Back in September, Goldman Sachs received a $5 billion capital investment from Warren Buffett that requires interest payments of 10%. A month later they received a $10 billion capital injection from the Treasury that requires interest payments of only 5%. Given that Buffett’s terms are far more onerous, Richard Bove wants to know why Goldman is planning to pay back the Treasury’s investment:
“If you were thinking of shareholders first, you would get rid of the most onerous amount first, and that would benefit shareholders….However, if you pay off TARP you are eliminating all of the restrictions on paying management,” Bove told TheStreet.com. “You shouldn’t be diluting existing shareholders to pay off TARP so you can pay management more money.”
This should become a case study in principal-agent research. If Goldman management were primarily concerned with shareholder value, they’d pay off Buffett. But if they’re more concerned with their own personal welfare, they’ll pay off Treasury. Apparently they’ve made their choice.
Needless to say, though, they’re not planning to give up all the other government aid they’re getting. From the Washington Post:
Even as they clamor to exit the most prominent part of the bailout program by repaying government investments, firms continue to rely on other federal programs to raise even larger amounts of money….The Federal Deposit Insurance Corp. has helped companies  borrow more than $336 billion through the end of March, by guaranteeing to repay investors if the firms defaulted. And financial firms hold more than $1 trillion in emergency loans from the Federal Reserve.
Goldman Sachs declared a “duty” to repay the Treasury after posting a first-quarter profit. The chief executives of several large banks at a meeting last month urged President Obama to accept repayments. But no company has similarly pledged to leave the government’s other aid programs.
The explanation appears to be simple: Only the capital investments by the Treasury require the companies to make significant sacrifices, such as restricting executive pay.
“The capitalization efforts are actually the most important and are doing the most good, but they come with strings attached, and because they come with substantial strings attached they are getting the most push-back from the banks,” said Douglas Elliott, a financial policy expert at the Brookings Institution. The other programs “have no strings attached,” he said. “What’s not to like about it from the perspective of the banks?”
Perhaps it’s time to attach strings to anyone who takes advantage of any extraordinary aid from the government. If that happened, I wonder how many of these rock-jawed titans of capitalism would still be willing to put their money where their mouths are?
UPDATE: It turns out this is less mysterious than I thought. Apparently Goldman Sachs paid back the Treasury money first because they were required to under the terms of the TARP agreement. Details here.