Sunday, April 5, 2009

Why Goldman Sachs Is In A Hurry To Pay Back TARP Money?

. Sunday, April 5, 2009

By stockOzone team

It seems that Goldman Sachs is in a great hurry to pay back taxpayer’s money. According to London Telegraph, Goldman Sachs (NYSE: GS), which will report its first-quarter results on April 14, is expected to announce on the same day that it is to submit a formal application to repay the sum given to it as soon as it passes the formal “stress test” being conducted by US government on all bailout recipients. It is being said that Goldman Sachs may try to raise money by a new share sale, though it still is quite unlikely.

Goldman Sachs received $10 billion as federal loan under US Treasury's troubled asset relief plan in October last year after it converted into a bank holding company.

The company has already privately held talks with Barney Frank, the Democratic chairman of the House Financial Services committee, on the matter.

Last month, the Wall Street Journal reported that the company is looking to sell part of its 4.9% stake in Industrial and Commercial Bank of China in order to raise money. Based on ICBC's market capitalization of about $178 billion, the stake works out to be worth around $8.5 billion.

Earlier, CEO Blankfein had suggested that the Bank would pay back the government loan by the end of the year.

What really explains the sudden change of heart? Well there are several reasons.

Officials at Goldman Sachs are particularly upset at public outcry following AIG disclosure last month that Goldman Sachs was the largest recipient of its bailout money.Moreover, by paying back the TARP money, the company is also seeking to avoid the restrictions which are being imposed on TARP recipients. CFO David Viniar said in February that running the company without TARP money “would be an easier thing to do.” A Legislation passed by the House of Representatives recently would impose a 90 percent tax on bonuses for employees with income of $250,000 at banks that received $5 billion or more in federal aid. The company is known for paying astronomical salaries- CEO Blankfein was paid $60 million in cash and stocks in 2007.

The firm's reputation has taken a hit in last few months amid allegations that ex-Treasury Secretary Henry Paulson and current Treasury Secretary Timothy Geithner crafted policy that benefitted Goldman Sachs. So much so, that at a House banking hearing on Tuesday, Rep. Maxine Waters of California asked Treasury Secretary Timothy Geithner about his connections to Goldman Sachs. Repayment of government loan would be thus a great PR exercise.

Above all, the company wants to send a strong signal to the market that it is better positioned than most of its competitors. The company is currently sitting on a cash pile of $100 million, and hence, returning $10 billion would be a big deal for the company. However, it is still unclear whether it will be allowed by regulators to return money; as such a move may exert pressure on other bailout recipients.

So far, five smaller American banks have repaid millions of dollars of emergency aid, while bigger banks are soon expected to follow the suit. Though few like J.P Morgan (NYSE: JPM) have expressed desire to pay back TARP fund as soon as possible, others like Citigroup (NYSE: C) are not in a position to return money soon.

Goldman Sachs rose $58.18 or 4.53% to close at $119.40 on Friday.

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

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