Taxpayers did OK on Goldman, Buffett did better

July 22, 2009

UPDATED 3:25PM

NEW YORK, July 22 (Reuters) – Tim Geithner deserves a pat on the back, Hank Paulson a kick in the rear.

Goldman Sachs has announced the redemption of its TARP warrants for $1.1 billion. Including dividends, taxpayers will have made a 23 percent annualized return on their TARP investment in the firm. That’s not bad considering the great terms Goldman received when Paulson issued the warrants in the first place.

Compare the terms to those Warren Buffett received when Berkshire Hathaway made a similar preferred investment in Goldman. We got a 5 percent dividend yield. Buffett got 10 percent. We were able to redeem our preferred shares for only 100 percent of their par value. Buffet can redeem his for 110 percent.  The strike price on Buffett’s warrants is $115, the strike price on ours is $122.90.

In the end we made a 23 percent annualized return while, according to Linus Wilson, assistant professor of finance at the University of Louisiana at Lafayette, Buffett’s annualized return through July 13 was 105 percent.

Despite the poor terms, we actually did OK. According to Wilson, the deal for Goldman warrants “is the best one taxpayers have gotten to date.”  Previous warrant redemptions haven’t been very favorable for taxpayers. Here we at least got fair market value.

While it’s good news that Goldman has paid back TARP, taxpayers shouldn’t be fooled into believing that the bank is operating free of public support.

The bank has borrowed $28 billion at below-market interest rates courtesy of FDIC’s debt guarantee program; it received $13 billion directly from taxpayers to make good on AIG investment guarantees; and then there’s the various emergency lending facilities provided by the Federal Reserve to which Goldman still has access.

And these are just the explicit forms of support that Goldman gets. As a “too-big-to-fail” bank, all of its private obligations carry an implicit taxpayer guarantee.

Because taxpayers continue to insure Goldman’s liabilities, we need a greater degree of control over the firm’s assets. Hopefully regulators exercise this control and exorcise the bank’s high-risk trading business.

If Goldman guys want to keep running their hedge fund, they should do it somewhere else — not within a federally insured institution.

Comments

Soo… if you’re against bailouts, shouldn’t you in some way hope the gov’t LOSES money on the bailouts?

Posted by Andrew | Report as abusive
 

Not sure what you mean. My point is that once we’re in, I want to be adequately compensated. Take deposit insurance….as long as it’s being provided, banks should be forced to pay up on their insurance premiums. We need to charge appropriate fees for the use of our balance sheet. Otherwise we’re providing a subsidy.

Posted by Rolfe Winkler | Report as abusive
 

Point being that if the gov’t actually shows a profit doing this sort of stuff, then its more likely to do it in the future, not less.

The money’s gone regardless of the outcome. They’ve already held the gun to the taxpayer head and lifted our wallets, and then shown that any hope of the TARP paybacks actually being used to wind down the program was unrealistic. Even when all the TARP money is paid back, they’ll plow it into something else rather than end the program.

If the gov’t profits from TARP, what we’ll have actually seen is the creation of the first US sovereign investment fund and not a financial bailout.

I’d rather see the program go down in flames and leave a bad taste in the mouths of people and politicians alike. The tax payer would probably get a better return on their money to lose on the TARP funds than suffer the gov’t being intoxicated with “success” and start wallowing around in the economy with a new investment fund like a walrus on the beach during mating season.

Posted by Andrew | Report as abusive
 

I don’t worry as much about that. If the government is making money on this, then private market players won’t want to be involved. The only reason they’re participating in the bailout programs (the only reason that policymakers give to justify them) is because the bailouts are cheaper than private funding sources.

I hear your point about TARP becoming permanent. Already Geithner is recycling funds. That’s certainly problematic. It wouldn’t be an issue if he was charging a premium for his money relative to the market, though. Then banks wouldn’t take it.

Posted by Rolfe Winkler | Report as abusive
 

Rolfe, I am curious as to why the term ‘windfall profits’ has not entered the discussion considering that the funds are obtained below a true market clearing price and are backed by a government backstop – oh yeah, let us not forgot about the VAR exemption they obtained from the SEC.

I do not view GS as any more altruistic or virtous than Exxon or Conoco.

Posted by Reje | Report as abusive
 

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