By : Michael J. Moore | July, 23 2009
July 24 (Bloomberg) -- Goldman Sachs Group Inc. may have gone from public enemy to model citizen in eight days.
The most profitable firm on Wall Street paid 98 percent of fair market value to buy back warrants from the U.S. government this week, after BB&T Corp. and U.S. Bancorp paid less than 60 percent, according to University of Louisiana finance professor Linus Wilson. JPMorgan Chase & Co. has disagreed with the price set by the Treasury for the warrants, which the U.S. received when it bailed out the banks last year.
Chief Executive Officer Lloyd Blankfein’s decision to hand over the full amount sought by Treasury Secretary Timothy Geithner reflects an effort by Goldman Sachs to defuse the public’s anger at firms that took taxpayer money, said Simon Johnson, a finance professor at Massachusetts Institute of Technology’s Sloan School of Management in Cambridge, Massachusetts. Goldman Sachs drew criticism from lawmakers last week when the New York-based bank set aside a record $11.4 billion for employee pay.
“They are beginning to realize that there is a broader backlash here,” Johnson said. “The Goldman precedent puts pressure on people to agree with the Treasury’s offer, and it puts pressure on the Treasury to make a reasonable offer” when setting the price for banks to redeem their warrants, he said.
House Financial Services Chairman Barney Frank, a Massachusetts Democrat, said yesterday on Bloomberg Television that the amounts Goldman Sachs and other banks are funneling into employee pay are “unwise.” Paul Krugman, the Nobel Prize- winning economist, faulted Blankfein’s firm in a July 17 column in the New York Times, saying the bank’s pay practices may spur employees to take risks.
Outstanding Warrants
Morgan Stanley, the biggest U.S. brokerage, and credit-card issuers American Express Co. and Capital One Financial Corp. are among the financial firms that have yet to buy back the government’s warrants, even after repurchasing preferred shares the Treasury acquired at the same time. Bank of America Corp., the largest U.S. bank by assets, and Citigroup Inc., the third- biggest, have not returned any of the taxpayer’s funds.
“Once it was clear that there would be substantial public scrutiny, backed up by rigorous valuation analysis and a clear delineation of the policy choices, Goldman surely understood that there were no great deals left on the table,” Elizabeth Warren, chairwoman of the Congressional Oversight Panel, which is monitoring the federal bailout, said in an e-mail. “The rest of the warrant repurchases will take place in the same sunshine- filled arena.”
Morgan Stanley, American Express and Citigroup are based in New York. Capital One’s headquarters are in McLean, Virginia. Bank of America is based in Charlotte, North Carolina.
‘Full and Fair’
Goldman Sachs said July 22 that it agreed to Treasury’s request for $1.1 billion to repay warrants the government received when it injected $10 billion into Goldman Sachs last October.
That’s 98 percent of the warrants’ value, according to calculations by Wilson, the finance professor at the University of Louisiana at Lafayette, using the Black-Scholes and Merton option pricing models. He estimates that BB&T, in Winston-Salem, North Carolina, and Minneapolis-based U.S. Bancorp are paying less than 60 percent of their warrants’ value.
“We think the price we paid to redeem the warrants was both full and fair,” said Lucas van Praag, a Goldman Sachs spokesman. “We’re grateful to the government for the extraordinary steps taken to stabilize the financial system, and have always maintained it was appropriate that taxpayers should receive a significant return on their investment.”
23 Percent Return
Blankfein’s warrant repayment “will certainly have an influence or an effect on the price going forward” said U.S. Representative Scott Garrett, a New Jersey Republican. “Now we have another indication of where that market is.”
The warrants on New York-based JPMorgan, which has repaid $25 billion it received from the government, will be sold in a public auction after the bank said its offer was rejected by the Treasury earlier this month.
Taking into account the dividends that Goldman Sachs paid on the government’s preferred shares, the Treasury earned an annualized 23 percent return on its funds, according to estimates from the bank and the Treasury.
Garrett, a member of the House Financial Services Committee, said the public and Congress will be more aware of the bank’s record compensation set-asides than the taxpayers’ return. He said neither should affect the firm’s reputation.
‘More Realism’
“This shouldn’t give them any positive points, and conversely what they’re doing with their salaries shouldn’t be negative points,” Garrett said.
Lawmakers were concerned that banks may shortchange taxpayers after Old National Bancorp, in Evansville, Indiana, paid less than half of fair market value for its warrants in May, according to valuations by Wilson and Pluris Valuation Advisors LLC.
“It seems like there is a little bit more realism on the valuation from both the buyer and the seller in this case, that people are coming a little bit closer together,” said Espen Robak, president of Pluris in New York. “That would seem to reduce the level of contention going forward.”
The Congressional Oversight Panel said July 10 that taxpayers should have recovered $10 million more from warrant sales with 11 banks. A Treasury official disputed the conclusion, saying the government has rejected as too low most proposals from the largest banks seeking to retire the warrants.
“Treasury is committed to getting fair value for the taxpayers for these warrants,” Herb Allison, the Treasury’s assistant secretary for financial stability, said July 22 in testimony before the House Financial Services Committee’s subcommittee on investigations. He said the Treasury has a “consistent and clear process” for valuing the warrants that applies to all banks.
Johnson, the MIT professor, said the Treasury may continue to demand fair-value payment, rather than risk being accused of easing the cost for banks at taxpayers’ expense.
“The Treasury shooting itself in the foot politically on this issue for basically small money doesn’t make sense,” Johnson said.
