Goldman Sachs Group Inc. (NYSE:GS) CEO Lloyd Blankfein made headlines last week reiterating that his company should pay back money it took from the Treasury's Troubled Asset Relief Program as soon as possible. But Rochdale Securities analyst Richard Bove thinks the New York-based bank's priorities are out of order.
Bove feels Goldman should pay back Warren Buffett's Berkshire Hathaway Inc. (NYSE:BRK.A) first. The bank took a $5 billion preferred equity investment from Buffett in September, which yields a hefty 10% annual dividend. Additionally, Buffett's investment also includes warrants to buy $5 billion of common stock at $115 per share. Meanwhile, Goldman took a mandatory $10 billion loan from the U.S. government, which yields 5% interest.
"If you were thinking of shareholders first, you would get rid of the most onerous amount first, and that would benefit shareholders. ... However, if you pay off TARP you are eliminating all of the restrictions on paying management," Bove told TheStreet.com. "You shouldn't be diluting existing shareholders to pay off TARP so you can pay management more money."
Is Bove correct? Some would argue that Goldman might be better off with the government in its corner to keep an eye on the company, but others say Uncle Sam just hinders the bank from attracting the best talent because of possible pay restrictions.
Whether Goldman intends to pay its executives more money if it does pay off the TARP money first remains to be seen. But what does still seem to remain apparent in some Wall Street circles is the massive amounts of compensation that executives still receive and expect. Some financial institutions already are having trouble living under the new world order of frugality. Only last month, American International Group Inc. (NYSE:AIG) was reprimanded for reportedly doling out $165 million in bonuses despite receiving $173 billion in bailout money. - Gerald Magpily
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