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Goldman Sachs Tells Uncle Sam Go Away!!

Posted by Larry Doyle on March 25, 2009 9:46 AM |

Like it or not, Goldman Sachs is widely considered to be the preeminent risk manager in the world. I would never blanketly endorse Goldman Sachs nor every one of their transactions or employees. Anything but. I am sure Goldman, like every institution in every industry, has some bad apples who will and have made some bad, if not outright illegal, moves. If so, the proper regulatory authorities should address, investigate, and if need be prosecute. I am here to write on a different topic. Goldman Sachs does not want Uncle Sam as a business partner. Whether Goldman wanted government money last Fall via the TARP (Troubled Asset Recovery Program) or not, the firm very clearly wants to return those funds soon.

Goldman Sachs is currently working with government officials to return $10 billion in TARP funds by late April. The firm will look to make this return after the U.S. Treasury completes its first round of bank stress tests. Other smaller banking institutions are looking to do the same.

Why would Goldman or others want to return what is widely considered to be very cheap money? Very simply, the price of that money is not merely the borrowing rate of 5%. The real risk with this money is embedded in the counterparty risk. Where is counterparty risk in dealing with Uncle Sam? In overly simplistic terms, the counterparty risk can be personalized in the names of Barack Obama, Joe Biden, Tim Geithner, Chris Dodd, Barney Frank, Nancy Pelosi, and Harry Reid. These leaders of the administration and Congress present real and unknown legislative risks for Goldman and every other TARP participant.

Current TARP rules require Goldman to replace TARP funds by raising common or preferred equity capital or via their own resources. What would be the price of that capital in the market today? Good question. One of the last major private capital injections into a Wall Street firm, actually Goldman Sachs, came from Warren Buffett in the form of a 10% preferred equity investment. That transaction occurred last Fall. The markets and economy have only worsened since then. Could Goldman or any other firm raise 10% preferred money right now? Who knows.

What Goldman is indicating, though, is that the counterparty risk in this Washington relationship is not worth the 5% savings on this money. In layman’s terms, Goldman views the risk to their firm of doing business with our government as being greater than $500 million!!!


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