Cnn.com tells us the good news that “Goldman reports $1.8 billion profit,” but the totality of the information in the cnn.com article strikes me as mildly curious.
While announcing that “Goldman reports $1.8 billion profit,” the article points out that Goldman needed $10 B in TARP funds only a few months ago. Yet now Goldman is planning to sell stock in order to raise $5 B in order to pay down the TARP obligation. Further, Goldman reported earnings of $3.39 per share for the quarter ended March 31, which is more than double the earnings per share amount projected by analysts.
All of this together paints a picture that strikes me as mildly curious. I suppose the fact that Goldman took $10 B in TARP funds but is now, merely months later, parading $1.8 billion in quarterly profit could be chalked up to “short term liquidity problems.” But the analysts’ 100% miss on Goldman’s earnings per share is a pretty big miss given that usually banks offer enough guidance for the analysts to stay on the ball field.
Goldman’s plan to raise $5 B in a stock offering has me similarly ruminating, given that now would not have struck me as the ideal time for Goldman to tap the stock market for $5 B.
The whole situation harkens back to 1999, and I cannot help but wonder what Arthur Levitt might think of it.
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TARP’s “roach motel”: the money comes in but you can’t get it out!
Goldman’s posture makes perfect sense. My understanding is that all the big banks were forced in Sept./Oct. 2008 by a combination of the Fed, Treasury and peer pressure to take the TARP money, lest any of them be singled out as “troubled” and then suffer the spiraling effect of a run on their deposits (bank or brokerage); fire sales of assets; lowered credit ratings; events of acceleration if not default; etc. But the fine print from the Fed in the TARP funding required that no matter how profitable and financially secure a bank was, it had to float shares (possibly debt?) to the public on the order of 25% (maybe 50%) of the TARP funding in order to qualify to pay back the TARP funding.
Not until now did any bank (even Goldman, which had among the least problems of any bank) find the political and economic climate suitable to issuing the necessary stock (and/or debt?). I understand that MANY of the TARP banks now WANT to (and are financially able to) repay their TARP money, but they CAN’T without the stock (debt?) issuance and perhaps some other TARP-induced restrictions. Meanwhile, they are cringing ever more under the specter of government intrusion into their management and business practices.
I wonder whether Goldman really needed the $10 billion TARP bailout at all– I haven’t paid much attention to these matters, but it’s not at all implausible that the feds forced Goldman and other banks to take the cash simply for cosmetic purposes, to ensure there’d be no stigma for the bad banks taking bailout money they really did need. Or perhaps Goldman might have needed the bailout cash if the worst-case scenarios panned out, and then they never actually did.