Sumitomo Bank Ltd. has agreed to extend its landmark $500 million equity investment in Goldman Sachs & Co. for five years, to 2001.

The move, disclosed Wednesday by an investment banking source and confirmed by a Goldman official, is seen as a vote of confidence for Goldman and evidence of the huge Japanese bank's commitment to a role in the U.S. securities market.

Deal Had Been Controversial

Sumitomo raised a furor in 1986 when it sought to make the investment. Critics contended it would give the bank undue influence over Goldman in violation of U.S. laws separating banking and commerce.

The Federal Reserve Board ultimately approved a passive $500 million investment -- currently amounting to a 12.5% stake in Goldman.

The original 10-year agreement gave either side the option of backing out in 1996. "It is this option that has been deferred beyond 2001," according to a memo circulated by Goldman's management committee on Tuesday.

No Need for Bonds

The extension is something of a coup for Goldman. Because it is one of the last remaining private partnerships on Wall Street, the investment bank is constantly looking for sources of capital to replenish withdrawals by departing partners.

Goldman has reportedly been planning to sell bonds to raise capital. Referring to the extended pact with Sumitomo, a Goldman official said: "When you can do this, you don't have to" sell bonds.

Skeptics had predicted that Sumitomo, the world's second-largest bank after Dai-Ichi Kangyo Bank Ltd., would regret investing in a U.S. securities firm shortly before the crash of 1987.

But by extending the agreement, the Osake-based bank, which had $409 billion in assets at yearend 1990, is signaling its satisfaction with its return on the deal, the Goldman official said. Sumitomo executives could not be reached for comment.

Strong Capital Base Noted

In its memo on the arrangement, Goldman said: "Today our total capital is approximately $3 billion, which ranks our firm among the largest and bestcapitalized in the securities industry.

Sumitomo Bank's confidence in out future, coupled with the support of our other limited partners and institutional investors, will provide a strong capital base upon which to build."

In approving Sumitomo's investment in 1986, the Fed forced the bank to forsake some voting interests it would have had in Goldman units in London and Tokyo.

The Fed also required a reduction in equity to less than 25%. Furthermore, it eliminated Sumitomo's representation of the Goldman board, and it barred a plan to transfer Sumitomo employees to Goldman for training.

Under the original proposal, the Fed said at the time, "business arrangements between the parties would have been complex and extensive."

The Fed ruling was seen as a precedent setter. Since then, a number of Japanese banks have invested in smaller U.S. investment banks.

Barbara Rehm in Washington contributed to this report.

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