Tuesday, April 14, 2009

Goldman Would Use Share Sale to Return Bailout Money

. Tuesday, April 14, 2009

By stockOzone team

Six months after accepting a financial lifeline from Washington, a newly profitable Goldman Sachs is pushing to return the billions of taxpayer dollars that it received in an effort to extricate itself from heightened government control.

Goldman, which rode out the final, tumultuous months of 2008 with the help of a federal rescue, reported strong quarterly profits on Monday and said that it would seek to raise money in the capital markets to repay the government.

If successful, Goldman would become the first major bank to return funds received under the Troubled Asset Relief Program, or TARP. Such a step would probably enable Goldman — long one of the most lucrative places to work on Wall Street — to free itself from government-imposed restrictions on compensation.

Many analysts welcomed the news as the latest in a series of signs that the financial industry is stabilizing. But others warned of a looming divide between a handful of banks like Goldman, which may be strong enough to return their TARP money, and the many others that are too weak to go without government funds.

It is unclear how quickly Goldman, which was also a beneficiary of a separate government rescue of the American International Group, might be allowed to return the $10 billion it accepted last October.

In a conference call Tuesday morning, Goldman’s chief financial officer, David A. Viniar, said Goldman never viewed the taxpayer money as long-term capital.

“We view it as our duty to return the funds as long as we can do it without negatively impacting our financial profile,” Mr. Viniar said.

While Goldman’s latest results bolster its case for untangling itself from TARP, federal regulators are nonetheless concerned about the health of the broader financial industry and the implications such a move might have for other institutions. Goldman is not allowed to return the money without the approval of the Treasury and the Federal Reserve, which both declined to comment on Monday.

“The issue is really, will the government give Goldman special dispensation to get out first?” said Brad Hintz, an analyst at Sanford C. Bernstein. “Goldman can walk the halls of Congress waving a check, but is it in the best interest of the marketplace for them to pay it back?”

Goldman indicated in early February that it would seek to repay the funds, and since then, several other banks have said they would like to do the same. Not all banks, however, are likely to bounce back as quickly as Goldman, despite expectations that other banks will report strong results for the first quarter.

Goldman announced profits of $1.66 billion in the quarter or $3.39 a share, marking a strong comeback from a loss in late 2008. Goldman’s profit was propelled by record revenues of $6.56 billion in its fixed income, currency and commodities unit, where mortgage and other credit instruments are traded. Over all, Goldman’s revenues were $9.43 billion, up 13 percent from the first quarter a year ago.

Mr. Viniar said Tuesday morning that the bank was able to generate much of its revenues by trading “plain vanilla” investments. Margins were higher-than usual, he said, in part because of the disappearance of some of Goldman’s former competitors, like Bear Stearns and Lehman Brothers.

“Many of our traditional competitors have retreated from the marketplace,” Mr. Viniar said.

Goldman reported its results a day ahead of schedule, setting a positive tone for a slew of other bank results expected in the coming week. While several small banks have returned TARP money, Goldman so far is alone among large institutions.

Last Tuesday, Lloyd C. Blankfein, Goldman’s chief executive, visited Washington to speak before an industry conference, and to meet with Treasury Secretary Timothy F. Geithner. Though rumors have swirled about Goldman’s payback, it was only last week in that meeting that Mr. Blankfein formally asked to return the money and detailed his plan to raise more private capital. Goldman said on Monday that it would seek to raise $5 billion by selling new common stock and use the proceeds, along with other funds, to repay the government.

The amount Goldman owes will be higher than the $10 billion because of warrants that the government was granted that must be valued by an independent firm. Goldman said in a statement on Monday that returning the TARP money depends on the results of a stress test that federal bank examiners are in the process of evaluating for Goldman and other big banks.

Goldman did not address the bonds that it issued with government backing last fall.

While Goldman reported a strong first quarter, it also reported a loss of $1 billion in the month of December, underscoring how quickly its fortunes can change. That month was reported on its own because Goldman is changing the timing of its fiscal year by a month, to match the calendar year. The loss was in part related to write-downs on high-yield bonds, as well as deterioration in real estate.

Goldman did not detail its reasons for wanting to return the TARP money, but Mr. Viniar addressed the topic at a conference in early February.

“We just think that operating our business without the government capital would be an easier thing to do,” Mr. Viniar said. “We’d be under less scrutiny, and under less pressure. Not that we’d be out of the public eye; we’re still going to be in the public eye.”

Since then, the government added new requirements for companies that accepted taxpayer money, including stronger rules about bonuses. In a speech last week, Mr. Blankfein criticized one of the other new rules, which centered on visas issued by banks for foreign workers.

The capital markets have been virtually dead for months, so it is unclear how Goldman’s stock offering will fare. Only two companies — HSBC, the big British bank, and Xstrata, a mining company — have issued more than $5 billion in equity this year, without government backing, according to Dealogic.

Some analysts were skeptical about Goldman’s intention to return the money. “If you look at most of the conditions in place that forced TARP onto the banks, those conditions have not changed,” said Roger Freeman, an analyst with Barclays Capital. Since the end of November, Goldman had reduced the number of its employees by more than 2,000, to 27,898, according to the statement. In the last year, the bank has cut 4,000 jobs.

“Given the difficult market conditions, we are pleased with this quarter’s performance,” Mr. Blankfein said in the release. “Our results reflect the strength and diversity of our client franchise, the resilience of our business model and the dedication and focus of our people.”

Disclosure: Author does not own any of the stocks discussed here.

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