Goldman Sachs Payments to U.S. Give 23% Return to Taxpayers
By Christine Harper
bloomberg.com
July 22 (Bloomberg) -- Goldman Sachs Group Inc.’s repayments to the government of last year’s bailout money, including an agreement today to repay warrants, generated a 23 percent annualized return for U.S. taxpayers.
Goldman Sachs agreed to the Treasury’s request for $1.1 billion to repay warrants the government received when it invested $10 billion in the New York-based firm last October. The payment is in addition to $318 million in preferred dividends.
That 23 percent return compares with the 42 percent surge in Goldman Sachs’s share price since October, and the 5.1 percent gain in the Standard & Poor’s 500 Index. Goldman’s decision follows criticism of the bank by lawmakers who questioned its decision to set aside a record $11.4 billion to pay employees in the first half of the year.
The company’s warrant transaction “was the best deal for taxpayers yet,” said Linus Wilson, a finance professor at the University of Louisiana at Lafayette.
The firm is paying about 98 percent of the warrants’ value, based on Wilson’s use of the Black-Scholes and Merton option pricing models. By contrast, he estimates that BB&T Corp. and U.S. Bancorp have struck deals with Treasury to pay less than 60 percent of the value of their warrants.
Unlike JPMorgan Chase & Co., the second-biggest U.S. bank by assets, Goldman Sachs agreed to pay the full amount sought by Treasury for its warrants. New York-based JPMorgan, which has repaid $25 billion it received from the government, said earlier this month that it couldn’t agree with the government on its warrants’ value, leaving them to be sold in a public auction.
Common Shares
Goldman Sachs could have issued additional common shares to cancel half of its warrants. “They didn’t want to do that for political reasons,” Wilson said. “They didn’t want to drag this process out from a public relations standpoint.”
Goldman Sachs was one of the first nine banks to receive capital from then-Treasury Secretary Henry Paulson in October as the government tried to stabilize the financial system. Last month, Goldman Sachs returned its $10 billion, along with rivals including JPMorgan Chase and Morgan Stanley, enabling the banks to shed restrictions on bonus payments to employees.
The 23 percent annualized return to taxpayers “is reflective of the government’s assistance, which benefited the financial system, our firm and our shareholders,” Chief Executive Officer Lloyd Blankfein, 54, said in a statement. “We are grateful for the government efforts.”
Warren Buffett
Goldman Sachs agreed to sell $5 billion in preferred shares to Warren Buffett’s Berkshire Hathaway Inc. in September, paying 10 percent interest after the bankruptcy of Lehman Brothers Holdings Inc. and the emergency takeover of Merrill Lynch & Co. by Bank of America Corp. Buffett’s deal requires Goldman to pay Berkshire a 10 percent fee if the firm buys back the preferred shares from Berkshire before 2013.
As part of that arrangement, Berkshire also received warrants to buy $5 billion of Goldman Sachs common stock for $115 a share any time in the next four years. Goldman rose 66 cents to $160.46 at 4 p.m. in New York Stock Exchange composite trading today, meaning the warrants would earn a profit for Berkshire of $1.98 billion if Buffett were to cash in now.
Last week, Goldman Sachs said it earned a record $3.44 billion in the second quarter and disclosed that it had set aside $11.4 billion to pay salaries, bonuses and benefits in the first six months of the year. While some lawmakers applauded the firm’s success, others expressed concern that it would be unpalatable to U.S. taxpayers at a time when the economy is still under pressure.
‘Not Happy’
“It’s good that they had a good quarter, but I’m not happy about the whole compensation thing,” Senator Jon Tester, a Montana Democrat on the banking committee, said last week. “They can’t continue along these lines or there will be outrage.”
JPMorgan and Morgan Stanley, which refunded $10 billion, haven’t yet repurchased their warrants.
“We made a bid on the warrants, based on an independent appraisal, which the Treasury turned down,” Joseph Evangelisti, a spokesman at JPMorgan, said in an e-mailed statement on July 10. “According to this process, the Treasury will now be able to auction the warrants in the public market, which will result in the actual market price.”
Evangelisti today declined to comment further.
“The capital infusion has helped drive greater stability in the financial system, private capital has replaced taxpayer investments at many banks, and the taxpayers have gotten a good return on their investment,” Treasury spokesman Andrew Williams said today.
To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.
Last Updated: July 22, 2009 16:19 EDT |
