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Goldman Sachs Stock Sale, TARP Repayment, Might Pressure Rivals

April 10 (Bloomberg) -- A Goldman Sachs Group Inc. sale of stock to speed repayment of $10 billion in government money will pressure other banks to follow suit or risk appearing dependent on federal support, analysts said.

The New York-based bank, scheduled to report earnings April 14, is considering announcing the share sale as early as next week, the Wall Street Journal reported today, citing unidentified people familiar with the matter. Lucas van Praag, a spokesman for Goldman Sachs, declined to comment.

A 47 percent gain in the company’s stock price this year and a return to profitability in the first quarter may help Chief Executive Officer Lloyd Blankfein raise new money, analysts said. That might let Goldman Sachs, the sixth-biggest bank, return the $10 billion it received in October from the U.S. Treasury’s Troubled Asset Relief Program and shake off compensation and hiring restrictions imposed on banks that took government aid.

“It’s in Goldman’s best interest to be free from the TARP,” said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York. “But just because it’s best for Goldman Sachs, doesn’t mean their repayment is in the best interests of the broader U.S. economy.”

A repayment by Goldman Sachs may lead banks “to race each other to access a very weak equity market and to write their checks to the Treasury,” Hintz said today in an e-mail. “This could set off new credit concerns about the banks that can’t repay and could set back the recovery of the credit markets.”

Citigroup Inc., the third-largest U.S. bank, has tumbled 55 percent in New York Stock Exchange composite trading this year and is expected by analysts to report a sixth consecutive quarterly loss. Bank of America Corp., the largest U.S. bank by assets, has dropped 32 percent this year and analysts estimate it will report a first-quarter profit.

Mack Opposes Repayment

Morgan Stanley CEO John Mack, whose firm is expected by analysts to report a first-quarter loss when it reports earnings a week after Goldman, said last month he opposes any move by banks to return TARP money right now. Morgan Stanley, which has gained 58 percent in New York trading this year, was the second- biggest U.S. securities firm after Goldman before they both converted to banks in September to access Federal Reserve lending programs.

“As much as we would like to give the money back and just focus on not having government involvement, being totally a public entity, we think, and I think, that it’s the wrong time to do it now,” he told employees on a March 30 conference call.

The Federal Reserve is reviewing the financial condition of 19 U.S. banks in a so-called stress test to determine whether any need to raise more capital or require extra aid to help absorb losses from further deterioration of the economy.

Stress Test Silence

The 19 banks, which include Goldman Sachs as well as Citigroup, Bank of America and Morgan Stanley, have been told not to talk about the tests so the government can release the results in an orderly fashion later in the month, according to people familiar with the matter.

“The top 10 TARP-funded banks will start being differentiated as to those that can shed the TARP and those that cannot,” said Roy Smith, a finance professor at New York University’s Stern School of Business and a former Goldman Sachs partner. A share sale by Goldman “makes the gap more pronounced and more obvious.”

Even without Goldman Sachs’s share sale, any banks that don’t pass the stress test “will find it very difficult to tap private money,” said Isabel Schauerte, an analyst at Boston- based financial research and consulting firm Celent. “They are visibly marked as the bottom -- a message that doesn’t go down well with the many investors that have burnt their fingers.”

‘Easier To Do’

Goldman Sachs, the world’s biggest and most profitable securities firm before becoming a bank, was among nine financial institutions that shared $125 billion in the first payments from the Treasury’s $700 billion TARP. David Viniar, Goldman Sachs’ chief financial officer, said in February that the bank would like to repay the money because “operating our business without the government capital would be an easier thing to do.”

Earlier this week, Blankfein said that banks have “not a choice, but an obligation to taxpayers” to repay the government money as soon as they can without jeopardizing their business.

A $787 billion economic stimulus law signed by President Barack Obama in February included a provision that prohibits cash bonus payments to the top five executives and the 20 highest-paid employees at banks that receive at least $500 million of bailout funds. Bankers can still get stock bonuses, although those are restricted until their companies repay the bailout funds.

Shake Off Restrictions

“Goldman is extremely eager to shake off the restrictions and scrutiny that come along with TARP,” said Celent’s Schauerte. “A return of taxpayer funds would manifest the bank’s restored strength and set it apart from the pack -- just as in better times.”

Goldman Sachs raised $5.75 billion from a common stock offering at $123 each on Sept. 24, a day after Warren Buffett’s Berkshire Hathaway Inc. bought $5 billion of preferred stock in the company.

Goldman Sachs shares jumped 8.4 percent yesterday to close at $124.33, its highest since Oct. 3, amid a rally in bank stocks. The rally was sparked by Wells Fargo & Co., in which Berkshire is also a large investor, saying that it expects to report record first-quarter earnings.

“It shouldn’t be beyond anybody’s imagination for them to be able to raise $5 billion or $6 billion through a new raise,” said NYU’s Smith. “Remember Goldman Sachs raised $5 billion in a capital raise in September -- it was a much worse time and they raised it at a price level which is not far from where the stock is now.”

If Goldman Sachs’s first-quarter earnings match or exceed expectations, “it would make a lot of strategic sense to announce share sales in concert with releasing earnings,” said Celent’s Schauerte.

To contact the reporter on this story: Christine Harper in New York at [e-mail].

Last Updated: April 10, 2009 15:53 EDT
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