the company is exposed to risky collateralized debt obligations and recently revised its first-half profits lower. But it's hard to find a better endorsement for a bank than one from a man worth $26.5 billion.

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In Russia, Mikhail Prokhorov has the same idea. The man worth $19.5 billion announced this week that he would buy half of Russian investment bank Renaissance Capital and a smaller financial player called APR-Bank. Prokhorov is reportedly planning to infuse $500 million of his own money to jump start a new financial conglomerate.

Not all billionaires are bullish on banks though. British headlines this week say John Paulson is gambling that the shares of a quartet of UK banks will lose value. Take note because Paulson is the hottest fund manager around right now thanks to another wildly successful gamble. Last year, he shorted subprime credit. His take was $3.5 billion.

There's more billionaire deal making happening outside of the banking industry. Tycoon Anil Ambani and Transformers producer Steven Spielberg are putting money on America's love of movies. Spielberg is planning to leave employer Viacom to start an independent film studio.

Spielberg, who reportedly clashed with Viacom management, gets his freedom with the help of Ambani, one of the richest men in India. Ambani's entertainment business, Reliance Entertainment, is contributing about $500 million to the venture.

Russian billionaire Alexander Mamut likes cellphones. On Tuesday, he announced he was buying the Evroset, a major retailer in Russia's mobile phone market. Mamut gets a big chunk of debt with Evroset--some estimates run as high as $850 million--but he also gets to wager on Russia's cellphone market. Sales could benefit as the country's prosperity rises.

There is a downside to these high stakes bets, however. With the potential of big payoffs also comes the potential of punishing losses. T. Boone Pickens knows this. The Wall Street Journal reported earlier this week that Pickens' funds have lost around $1 billion this year. He personally has taken a $270 million hit.

"It's my toughest run in 10 years," said Pickens. "We missed the turn in the market, there's nothing fun about it."

Andrew Farrell, Forbes
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