Why Is Goldman Paying Back The Government?

A reader emails to make a very interesting point about Goldman's plan to issue $5 billion common stock in order to pay back its TARP funds:

You've probably seen the news about Goldman Sachs: The investment bank, after posting $1.7 billion in profits, is planning to pay back its TARP money so it can escape from compensation restrictions.

Last fall, Goldman also raised capital from Warren Buffett, who got a sweet deal: $5 billion worth of preferred shares paying a 10% annual dividend.

The TARP money, on the other hand, is $10 billion with an annual yield of 5% - that's a much better deal for Goldman.

So shouldn't Goldman pay Buffett back first, which Goldman can do with a 10% penalty (i.e. it would cost Goldman $5.5 billion to pay back Buffett early)?

That would leave the firm with more equity on its balance sheet and roughly the same annual dividend payments on the preferred shares. Better for the shareholders, the bondholders and the firm as a whole.

Of course Buffett's money comes with no executive compensation restrictions, and that's the key. Goldman in its announcement this morning said it would set aside $4.7 billion in salaries and bonuses. That's 50% of its quarterly revenues, a higher proportion than last year.

The key here is that Goldman executives feel it is really important to pay themselves and their employees lots and lots of money - so important that they'd rather ditch the great deal they have with the U.S. Treasury than give up the no-strings-attached deal with Buffett.

Maybe they're right: without the possibility of high pay, the business will disintegrate, as the smart people who work at Goldman head for the exits. And Goldman did make smarter decisions than the idiots at Citigroup and Merrill Lynch.

Still, it's pretty striking to see the lengths Goldman is going to ensure that they can still pay loads to executives and bankers.

Wonder what Goldman's institutional investor shareholders think about this.

Comments (35)

1. fire geithner!

   fire summers!

   Posted by frosty zoom at 04/15/2009 @ 9:33pm

2. http://www.goldmansachs666.com/

   Posted by frosty zoom at 04/15/2009 @ 9:37pm

3. i keep telling y'all:

   A 'Copper Standard' for the world's currency system?

   Hard money enthusiasts have long watched for signs that China is switching its foreign reserves from US Treasury bonds into gold bullion. They may have been eyeing the wrong metal.

   By Ambrose Evans-Pritchard Last Updated: 6:54PM BST 15 Apr 2009

   Setting the standard: China has eschewed US Treasury bonds in favour of industrial metals, especially copper

   China's State Reserves Bureau (SRB) has instead been buying copper and other industrial metals over recent months on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons.

   Posted by frosty zoom at 04/15/2009 @ 9:39pm

4. gs wants to pay back early in order to make other "banks" look bad.

   Posted by frosty zoom at 04/15/2009 @ 9:41pm

5. Very astute point. Makes good sense

   Michael Corcoran

   Posted by Chonce at 04/15/2009 @ 9:42pm

6. and how did gs disappear december?

   wtf?

   oligarchs unite!

   Posted by frosty zoom at 04/15/2009 @ 9:49pm

7. FROSTY...rapidly reaching Maximum Spam Levels. The engines canna take it Captain--Scotty

   Posted by Mask at 04/15/2009 @ 9:56pm

8. fire geithner! fire summers! http://www.goldmansachs666.com/ i keep telling y'all: A 'Copper Standard' for the world's currency system? Hard money enthusiasts have long watched for signs that China is switching its foreign reserves from US Treasury bonds into gold bullion. They may have been eyeing the wrong metal. By Ambrose Evans-Pritchard Last Updated: 6:54PM BST 15 Apr 2009 Setting the standard: China has eschewed US Treasury bonds in favour of industrial metals, especially copper China's State Reserves Bureau (SRB) has instead been buying copper and other industrial metals over recent months on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons. gs wants to pay back early in order to make other "banks" look bad. and how did gs disappear december? wtf? oligarchs unite!

   there you go MASK, all in one.

   sheesh.

   Posted by frosty zoom at 04/15/2009 @ 10:02pm

9. RAPTOR!

   Posted by frosty zoom at 04/15/2009 @ 10:02pm

10. This is bogus rabble rousing! They are up 20% in the 1st quarter and will boost outstanding shares 8%.

    Now if you want to get upset about something;

    Lehman Brothers Holdings Inc., which set a record as the largest company to file for bankruptcy protection, is on course to yield one of the biggest bonanzas for lawyers.

    New York-based Weil, Gotshal & Manges LLP earlier this week asked a federal bankruptcy judge in New York to sign off on a $55.1 million payment for its work representing Lehman.

    That marks the biggest quarterly fee request made by lawyers representing a bankrupt company, according to Lynn LoPucki, a law professor at the University of California, Los Angeles, who runs a bankruptcy-fee database.

    Oh, sorry I forgot! The biggest lobby in D.C. and BIGGEST contributor to the Demoncrat congress is the AMA that Obamanation and the Demoncrats always have rewarded for their donations.... My bad?

    Posted by comancheamerican at 04/15/2009 @ 10:04pm

11. rio,

    geithner, paulson.......

    can't you see a pattern?

    Posted by frosty zoom at 04/15/2009 @ 10:13pm

12. Governmental THEFT of taxpayers rewarding party supporters is on par!

    Posted by comancheamerican at 04/15/2009 @ 10:22pm

13. Governmental THEFT of taxpayers rewarding party supporters is on par!

    Posted by comancheamerican at 04/15/2009 @ 10:25pm

14. Hmmm... posting it twice accidentaly did not make it the truth any easier to swallow.

    Posted by comancheamerican at 04/15/2009 @ 10:28pm

15. MUST see:

    http://www.youtube.com/watch?v=9lp0IWv8QZY&feature=related&fmt=18

    Posted by frosty zoom at 04/15/2009 @ 10:32pm

16. Real estate is a legal term (in some jurisdictions, notably in the USA, United Kingdom, Canada, and Australia) that encompasses land along with anything permanently affixed to the land, such as buildings, specifically property that is fixed in location.[1] Real estate law is the body of regulations and legal codes which pertain to such matters under a particular jurisdiction. Real estate is often considered synonymous with real property (also sometimes called realty), in contrast with personal property (also sometimes called chattel or personalty under chattel law or personal property law). However, in some situations the term "real estate" refers to the land and fixtures together, as distinguished from "real property," referring to ownership rights of the land itself.[clarification needed] The terms real estate and real property are used primarily in common law, while civil law jurisdictions refer instead to immovable property.

    visit

    <a href="http://homesforsalemiamifl.com">Miami real estate</a>

    Posted by zinthaq at 04/15/2009 @ 11:00pm

17. real estate business in Mexico and Central America is different from the way that it is conducted in the United States.

    Some similarities include a variety of legal formalities (with professionals such as real estate agents generally employed to assist the buyer); taxes need to be paid (but typically less than those in U.S.); legal paperwork will ensure title; and a neutral party such as a title company will handle documentation and monies in order to smoothly make the exchange between the parties. Increasingly, U.S. title companies are doing work for U.S. buyers in Mexico and Central America.

    Prices are often much cheaper than most areas of the U.S., but in many locations prices of houses and lots are as expensive as the U.S., one example being Mexico City. U.S. banks have begun to give home loans for properties in Mexico, but, so far, not for other Latin American countries.

    http://homesforsalemiamifl.com

    Posted by zinthaq at 04/15/2009 @ 11:05pm

18. Why? Well, Christopher.....look at it this way:

    Would the average Joe prefer to borrow from the mother-in-law at 5%, but with her living in Joe's house and having the final say on really, really important stuff--like Joe's weekly allowance for beer and shit--or would he prefer to borrow from Warren, the HAPPY loan shark down the block, at 10%....and live his life as he always had?

    I know you're still quite young, but trust me, this one is a No-Brainer!

    Posted by Happy at 04/15/2009 @ 11:18pm

19. "Wonder what Goldman's institutional investor shareholders think about this?"

    This is an excellent question, Mr. Hayes! This story is a gem.

    Of course, I still find it lamentable that we have to rely on the greed of shareholders to hold both our biggest banks and the government, which is supposed to regulate them, accountable for obvious malfeasance. It seems that we, the people, have no power at all.

    I appreciate "Happy's" most recent contribution to this thread, because it argues forcefully for the claim that the financial power in this country truly is an old boys' club. Surely this is a club that transcends party lines as well. But what are we non-club-members to do?

    I am resigned to waiting for more economic failures, in the hope that these will be educational rather than merely hurtful, but this is only a hope, not an expectation. Sometimes, a dream deferred does explode, and when this happens, the effect is not always progressive.

    I've been reading a bit of James Howard Kunstler recently. His view of the future is a little stronger than "sobering," but he writes so eloquently that he remains enjoyable, even when the news he delivers is not good. And I believe he is right about nearly everything.

    Posted by JakobFabian at 04/16/2009 @ 07:28am

20. Posted by comancheamerican at 04/15/2009 @ 10:25pm

    But you only think that works with ONE party, right, RIO?

    Posted by Mask at 04/16/2009 @ 07:51am

21. "Would the average Joe prefer to borrow from the mother-in-law at 5%, but with her living in Joe's house and having the final say on really, really important stuff--like Joe's weekly allowance for beer and shit--or would he prefer to borrow from Warren, the HAPPY loan shark down the block, at 10%....and live his life as he always had?"

    Yes, the average Joe loves worrying about getting his fingers broken or his kneecaps smashed with a bat if his payment is late.

    Posted by onthehelm at 04/16/2009 @ 08:13am

22. I'm confused that anyone can claim to be surprised by Goldman Sachs' actions. Of course they are going to prioritize compensation. They will do what is best for their shareholders' bottom line.

    Wait a second... You don't think the American taxpayer, by virtue of financing a "bailout" is a PARTNER with these banks and financial institutions now do you?! And that now institutions like Sachs will act in the public interest??? Surely none of us are that naive.

    Nope, the system is functioning exactly as designed throughout its evolution since 1913. I'm really surprised Mr Hayes can call any of it "striking". I hoped he was starting to see the truth about the creature.

    Posted by freiheit1 at 04/16/2009 @ 10:19am

23. The big questions for G-S include:

    1) Is it really legitimate for them to have claimed a profit without including the month of December (a big write-down month, is my understanding) in their accounting? It was so convenient, to change their definition of a calendar year at just this point in time.

    2) How much of the money that allowed them to report a profit came from TARP via AIG in the form of payouts on CDS that AIG owed? While it is OK for a bank to report payouts on debts they are owed as part of their profit, the fact that this was still public money - bailout money - that AIG might have been giving them - in vast sums - needs to be assessed.

    After all, if Hayes' reader is right, and G-S just wants to make a nice public showing of "nothing to see here, move along", perfectly timed, while evading executive compensation limits, they ought to have to tell us exactly what their profits would be if the month of December had been included, and how much of their "profit" was just TARP money anyway.

    Posted by syfriendly at 04/16/2009 @ 10:34am

24. MUST see:

    ..... Posted by frosty zoom at 04/15/2009 @ 10:32pm

    Frosty, Thanks for the link. She kicked ass!! That's an excellent song from and excellent musical....the book wasn't too bad either.

    Posted by Wolfgang1 at 04/16/2009 @ 10:53am

25. I think GS should pay the government every cent it owes along with a significant bonus to us taxpayers who bailed their sorry asses out. Any bonuses being thrown out should go to their savior, not the idiots who ran the company into the ground in the first place. Also, they should be paying a sizeable interest rate back to us as well.

    It would be nice to see their shifty proftis go the other way for a change.

    Here's some food for thought. It's only April and they have been able to pay back such a significant loan in such short time, then why did they need it in the first place? This is starting to smell really bad and the term fraud comes to mind.

    Posted by Wolfgang1 at 04/16/2009 @ 10:57am

26. Quotable quote of day.....courtesy of the bankruptcy filing of General Growth:

    .....President Thomas Nolan said in an interview today. ".... Our business model remains strong."

    I had a heck of a good laugh upon reading this.....maybe you too!

    Posted by Happy at 04/16/2009 @ 11:30am

27. .....President Thomas Nolan said in an interview today. ".... Our business model remains strong."

    I had a heck of a good laugh upon reading this.....maybe you too!----Posted by Happy at 04/16/2009 @ 11:30am

    Sort of like...

    "The fundamentals of our economy are strong"--Sen. John McCain????

    Posted by Mask at 04/16/2009 @ 11:45am

28. In all honesty, if I invested in Company GS and they had to choose between being in bed with Warren Buffet and being in bed with Polosi and Ried, there is no question who I'd advise them to choose.

    If you are in the business of shareholder return you stick with Buffet ever if you have to pay a 5% premium.

    Compared to Pelosi and Ried, Buffet is worth every cent.

    Posted by Darin_the_Big_Fat_Troll at 04/16/2009 @ 1:35pm

29. Sen. John McCain????

    Posted by Mask at 04/16/2009 @ 11:45am

    You and McCain.....what's the connection? Why so hung up on a old warrior? Does he STILL scare you? Is he still in your nightmares?

    Nagic is far more topical.....the contradictory BS he spoon feeds you on a weekly basis....If I had the time that you do, or the payoffs you get to post here, I can nail your Messiah with far more `current' quotes!

    Posted by Happy at 04/16/2009 @ 1:36pm

30. Posted by Happy at 04/16/2009 @ 1:36pm

    SOrry, HAPP, forgot the new Right paradigm by which your memories only go back to January 20th at noon....just before Bill Clinton left office and Obama took power.

    Posted by Mask at 04/16/2009 @ 2:14pm

31. Goldman also wants to participate in Geithner's troubled asset purchase program, and when they start trading on these government guaranteed deals, they likely don't want to be seen as having any ties with the Gov't - hahahehe - a conflict of interest.

    Where did all that money go that they got from AIG? I thought we already bailed their sorry assess out before they got the money from AIG through the bank bailout shenanigan.....

    Nice profit there GS - way to go. Taxpayers....give yourselves a pat on the back. Isn't it rich.

    Posted by OneVote at 04/16/2009 @ 5:51pm

32. Ed Schultz said it best on his program today. These 'companies' are paying it back because they know that $500,000 executive salary caps are around the corner. They don't give a flying f*ck about the company or shareholders past where they are needed to gouge catastrophic salaries out of. I want to see salary caps grandfathered back to Reagan's election date and all of it seized so we can decide who actually merits what pay.

    Posted by Milhaus at 04/16/2009 @ 8:51pm

33. I want to see salary caps grandfathered back to Reagan's election date and all of it seized so we can decide who actually merits what pay.

    Posted by Milhaus at 04/16/2009 @ 8:51pm

    Let me see if I understand this.

    In the real world, results occur. But these results don't always comport with my values or my sense of justice. So the government needs to confiscate people's property and impose my sense of justice on this country's citizens. And the reason the goverment needs to impose my sense of justice on everyone is because everyone agrees with me.

    Have I got that right?

    Posted by Darin_the_Big_Fat_Troll at 04/17/2009 @ 06:30am

34. Have I got that right?

    Posted by Darin_the_Big_Fat_Troll at 04/17/2009 @ 06:30am

    Durwood, You may have that right, but let's look at your position shall we.

    You seem to be of the ilk that business execs are free to screw their investors to the nth degree because of their irreplaceable talents, but at the same time believe that we need to bail them out and allow them to have their obscene bonuses. So, they screw up, but that's okay, everyone does, but by all means continue to pay these eff ups what they were being paid before? You also bitch about union members being paid too much but have no problem with the overpaid execs. Does the word hypocrit come into play here?

    Then you are all for offshore tax havens so these assholes don't even pay any taxes when it's tax time and use tax shelters to hide what money they do have in the CONUS.

    The question is, which side are you on, the greedy blood suckers side who are getting richer by the second through this "manufactured downturn" or do you have any sympathy for the people losing their jobs, homes, retirement money and everything else due to these very same business execs who brought this mess on?

    You posts show you side with the blood suckers.

    I still think Obama made a huge mistake bringing two Friedman neocons on board like Summer and Geithner. These appointments must have something to do with his days at the U. of Chicago. So, I don't trust Obama a hell of lot myself, but trust the wallstreet and banking tycoons even less.

    To sum things up, working Americans are screwed. If the vote rethug, well, we know what that got us. If Americans vote democrat, we still bail out the rich and let the working class suffer, just a little less is all.

    Posted by Wolfgang1 at 04/17/2009 @ 09:15am

35. Sort of like...

    "The fundamentals of our economy are strong"--Sen. John McCain????

    Posted by Mask at 04/16/2009 @ 11:45am

    Hey Mask,

    I haven't seen a comment from you mocking Obama and his administration for claiming the fundamentals are strong.

    WASHINGTON -- The economy is fundamentally sound despite the temporary "mess" it's in, the White House said Sunday in the kind of upbeat assessment that Barack Obama had mocked as a presidential candidate During the fall campaign, Obama relentlessly criticized his Republican opponent, Sen. John McCain, for declaring, "The fundamentals of our economy are strong."

    But on Sunday, that optimistic message came from economic adviser Christina Romer. When asked during an appearance on NBC's "Meet the Press" if the fundamentals of the economy were sound, she replied: "Of course they are sound."

    "The fundamentals are sound in the sense that the American workers are sound, we have a good capital stock, we have good technology," she said. "We know that -- that temporarily we're in a mess, right? We've seen huge job loss, we've seen very large falls in GDP. So certainly in the short run we're in a -- in a bad situation."

    During the fall campaign, Obama relentlessly criticized his Republican opponent, Sen. John McCain, for declaring, "The fundamentals of our economy are strong." Obama's team painted the veteran senator as out of touch and failing to grasp the challenges facing the country.

    "If we are keeping focused on all the fundamentally sound aspects of our economy, all the outstanding companies, workers, all the innovation and dynamism in this economy, then we're going to get through this," Obama said, striking a tone that his top aides mimicked.

    http://tinyurl.com/cqbzw7

    Posted by antisocialist at 04/18/2009 @ 2:01pm