Goldman Sachs (GS) issued $5 billion dollars of common stock on April 14, 2009. Further, GS says it wants to use these proceeds and part of its cash hoard to pay back the $10 billion dollar TARP investment. This common stock offering and the GS's repayment of TARP is good news for U.S. taxpayers.
The Congressional Oversight Panel’s February 6, 2009, report on page 1-10 argues that the present value of the U.S. government’s $10 billion investment in Goldman Sachs was worth $6.8 to $8.2 billion on the day the funds were passed out. That was a $3.2 to $1.8 billion subsidy according to that study. Joint work by Wendy Yan Wu and myself, “Common (Stock) Sense about Risk-Shifting and Bank Bailouts,” and solo work, “Debt Overhang and Bank Bailouts,” suggests that $1 of subsidy on a preferred stock recapitalization is equivalent in terms of incentives to $1 of new common stock issued.
Thus, the Goldman Sachs' seasoned equity offering is a “win-win” for U.S. taxpayers:
- First, if GS pays back TARP, taxpayers get paid back in full and recover most of the subsidy that they offered Goldman. (Yet, since market prices change every day, a new valuation would have to be done at the day the TARP funds are paid back to see how much of that subsidy would be recovered by GS returning the $10 billion TARP investment.)
- Second, taxpayers benefit by the improved incentives at Goldman Sachs. $5 billion of new common stock will make it less likely that Goldman will shift losses onto taxpayers and creditors than a $3.2 to $1.8 billion TARP subsidy. (Because the Fed and Treasury appear to believe that Goldman Sachs is "too-big-to-fail," taxpayers are on the hook if GS doesn't have enough capital.)
Nevertheless, I had hoped that Goldman Sachs would have tried to raise $10 billion dollars in new common equity as a symbolic gesture, which would have been even better news for U.S. taxpayers, but possibly not GS shareholders.
Disclosure: I invest in broad-based index funds. I do not own nor do I have any short positions on any individual securities issued by Goldman Sachs.
