In October 1929, the Goldman Sachs Trading Corporation was on its last legs, having suffered from the investment trusts’ holdings in other similar NYSE trusts and from using whatever cash it had left to buy huge blocks of its own shares in a hopeless attempt to support the daily quote. What J.K. Galbraith later called “a form of fiscal self-immolation.” Goldman, Sachs & Co. went on to survive the 1929 crash, but the namesake trading corp. would not.
The lessons of 1929 are multifaceted, and I, without a doubt, haven’t found a unique angle to that moment in history. What I do know is that some amount of transparency and oversight may well have prevented the 1929 stock market crash, and that a small dose of oversight would have certainly prevented the bankruptcy of Lehman Brothers in 2008. Perhaps avoiding some of the economic pain that the world is experiencing today.
“Operating our business without the government capital would be an easier thing to do,” said David Viniar, Goldman’s chief financial officer. “We’d be under less scrutiny and under less pressure.”
(Note to file: Now is probably the worst time in the modern history of the capital markets to be advocating less scrutiny.)
With the news of their unexpectedly profitable quarter, Goldman Sachs is going to be launching a US$5 billion stock offering. One has to wonder if the surprise profit has anything to do with the relaxation of the mark-to-market rules?
Use of proceeds for the US$5 billion equity offering? Pay off part of the US$10 billion TARP funding. Cost? 8% dilution to current shareholders. Rationale? Without TARP funding, Goldman would have no constraints on executive compensation.
As a business, Goldman Sachs should be run for its shareholders, a group of which includes yours truly. If our current liquidity is in excess of US$100 billion, for the life of me I don’t know why we need the additional US$10 billion of TARP funds to run our business. If the idea is to pressure the U.S. Treasury into taking back its TARP capital by launching an equity offering, what does the additional US$5 billion get us if we are already extremely well-capitalized?
Could there be anything more silly than raising US$5 billion to pay back the government money that we don’t currently need in any event? And if we don’t need the capital, although the thought of having too much cash is foreign in these times, why dilute the rest of us with this rumored equity offering? We’ve ridden the shares from US$200 to US$47 in less than a year. As we enjoy this current updraft in the stock, why reward our patience with unnecessary dilution?
Mr. Blankfein, we don’t own an investment bank any longer. GS is now what’s called a “Commercial Bank”. The rules are different (at least until GS applies to rid itself of that Charter, too). Third-party scrutiny and regulatory pressure are the lifeblood of any successful banking system. Get used to it.
Ridding Goldman of the TARP ball and chain is just window dressing so long as we remain a bank. The game has changed. Scrutiny, rather than excess leverage, is your new mistress.
Disclosure - I own GS and GS sub debt