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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!!!


  • fiscalliberal

    I view this as excellent news. Let us hope that doing business with the govenment comes with accountability factors that makes these people uncomfortable. Let us remember it is the Investment banks that tanked this economy because they were unable to manage risk. So, why should we consider these guy’s paragons of virtue. The problem was Hank Paulson who might have forced them in, thats AIG’s story, who knows the real facts. The fact of the matter is the investment community did not have the risk systems in place to mnanage their own industry. Now we shall see what their own industry thinks of their management capability. If they get cheap private money – good for them.

    I was extreemly happy when Barney Frank said, if you do not like the rules, give the money back. As a tax payer, I would like to see all of them turn their money back. We know the TARP money’s intention was to start credit. That has not happened.

    In a certain sense we might surmize that those who do not turn it back, might be in trouble and need some rules. Also I want to know about them, so I can stay away from them.

    Regarding yesterdays testimony before the House, I came away with being more comfortable with Bernancke and less comfortable with Geitner. I was willing to give Geitner the benefit of the doubt, but no longer. He seems to have this Wall Street elitest attitude and should not be trusted.

    It was interesting yesterday in that Maxine Waters went after the Goldman connection to all the decisions. Geitner got indignant, but did not effectively refute the concern the possible connection. Waters has a legitimate line of questions, I have heard bankers being interviewed on CNBC saying the fact that Goldman was in the room regarding Bear Stearns and AIG was highly irregular.

    • Margaret

      What we need to do is “End the Fed” in it’s current form and cut the private banking cartel out of earning interest on 100% of money that only 10% or less exists except on paper to begin with. THIS is what causes inflation – devaluation of the dollar, NOT rising prices as we are lead to believe. Government issued interest free treasury notes cuts out the middleman and their profit. Of course at least 2 president’s lost part of their head (literally) for implementing just this type of system. So who do you think is REALLY in control under the current Oligarchy? These blights on humanity must be reined in once and for all and eliminated if they won’t go gracefully. They must be cut off like a drunk at an open bar……

  • Larry Doyle

    I think th eproblem that GS, JPM, or anybody else has with the govt is the possibility of changing the rules or terms of the trade after it has occurred.

    Bankers by nature assess a transaction’s terms, price it accordingly, and either determine they want to enter into it or not. When terms are changed or can potentially be changed, then the risk grows and is repriced.

    There is no doubt that FRANCHISE-sized risks were taken and totally mispriced and misunderstood. For those entities ( Citi, AIG to start) there should be no qualms or concerns with what your majority shareholder wants to do.

    In regard to Frank, the initial terms of the TARP money came with penalties for early return. An early return is still not necessarily without cost, although, I think it will be subject to passing the stress test.

    • fiscalliberal

      In one of the hearings, I remember Frank said that in the stimulus bill they removed the return restrictions exept for interest. In a way, I like the bankers being nervous of changing terms. That incentivizes them to give the money back.

      I still like the idea that those that do not psy it back being suspect of being in trouble. A bankrupcy also is a sign of weakness, It is the way of the free market so we inverstors can make appropriate decisions.

      As I go to the bank for CD’s or interest on my money, I am getting a low rate. Some of this is because the government is funding these poor performers. With less government involvement, possibly I can expect a better interest rate. As Merideth says, there are a lot of good small banks out there. Lets let the free market work.

  • Larry Doyle

    I understand and appreciate your point, but there is a chance that the risk grows. How could that happen? An entity that should keep the capital to manage their company may actually try to return it to elude the government oversight.

    I accept the fact that it is good the banks feel uncomfortable about the govt presence but there are unknown costs as well.

    Ultimately what we need are strong regulators with real teeth doing their job.

  • Margaret

    They are all criminals and should be tried, convicted and executed for treason. Then all of their assests seized and returned to the American citizenry they stole it from. Geitner and company should head this list. That’s what sytematically destroying a country is pure and simple – TREASON and we should rid our nation of these sociopaths once and for all.

    • Margaret

      Financial terrorists should be added to the current DOMESTIC TERRORIST list. They are the GREATEST danger this country faces yet mainstream media (owned by some of these same entities) will NEVER keep this information front and center where it belongs until someone cries uncle. They can pressure some dolt about his sex life until he slithers away why aren’t we doing the same with these criminals?

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