Goldman Sachs cuts ties with Govt bailout

Goldman Sachs yesterday exited the US Government's bailout programme after paying off a loan that has netted US$1.4 billion ($2.1 billion) for the taxpayer.

The investment bank yesterday said it would pay US$1.1 billion to buy back warrants issued to the US Treasury as part of a US$10 billion federal loan agreement.

Goldman and eight other major banks were told to accept bailout money last October in order to restore confidence in the US banking system, and hundreds of smaller banks followed suit. The Government has received dividends on the loans and will also receive cash for the warrants if banks decide to repay the money early.

Goldman paid back its bailout money last month but it has taken several weeks to negotiate a price for the warrants, which enable the Government to buy shares of the bank at a set price in 10 years, capitalising on gains in market value.

Including the cost of the warrants and dividends, Goldman has paid US$11.418 billion on the loan, earning the taxpayer US$1.418 billion at an annualised rate of 23 per cent.

"Taxpayers have gotten a good return on their investment," the Treasury said in a statement. "The process we designed on valuation worked to protect taxpayers."

Some argue that by letting the banks pay back the warrants now, taxpayers potentially lose out on money if the price of the bank's stock appreciates over the years, as expected.

Herb Allison, the Treasury official overseeing the Troubled Asset Relief Programme (Tarp), said the Obama Administration wanted to sell the warrants quickly to end its involvement in the financial sector as soon as possible.

The Treasury doesn't want to speculate whether the warrants will become more valuable in the future, Allison said during a congressional committee hearing examining whether taxpayers are getting an adequate return on the warrants.

"We are not in the business of ... market timing," he said.

The Treasury announced in June that it would value the warrants through negotiation with the banks. The agency's offers reflect financial modelling and surveys of market participants. If the two sides can't agree on a price, the banks can elect to have the Treasury auction the warrants.

This month, a bipartisan congressional watchdog claimed the Treasury was selling the warrants for one-third less than they're worth, potentially shorting taxpayers up to US$2.7 billion.

But some banks, including JPMorgan Chase & Co, elected to have the warrants sold at auction. Jamie Dimon, JP Morgan chief executive, said the government was asking for too much.

Treasury said this showed it was driving a hard bargain, asking more than the banks were willing to pay.

Treasury has faced mounting accusations that its relationships with big banks are too cosy. After months of multibillion-dollar bailouts, the banks are reporting strong profits while the economy remains weak.

Elizabeth Warren, chairwoman of the congressional oversight panel that claimed Treasury didn't get a good deal on its earlier sales, said the price Goldman Sachs paid was similar to her panel's calculation of their value.

"That certainly increases our confidence" [in the process Treasury is using to value the warrants], she said.

Still, auctioning the warrants could yield a higher return, she said, and would be more transparent to the public.

Reaction from lawmakers to Goldman's repayment was guardedly optimistic. "That sounds pretty good, but is it enough?" asked Dennis Moore, a Kansas Democrat, who chaired yesterday's hearing.

THE BILL

* US$10 billion: To pay off Federal loan made on October 28.
* US$1.1 billion: To buy back warrants issued to the US Treasury.
* US$318 million: Dividends on the loan.
* US$1.418 billion: Gain for US taxpayer.

- INDEPENDENT, BLOOMBERG, AP