Goldman Agrees to Higher Price in Buying Back Taxpayers' Stake
Thursday, July 23, 2009
Goldman Sachs said Wednesday that it had paid $1.1 billion to buy back the ownership stakes it had handed over to the government when it received a federal bailout package last year, acceding to Treasury Department demands for a higher price on the securities.
The investment giant initially offered to pay $650 million, sources familiar with the negotiations said. Some administration officials have expressed frustration that some of Wall Street's biggest banks are seeking to pay less for the stakes, just as these companies are reporting a tremendous surge in profits, according to two of the sources, who spoke on condition of anonymity because the negotiations were private. Goldman Sachs this week reported a record quarterly profit and set aside nearly half of its revenue to pay employees.
Many major banks that received federal aid are seeking to exit the Troubled Assets Relief Program. To completely sever ties with the program, the companies must also buy back these ownership stakes, known as stock warrants, which were given to the government in exchange for aid. Last month, Goldman repaid the $10 billion in bailout funds it received.
The Goldman deal may put political pressure on other banks that so far have refused to meet the government's price for the warrants. J.P. Morgan Chase has declined the Treasury's offer, and its warrants are now set to face a public auction. Last week, the company's chief financial officer said the Treasury is using a "convoluted appraisal process" in pricing the warrants.
"This is good news for the American taxpayer," said Rep. Carolyn B. Maloney (D-N.Y.), who chairs the Joint Economic Committee. "Going forward, we can hope that this sets a pattern for other warrants outstanding at other firms that received aid."
Stock warrants give their owner the right to buy a company's stock after a set period of time at a predetermined price. The Goldman warrants allow the holder to buy 12.2 million shares at $122.90 apiece 10 years from now. If Goldman's stock price rises to $200 a share after 10 years, the holder would net nearly $1 billion in profit. Goldman Sachs's shares closed Wednesday at $160.46.
But the long-term nature of the warrants makes them difficult to value because no one knows what the stock price will be after a decade.
Treasury spokesman Andrew Williams said the government received an annualized return of 23 percent on the $10 billion in rescue funds it gave to Goldman Sachs last year. That return factors in the $1.1 billion payment made Wednesday, as well as $318 million in dividends the bank has paid to the government, he said.
"The capital infusion has helped drive greater stability in the financial system, private capital has replaced taxpayer investments at many banks, and the taxpayers have gotten a good return on their investment," he said.
Meanwhile, the administration also announced that it had nominated Jeffrey Goldstein, a managing director of the private-equity firm Hellman & Friedman, to be the Treasury's undersecretary for domestic finance.
If confirmed by the Senate, Goldstein would oversee a critical office in the Treasury that develops the agency's policy for banks and the rest of the financial system. It has been without a senior manager since the new administration took office.
Lee Sachs, a counselor to Treasury Secretary Timothy F. Geithner, has been running the office on an informal basis. Sachs initially expressed interest in the post and was vetted by the White House, but he removed himself from consideration for the job in the spring.
Goldstein previously worked at the World Bank's management committee before joining the private-equity business.