Why Shouldn't Goldman Sachs Repay Their TARP Money?

Pigs are flying today. People are upset about someone paying back a government loan.

Goldman Sach's (GS) plan to raise private equity and repay their TARP borrowings has a bunch of undies in a bunch. Felix Salmon at Reuters and John Carney at Clusterstock both seem aggrieved at the turn of events. Their argument seems to center on the argument that financial firms need to be forced to become smaller and that this equity offering will somehow thwart that eventuality.

I happen to agree with the premise that we could do with smaller, less complex financial institutions. I don’t, however, see how Goldman’s offering has anything to do with whether or not that occurs. Both Salmon and Carney somehow conflate Goldman selling stock to capitulation to the maintenance of the financial services industry status quo. The connection escapes me.

Salmon sees the sale of the stock as “…part of the problem, not part of the solution,” and Carney thinks that:

…those considering buying into the Goldman offering should at least be put on notice that future financial regulations may include caps on the size of a business such as Goldman and may intentionally reduce the profitability of the firm by reducing the amount and type of risk it may take on.

I suspect that most buyers are well aware of the risks that they’re entering into with any purchase of Goldman stock. If they want to assume that risk then so be it. I do doubt the usefulness of including media speculation as to the future course of public policy as required disclosure in stock prospectuses.

Realistically, any significant change to the country’s financial system is going to evolve over a fairly long period of time. Few experts even argue that major changes should be undertaken in the middle of this crisis. Stability is the goal at this point in time not change that engenders even more uncertainty. It’s likely that most if not all TARP money will have been returned to the government before any meaningful restructuring is finalized.

So by all means, let businesses tap the equity markets and pay us back. Lord knows we have other uses for the money. And, wasn’t it supposed to be a good sign when private investors were willing to take a flyer on the financial companies?

Comments

[ArkansasAngie:]

I don't have a problem with your thoughts at all.

I'm a little worried this means that the PPIP funds will be drawn instead.

I guess I'll watching to see who's willing to put equity into them for a better deal than TARP funds. Here I'm wondering if PPIP profits aren't just a tad bit too generous.

Speaking as a tasxpayer, that nonrecourse loan part bother me.

Apr 13 04:35 PM

[jstratt:]

It seems to me that the Government ought to be deciding when they sell their preferred shares in GS.

If the government owned GS that might be the case. Unfortunately GS owns the government. At least when it comes to financial matters.

GS knows that taxpayers and legislators want pay and financial restrictions going forward and want out of TARP asap. They usually get their way.

Apr 13 05:11 PM

[DonFurio:]

This is great news, and it just shows you that unlike the autos, the $ sent to the banks will get paid back so people need to stop whining. The gov't is collecting a %5 return in the mean time..

Apr 13 05:58 PM

[dcb:]

It may be my paranoia, but I am convinced that company is manipulating the markets. There was the crazy drop off traight down to shake out people, then this huge run up. I learned they are big in quanf funds from tyler durden, and the behavior from that end has been looking funny to me since the drop off started. How much of the money is from AIG regarding their announced profit. now they are selling new equity. We aint in Kansas anymore I think

Apr 13 06:39 PM

[schlumpf:]

Repay Their TARP ???
Sure??
Maybe they dont pass the stress test.

Apr 13 06:40 PM

[Alan Young:]

"value talent and skill over entitlement." Sweet-- like populating 2/3 of the highest-ranking government financial-policy positions with your alumni is all about talent, and not entitlement. Like I'm sure ex-Goldman CEO Hank Paulson was completely unbiased when deciding to consult Goldman about which banks to bail out and which one to consign to bankruptcy.
I know, one shouldn't feed the troll, but that line was too rich to let pass.

Apr 13 07:28 PM

[Alex S. Gabor:]

The Penny King says, "Don't give Goldman another penny!"

www.associatedcontent....

Apr 13 09:12 PM

[dcb:]

I don't understand why the street is excited about goldman's profits. if you cut out the Aig money they lost a huge amount.

I postulated they hand a hand in the markets manipulation, and the equity sale is as good a motive as any. I was wondering about behavior of quant funds, and tyler duden mentions Goldman has greatly increased quant trading. If a smuck like me noticed something is up on the quant side, then it gets confirmed by someone who appears to know their stuff (Durden). Then why isn't a real issue.

If it was the other way around I think you could really question my view. But goldman then equity sale. quant, then goldman role. there also was a big article about return of quants in FT.

I make sure when I trade I trade along with what the quants are doing, because they are doing a good portion of the trading so what they say goes. Therefore, what goldman says goes. DUH

Watch the trading patterns of the S&P, look at the spikes. look at how regular they are at certain times. they direct the market.

Apr 13 10:34 PM

[FreeMktFailure:]

Money set aside for future pay in 1Q, $4.7 billion. Money Goldman is planning on raising in the equity offering, $5 billion. Ouch, these guys are real a-holes. Good thing it was Goldman and their bets payed off with all the risk they were taking. Will be unfortunate when it is Bank of America and Citi and every other envious and inferior bank, and they blow up, again, with our money, again.

Oh those guys at Goldman are so smart! The government can't blatantly retain control of them, that'd be like socialism or something! It's probably better that we let their greed and hubris serve as an example for the rest of the banks, the ones who f'ed up last time. They always seem to be one step behind Goldman. Now they've got to race to get out of TARP, God help us all.

Apr 13 10:48 PM

[CitizenPat:]

It's not Goldman’s size that’s really the issue, it’s their business model that will likely be legislated or regulated into oblivion. The real question is, do we really want publicly traded hedge funds? (Let’s face it, that’s what GS is.) Especially ones that hide behind a bank charter, which implies something altogether different from a hedge fund.

Goldman’s bread and butter is trading and investment banking, the latter of which is on hiatus for God knows how long. So, shareholders of GS are basically just buying a trading desk. GS is the antithesis of the type of financial services firm we want in the future. We need to purge the financial system of the casino activities that have done so much harm, and GS is exactly what needs to be purged. We need to return to a financial system in which the players are long-term investors who are interested in participating in the capitalist system via stock ownership. Anyone interested in doing that has been completely thwarted by the likes of Goldman for at least 10 years now. The stock market wasn’t created with the intention of using the public as pawns in some kind of trading scheme. Goldman and other market manipulators must be shown the door if we are to ever restore trust in the stock market.

Apr 13 11:16 PM

[MiddleOfRoader:]

Once Goldman and other financial companies capable of repaying the TARP money do repay, there will be a stigma for still having TARP money. The shorts will know who to zero in on and it will be open season, sort of like shooting fish in a barrel.

Apr 14 12:15 AM

[Fighting Yoda:]

Goldman has simply looted money from treasury via AIG, of course Goldman is ready to pay back TARP, so it can screw the tax payers with impunity with PPIF.

Goldman is the evil empire, it must be destroyed.

Apr 14 01:18 AM

[Allan Frain:]

GS' business model works best in the dark. That's why they will pay back TARP and sue blogging sites that peer into their operations.

Apr 14 10:32 AM