Is Goldman Sachs ignoring the lessons of history?
In October 1929, the Goldman Sachs Trading Corporation was on its last legs, having suffered from the investment trusts’ holdings in other similar NYSE trusts and from using whatever cash it had left to buy huge blocks of its own shares in a hopeless attempt to support the daily quote. What J.K. Galbraith later called “a form of fiscal self-immolation.” Goldman, Sachs & Co. went on to survive the 1929 crash, but the namesake trading corp. would not.
The lessons of 1929 are multifacted, and I, without a doubt, haven’t found a unique angle to that moment in history. What I do know is that some amount of transparency and oversight may well have prevented the 1929 stock market crash, and that a small dose of oversight would have certainly prevented the bankruptcy of Lehman Brothers in 2008. Perhaps avoiding some of the economic pain that the world is experiencing today.
Over at my favourite investment bank, the partners of Goldman Sachs (GS:NYSE) may be ignoring the lessons of history. The first hint? Comments at an investor conference on Feb. 4, 2009 (via WSJ):
“Operating our business without the government capital would be an easier thing to do,” said David Viniar, Goldman’s chief financial officer. “We’d be under less scrutiny and under less pressure.”
(Note to file: now is probably the worst time in the modern history of the capital markets to be advocating less scrutiny.)
With the news of their unexpectedly profitable quarter, Goldman Sachs is rumoured to be launching a US$5 billion stock offering. One has to wonder if the surprise profit has anything to do with the relaxation of the mark-to-market rules?
Use of proceeds for the US$5 billion equity offering? Pay off part of the US$10 billion TARP funding. Cost? 8% dilution to current shareholders. Rationale? Without TARP funding, Goldman would have no constraints on executive compensation.
As a business, Goldman Sachs should be run for its shareholders, a group of which includes yours truly. If our current liquidity is in excess of US$100 billion, for the life of me I don’t know why we need the additional US$10 billion of TARP funds to run our business. If the idea is to pressure the U.S. Treasury into taking back its TARP capital by launching an equity offering, what does the additional US$5 billion get us if we are already extremely well-capitalized?
Could there be anything more silly than raising US$5 billion to pay back the government money that we don’t currently need in any event? And if we don’t need the capital, although the thought of having too much cash is foreign in these times, why dilute the rest of us with this rumoured equity offering? We’ve ridden the shares from US$200 to US$47 in less than a year. As we enjoy this current updraft in the stock, why reward our patience with unnecessary dilution?
Mr. Blankfein, we don’t own an investment bank any longer. GS is now what’s called a “Commercial Bank”. The rules are different (at least until GS applies to rid itself of that Charter, too). Third-party scrutiny and regulatory pressure are the lifeblood of any successful banking system. Get used to it.
Ridding Goldman of the TARP ball and chain is just window dressing so long as we remain a bank. The game has changed. Scrutiny, rather than excess leverage, is your new mistress.
MRM
(disclosure – I own GS and GS sub debt)
Scrutiny and regulation are useful for those not clever enough to be masters of their own destiny, for anyone else, they serve only to restrict freedom and reduce the opportunity for creativity and innovation.
If GS have the financial and strategic ability to survive without government assistance then they should take it as a matter of principal if nothing else.
If you do not believe they do, why be a shareholder?
Barnabee
I’m the last person to advocate direct government involvement in domestic lending; but regulation of banking is necessary, of course. Bear and Lehman would be in business today if the SEC had done their jobs. Going from 24x levered to 35x levered was insane.
My simple point is this: if Goldman doesn’t need the government’s capital, then give it back (without an equity raise). Replacing unneeded TARP capital with unneeded new equity capital is foolish. If the capital IS required, raising equity from the private sector solely to avoid gov’t oversight is a very dilute path, and no case has yet been made for why this is good for non-employee GS shareholders.
The gov’t has already been issued their warrants by GS, so most of the financial cost of the TARP capital has already been experienced.
MRM
Some good points – I agree certainly that if they don’t need it at all they should simply repay the government capital. However I would argue that if the capital is required, ensuring that it does not come with the cost of regulatory oversight and government meddling should be very high on the priority lists.
I’m thinking particularly of the extra overhead introduced by any kind of snooping or approval required for business decisions, and the potential impact on the ability to reward people as the company see fit.
This of course relies on the assumption that they have a better idea what they’re doing and why than the government… if this were BofA I may well be arguing the other way (but then I’d never be a BofA shareholder).