Post-TARP Possibilities for Goldman Sachs

Ever since the U.S. government forced the top American banking institutions to take TARP money to prevent a total collapse of the banking industry, many have shifted focus to Goldman Sachs (GS) and the company’s next move with this cash. In October, Goldman was forced to take $10 billion of the TARP money. Top executives at Goldman spoke out about taking money, insisting that they did not need any assistance, but graciously accepted the government’s money to appease regulators and the markets.

In February, Goldman was quick to state that it is looking to pay back the $10 billion back to the government as soon as it can. Although Goldman had approximately $122 billion worth of cash and cash equivalents on its balance sheet as of November 28th, it won’t be able to pay the government back immediately. The government set up strict stipulations to make sure that if a bank chooses to pay back the money, it is truly healthy and capable of doing so. So in Goldman’s case, the only way it can pay the injection back is by raising its Tier 1 capital. Goldman is already working on raising its current Tier 1 capital ratio of 15.6% by potentially selling 5-20% of its stake in Industrial & Commercial Bank of China Ltd, a deal which could bring in over $1 billion.

Many are speculating that Goldman may choose to return to a partnership structure, similar to the structure it had in place before its IPO in 1999. Executives have spoken out against the partnership move, as it is not in the best interests of the company. One reason that Goldman executives dislike this idea is because partners within the firm retire and then take the firm’s capital with them.

At The Wall Street Journal’s Future of Finance initiative, Goldman’s President Gary Cohn spoke about Goldman’s business model. He and other top executives are satisfied with their current businesses. These businesses include investment banking, where the company underwrites securities and provides merger advice, and trading operations. Many firms used to operate with almost exactly the same model like Lehman Brothers, Bear Stearns, Merrill Lynch and Morgan Stanley (MS). Every bank except Morgan Stanley are now gone due to bankruptcies and/or mergers in the industry. Morgan Stanley has moved quickly to diversify away from its old business model. In January, Morgan Stanley moved boldly to get into the brokerage realm by entering into a joint venture with Citigroup’s Smith Barney division.

Both Cohn and Lloyd Blankfein, Goldman Sachs’ CEO, have defended this decision to keep the business model intact. At the WSJ initiative, Cohn stated: “Wall Street is not over. Wall Street is alive and well…” Although it has changed the company’s status to a bank holding company, it hasn’t moved that quickly in trying to acquire deposits. Many believe that when the company changed the structure back in late 2008, that it was going to acquire a mid-to large cap bank. One reason as to why Goldman has elected to not acquire a bank is because the traditional money center bank structure is less profitable than Goldman’s fee and deal based revenue structure. Another reason it has elected not to acquire or merge with another bank is because of the difficulty in merging corporate cultures.

So when will Goldman Sachs pay back their money? My guess is that they will pay it back within the next two months. Sources have confirmed that they will likely start holding meetings with Treasury officials this week to talk about the payback. According to the New York Times, Goldman officials have also held private meetings with Barney Frank, the chairman of the House Financial Services Committee, about the situation. If all goes according to Goldman’s plan, they could end up paying the money back with their monstrous cash position in a month.

One issue that regulators will consider is the effect of the payback on the rest of the industry. If Goldman is given permission to pay back the TARP money, what would that say about other banks? It will likely make them look bad and send a message to investors that they actually need that money to operate.

If Goldman is given the go-ahead to payback the TARP money, it will only jump further ahead of its competitors. This is because it will be able to attract the best talent that is available on the street. All other banks would be operating under the strict regulations which come along with borrowing from the government. Because of the capped pay from the TARP money, many executives may seek to join Goldman. This will only solidify Goldman’s position on the street and clients will flock to the company for its advice.

-Steve Murray

Disclosure: The Fund the author is associated with is long GS.

Comments

[drbob66:]

I'm confused. If their business model has not changed at all (and they don't intend to change it any time soon), why did they change the company status to a "bank holding company."?

Apr 01 05:54 PM

[kmf:]

What about the 12-13 billion they got from the govt. via AIG. The govt. made them whole on their positions with AIG just like many other domestic and foreign institutions. They became a bank holding company and received even more benefits from the govt. How long before they opt out of being a bank holding company. Now they want out because their trading position has improved thereby gaining a huge advantage over their competitors. Nobody has ever said that GS is dumb! If they get away with this I think GS will be a huge buy.

Apr 14 05:27 PM