Goldman Sachs, in cross hairs, mulls options
NEW YORK |
NEW YORK (Reuters) - Goldman Sachs Group might be the most vulnerable U.S. bank under President Barack Obama's proposals to crack down on Wall Street.
If Obama's "Volcker plan" were enacted, Goldman could be forced to explore a range of drastic measures, including spinning off key businesses, returning its bank charter -- or even taking the firm private.
Goldman, for its part, asserts it will not make any rash decisions as details from Obama's single-page proposal to limit the size and activities of U.S. banks remains sketchy.
The proposal was fleshed out a bit on Monday as Deputy Treasury Secretary Neal Wolin seemed to open the door to banks without federally insured deposits engaging in proprietary trading.
Goldman has some federally insured deposits, but they are a relatively small portion of its overall funding base. Goldman gets 55 percent of its adjusted operating income from trading, far more than other institutions.
On its earnings conference call last week, a Goldman executive denied it would consider handing back its bank charter and said drawing any conclusions about Goldman's next move would be premature.
But that is not deterring many investors from speculating about one possible Goldman exit strategy -- going private.
"Goldman is already in the process of figuring out how to go private," said Tom Sowanick, chief investment officer of the Omnivest Group in Princeton, New Jersey. "Goldman did not need -- or want the TARP money to start with -- and there is no reason for them to keep their bank charter and remain a public company."
Hedge fund manager Doug Kass, president of Seabreeze Partners, has made Goldman going private among his "20 Surprises for 2010."
Kass predicted: "Sick of the unrelenting compensation outcry, government jawboning and associated Populist pressures, Warren Buffett teams up with Goldman Sachs to take the investment firm private."
But going private is not as easy as it sounds. It would make it more difficult for the firm to raise capital and would reduce its access to liquidity.
Another option would be for Goldman to try to return its bank holding company charter, while continuing to be publicly traded. Regulators would likely resist such a move.
Goldman and Morgan Stanley became bank holding companies in 2008 at the height of the financial crisis, giving them access to the Fed's emergency lending facilities. But being a bank meant greater regulatory scrutiny and new capital requirements.
Goldman also accepted $10 billion from U.S. Treasury's Troubled Asset Relief Program (TARP) in October 2008 as part of a larger taxpayer rescue of the financial services program. Goldman repaid that money in less than a year -- in June.
Still, many analysts have questioned whether Goldman would have survived without the various forms of government backing extended during the crisis, including the ability to issue nearly $30 billion in FDIC-backed debt.
Public anger over Goldman's $16.2 billion in salaries and bonuses after the multibillion-dollar taxpayer rescue of the financial system has not subsided.
The company's profitability, and suspicions that its deep links with governments around the world gave it unfair advantages, made it a symbol of Wall Street greed and excess. Rolling Stone writer Matt Taibbi described it as "a great vampire squid wrapped around the face of humanity."
Goldman announced record earnings of $13.39 billion for 2009 and an average payout per employee in salary and bonuses of $498,000, which the bank seemed to think indicated restraint on its part.
Last week, Obama proposed to ban bank holding companies from owning, investing in or sponsoring hedge funds or private equity funds and from engaging in proprietary trading, or trading on their own accounts, as opposed to with their customers' money.
It is impossible to fully assess the impact of the proposals as they are a long way from becoming law.
"All kinds of discussions I know are going on -- what if, what if, what if," said Marshall Front, the chairman of Front Barnett Associates. "They could restructure their business, they could go private."
Some analysts say the most likely possibility is for Goldman to spin-off one or more of its businesses.
Brad Hintz, an analyst with Sanford C Bernstein, said its private equity business could be the target of such a move. But doing so could harm other parts of the business that use the private equity for clients.
"Private equity and investment banking are really linked at the hip," Hintz said. "I understand why they may be going this way, but it certainly severs some very nice relationships."
(Reporting by Steve Eder and Jennifer Ablan; editing by Leslie Gevirtz and Carol Bishopric)
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