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.