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Goldman Sachs could be the firm that sets the precedent for how Wall Street deals with the Obama government and how the Obama government deals with Wall Street. As the company prepares to attempt to pay back the funds that it received from the TARP fund, the ease with which it succeeds or fails will likely be the litmus test that defines the struggle between the alleged "Socialism" of Pennsylvania Avenue and the tarnished image of Wall Street and Capitalism. Indeed this epic battle and its outcome could be the one that sets up the way this historic struggle determines the future of America.
Yet, there is no simple way to look at this situation, even for Goldman, as the government set up a deal with the banks that could be very difficult to unwind.
To be sure, multimillionaire and billionaire investment bankers, dressed a' la Gordon Gecko are hardly the heroes of the masses. Yet, as confusing and paradoxical as it may seem, Goldman Sachs, like them or not, are, mostly by default, the Paladdins of Capitalism. And aside from the contrasting images that this may draw, this is the battle of battles.
So what's at stake? How about everything? Especially if you're Goldman Sachs, who took $10 billion from TARP. According to The Wall Street Journal: "Goldman managers have a big incentive to escape the state's clutches. Last year, 953 Goldman employees -- nearly one in 30 -- were paid in excess of $1 million apiece, according to people familiar with the matter. But tight federal restrictions connected to the financial-sector bailout have severely crimped the Wall Street firm's ability to offer such lavish pay this year."
How Goldman ended up taking TARP money in the first place is quirky. According to The Journal: "At a meeting President Barack Obama hosted with bank executives at the White House in late March, Lloyd Blankfein, Goldman's chief executive, argued that banks needed freedom to repay the loans the U.S. forced them to accept in October. Eight large institutions received a total of $165 billion in capital, including $10 billion for Goldman. The pay restrictions were tied to those loans. The banks were told then that everyone had to accept the money so it wouldn't be obvious who needed it most."
But Goldman had reservations. According to The Journal '"Those who could pay it back have an obligation to do so," Mr. Blankfein urged the president, according to attendees. Mr. Blankfein, who was paid $68.5 million in 2007, added that the pay caps and other factors are "going to limit our ability to compete, both here and abroad."'
In fact, Goldman's recently announced profits along with Wells Fargo's better than expected numbers last week are an indication that not all Wall Street firms are in dire straits, at least not to the same degree, making life difficult for the White House which seems to look at things in very broad terms, often in response to its agenda, rather than to how their actions may affect the overall big picture of business.
As The Wall Street Journal points out "The federal government's management of the financial crisis is entering a new phase. The trillions of dollars Washington has committed to help stabilize companies and thaw frozen credit markets have enmeshed the government deep in the affairs of investment banks, insurers and auto companies. Now that stock and bond markets have rebounded a bit, and pressure is easing for some financial firms, the government has to begin deciding how tight a grip to maintain on some companies, and for how long."
If Goldman pays The White House back and it does so early, it could make things difficult for the White House in terms of its political leverage as it pushes for its budget and its related programs, many of which are aimed at "fixing" problems with the way "business" and Wall Street got us into the economic mess.
And how the White House handles this situation, especially with Goldman Sachs, will also affect a significant number of issues. For one thing, according to Open Secrets.org, Goldman Sachs (via its PAC, individuals at the company, and family members) contributed $980,945 to the Obama campaign, making it the second largest donor to the campaign after the University of California. For another, the White House doesn't want to go through the "Socialism vs. Capitalism" thing again, even though there are large groups of tea parties planned from April 15th, and plenty of unhappiness among conservatives with regard to policies. Also important is the fall in popularity of the president in at least one poll, the usually accurate Rasmussen Report presidential tracking poll.
From Goldman's side of the ledger, an early payback to TARP means that it can return to business as usual, at least in terms of how it runs its business and how it pays its executives. Yet, an early payback from Goldman will likely affect what other banks do. As the Journal points out "A handful of smaller banks already have taken steps to repay the government. The U.S. has indicated it won't allow any major banks to do so before the government considers the results of financial "stress tests," which are expected by April 30. The tests measure banks' ability to continue lending through a severe and prolonged economic downturn."
Yet, it's even more complicated that that "because of the technicalities of the loans, it could take months before Goldman or any other big bank that repays will escape the government's clutches."
Furthermore, even if Goldman pays back the TARP money, it's not necessarily out of the deal. According to The Journal: "The U.S. did more than give the banks money. In exchange for the capital, it also received warrants, a security that gives the holder the right to buy common stock at a certain price. Paying back the money doesn't end the government's ability to exercise those warrants and own common stock in the banks. To formally end the government's involvement, the Treasury must sell the warrants back to the bank or to private investors."
Goldman is by no means bullet proof even though it beat earnings expectations, which it pre-announced on Monday afternoon. Yet, according to The Wall Street Journal, much of Goldman's revenues and profits in the past quarter came from trading, not from doing deals or running its other revenue generating deals such as real estate. In fact "a record $6.56 billion of revenue from its fixed-income, currency and commodities business, or FICC."
The Journal describes FICC as a "black box" that generated 70% of Goldman's net revenue, a fact that stems from Goldman's "appetite for risk in trading" while its competitors have "have drawn in their horns, while also suffering weakness in advisory and capital-markets businesses."
Conclusion
Goldman Sachs wants to be out of the government's clutches. The government wants a piece of Goldman. And the stage is set for a big fight with lots of consequences for both sides.
If Goldman wins, the government has a problem. First, it got outsmarted by Wall Street. Second, if Goldman starts to run into trouble a few months after it pays back the TARP money, the repercussions to the economy could be devastating, and the government would likely take at least part of the blame for not having stood its ground.
More important is whether Goldman is ready to cut itself off from the government? Is $10 billion that big a deal for the firm? That's the real question, as manyof Goldman's assets are tangible such as buildings that could be difficult to unload. It also has lots of leveraged bets on its balance sheet as well as being involved in derivatives.
If it had the money readily available, it seems that they would just cut the government a check instead of having to raise $5 billion in equity from a stock sale.
We're clearly looking at a complex issue with lots of risk for both sides. Goldman, though, seems more than willing to take the plunge. We're not sure as to what the White House is going to do. And therein is the old devil in the details situation.
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