Goldman Should Give It All Back

Posted by: Matthew Goldstein on April 14

If Goldman Sachs CEO Lloyd Blankfein wants to put his money where his mouth is, he won’t stop with just giving back the $10 billion in federal bailout money the investment firm got last autumn. He’ll also offer to return some of the $13 billion it got from the government by way of the AIG bailout.

Goldman’s decision to sell shares and raise the necessary cash to repay the government is being seen by some as a show of strength. That’s especially so after the firm posted a better than expected first quarter profit of $1.81 billion—largely driven by its proprietary trading desk. That’s the same group of bond and commodity traders responsible for much for Goldman’s outsized profits during the credit boom. So everything old is new again at Goldman. Right?

But more than anything, the move to repay the TARP money is being motivated by Blankfein’s desire to free his firm of all those nettlesome government mandates on executive compensation and bonuses. Now there’s nothing wrong with Goldman giving back the TARP money if it really doesn’t need it. After all, government officials have always said they expected the banks to repay Treasury at some point.

Still, if Blankfein really wants to help US taxpayers out, he can go the extra mile and give back some of that AIG money the firm got too. If the government had allowed AIG to file for bankruptcy, Goldman likley would have incurred an even bigger fourth quarter loss than it reported. So, Blankfein owes a bit of gratitude to Uncle Sam. And as our BW Unstructured Finance colleague Roben Farzad pointed out on CNBC on March 27, Blankfein can thank taxpayers by forking over its AIG largess.

Now we know Goldman will object that the AIG bailout money is different from TARP. The firm will argue that the dollars that passed through AIG was nothing more than money it was owed on all those credit default swaps it had purchased to insure some of its portfolio of collateralized debt obligations. In Goldman’s world, all the government was doing was allowing AIG to live up to its contractual agreements.

But, as we have seen in this financial crisis, some contracts can be broken. May be it was a smart move for the government to indirectly bailout AIG’s trading partners to prevent a systemic financial collapse. But the government didn’t have to make firms like Goldman completely whole by paying face value for the CDOs that AIG had insured.

If nothing else, may be Goldman should now take the haircut on those CDOs it probably should have at the time of the AIG bailout. It could start then by offering to give some of that $13 billion back too.


Reader Comments

sb

April 14, 2009 11:50 AM

see no reason why goldman should pay for AIG's messup...silly article !!

jw

April 14, 2009 11:56 AM

Nothing but glorified Ponzi all over the financial industry.
Worthless people stealing our money because the are 'too big to fail'.
what a crock.
They should all be on food stamps by now.
Non-productive, worthless pieces of @H$T.
Your gated communities are not going to save you for very much longer.

BG

April 14, 2009 12:12 PM

what was this article trying to prove? no concrete points made.
Goldman rightfully owed that money and shouldn't pay it back.
Spend your time on better research.

Realist

April 14, 2009 12:18 PM

The deceitful crap that has been passed off by MBAs as good business is nothing short of sophisticated theft. Unfortunately this is becoming the norm in business. Stick it to everyone and then call them stupid for not obeying the buyer beware mantra. If we have to have a buyer beware attitude all the time, with every transaction we will have lost the very essence of what made us a great country of people that took pride in their reputations and a job well done. People in general now don't care who they screw or cheat as long as there is at least a thin veneer of deniability and insulation. The code of silence that is becoming pervasive is related more to criminal syndicates that good business organizations. This attitude now pervades government and business. The government workers have not only not been sharing the sacrafice but putting higher taxes on everyone else. This is but one glaring example.

wiseguy

April 14, 2009 12:21 PM

goldman miss-calculated the risks of AIG gone bad - that is why goldman should pay too!

There is a letter today (4/14) in Wall Street Journal from AIG managing director claimining that goldman didn't do anything wrong, and its risk are fully "hedged."

What the "best" and the "brightest" in goldman still doesn't understand is that risk should involve counter-party default. They still seem to cling on the idea that as long as the math model is perfect, there is no risk. What the "brightest" and "best" brains we have!

And the letter also claims that goldman should not take a haricut, and its shareholders should not pay for AIG's mess - implying that the taxpayers should. What a "brilliant" brain indeed.

zedman

April 14, 2009 12:41 PM

AIG had contractual obligations that it was able to meet thanks to government bailout. Good for AIG and its counterparties, but the story ends there. Why do all these types of stories keep making the same useless comments? Either bail out AIG and allow them to satisfy their contracts, or don't bail them out and have counterparties sue them. Where do the "journalists" think the cash was going to go - bonuses?

zedman

April 14, 2009 12:46 PM

@wiseguy - if Goldman miscalulated, then did all the other AIG counterparties. In that case the govt shouldn't have bailed them out. That would have had other implications, but it is one approach. But you can't then come back and say that even though AIG was bailed out Goldman should still pay - that's not logical.
AIG had contractual obligations that it was able to meet thanks to government bailout. Good for AIG and its counterparties, but the story ends there. Why do all these types of stories keep making the same useless comments? Either bail out AIG and allow them to satisfy their contracts, or don't bail them out and have counterparties sue them and possibly go out of business themselves. But you can't have both.
If not used in their daily business activities, what did people think the cash would be used for?

Ricardo

April 15, 2009 09:20 AM

Is BW on a populist propaganda program?

These are very unbalanced reports, with a barely hidden ideological taint.

Bank shareholders have been almost totally dilluted (as they should), and the beneficiaries of the bailout are in the end mostly consumers and the elderly. And the taxpayer, as the alternative would have been a FDIC repayment of depositors of failed institutions.

Another BW example of biased reporting:
Taxing Grandma to Subsidize Goldman Sachs
by* Peter Morici

Justin

April 16, 2009 11:21 AM

Rediculous Article

tim flanagan

April 17, 2009 11:38 AM

I,m all for it, anything that cuts executive pay at Goldman,s must be a
good thing!

miller

April 21, 2009 06:53 AM

Hi,

A very smart and diplomatic answer. It’s really appreciable and generous.

Miller

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BusinessWeek's Adrienne Carter, Jessica Silver-Greenberg, and David Henry deconstruct the mysteries of high finance, Wall Street, and hedge funds for pros and ordinary investors. E-mail them directly if you've got tips about big deals, a hedge fund, or even securities industry gossip.

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