Published: March 25, 2009
Executives at Goldman Sachs made it clear that they wanted to give back the government aid the firm had received. A bill winding its way through Congress that would impose a 90 percent tax on bonuses for banks that receive government assistance reinforces that desire.
So let’s assume that regulators give Goldman the go-ahead. The question would be, would the firm want to replenish some of the money by selling new stock to the public?
But Goldman still needs to reckon with Warren Buffett.
Berkshire Hathaway, led by Mr. Buffett, injected $5 billion into Goldman last September in return for preferred shares. That, combined with a common stock offering, helped bolster Goldman’s capital in the wake of the Lehman Brothers bankruptcy. But Mr. Buffett’s involvement came with a condition that could qualify him for some kind of compensation.
That sounds ominously similar to the so-called ratchets granted to the big pension funds and sovereign wealth funds that invested in Merrill Lynch and Washington Mutual during the credit crisis. A ratchet is a feature that allows those investors’ stakes to be recalculated should the company raise more capital at a lower price. Investors like the protection it offers, but it’s often bad news for the recipient and its shareholders.
The rights Washington Mutual gave to the private equity firm T.P.G. arguably scared off other potential investors before the bank folded and was handed to JPMorgan Chase by regulators. Merrill Lynch, meanwhile, had to dole out almost a third of the $8.5 billion it raised last summer to cover a ratchet that Temasek Holdings of Singapore had previously negotiated.
The deal Goldman struck with the Oracle of Omaha is nowhere near as onerous. Unlike others, Goldman’s miniratchet isn’t linked to the price Berkshire negotiated for its preferred stock and warrants. Instead, it requires two triggers. First, Goldman would have to sell new shares at a discount of 5 percent or more to the stock price at the time. That’s certainly possible — it offered an 8 percent discount last September when it sold its stock during one of the most volatile weeks of the year. The average secondary share sale dangled at a little less than a 5 percent discount in 2008 and just breached that so far this year, according to the research firm Dealogic.
Second, the discount only applies if Goldman sells stock to a small group of select investors. A broader sale — like a rights offering to its shareholders — wouldn’t set off the ratchet.
That gives Goldman a good deal of leeway. It’s not as clean as Morgan Stanley’s ratchet-free $9 billion investment from Mitsubishi UFJ of Japan. But in this market, the fewer shackles the better.Related Links
Berkshire Hathaway Annual Letter to Shareholders 2008 - Read the latest Berkshire Letter
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