Goldman Sachs to Sell $5 Billion in Stock, Repay TARP

By Christine Harper

April 13 (Bloomberg) -- Goldman Sachs Group Inc. plans to raise $5 billion to repay U.S. government rescue funds after posting profit that exceeded the most optimistic Wall Street estimates.

The New York-based bank said today it will use proceeds from the common stock offering plus ?additional resources? to redeem the $10 billion it got from the U.S. Treasury?s Troubled Asset Relief Program. The company said it earned $1.81 billion, or $3.39 a share, in the first quarter as a surge in trading revenue outweighed asset writedowns, beating the $1.64 estimate of 16 analysts surveyed by Bloomberg.

Chief Executive Officer Lloyd Blankfein, 54, is raising money to shore up finances and repay government money it got in October after the bankruptcy of Lehman Brothers Holdings Inc. Goldman Sachs, now the sixth-biggest U.S. bank by assets, was the most-profitable Wall Street firm before converting to a bank last year and posting its first quarterly loss since the company went public in 1999.

?The only toxic thing on their balance sheet is the TARP and they want to get rid of that as soon as they can,? said Gary Townsend, president of Hill-Townsend Capital LLC. The earnings show ?they?re taking enormous market share away from virtually everyone else.?

December Loss

The company, which changed its fiscal year to end in December instead of November, also reported results for the month of December today. They showed the bank lost $780 million, or $2.15 per share, as losses in fixed-income trading and principal investments overwhelmed revenue from other units.

The company?s book value per share rose to $98.82 a share at the end of March from $98.68 in November, and its return on equity, a gauge of how effectively the firm invests earnings, was 14.3 percent in the first quarter.

First-quarter revenue was $9.43 billion. Fixed-income trading revenue was a record $6.56 billion, 34 percent higher than its previous record, as client-driven income outweighed an $800 million loss on commercial mortgage loans, excluding hedges.

Goldman Sachs benefited as the gap between what banks pay to buy fixed-income securities and the price at which they sell, the so-called bid-ask spread, almost doubled to 19 basis points in six months, according to data compiled by Bloomberg.

Equity Trading

Equity trading revenue was $2.0 billion as lower levels of activity outside the U.S. meant the firm generated fewer trading commissions than a year ago.

The company reported a $1.41 billion net loss from principal investments, including a $151 million loss from the firm?s investment in Industrial and Commercial Bank of China Ltd.

Goldman Sachs raised $5.75 billion by selling shares at $123 apiece in September in an offering that started after the company announced that Warren Buffett?s Berkshire Hathaway Inc. bought $5 billion in preferred stock.

A month later, Goldman Sachs was among nine financial institutions that shared $125 billion in the first payments from the Treasury?s $700 billion Troubled Asset Relief Program.

Government Restrictions

?A stock sale would be a good thing for the government; it would be a good thing for Goldman Sachs or any other bank which was able to do it, especially if they were also able to repay the TARP,? Roy Smith, a finance professor at New York University?s Stern School of Business and a former partner at Goldman Sachs. ?They would be free of the high cost of the dividend paid in after-tax dollars and the other restrictions, which everybody realizes they would like to get out of.?

If Goldman Sachs returns the TARP money, it may pressure other banks to follow suit or to risk appearing dependent on the government, Brad Hintz, an analyst at Sanford C. Bernstein Co. in New York, said before today?s announcement.

?The right thing for government officials to do will be to delay the GS repayment until a significant group of banks are able to repay simultaneously under some organized plan,? Hintz said.

Blankfein said last week at a conference in Washington sponsored by the Council of Institutional Investors that the funds that Wall Street firms received wasn?t intended to be ?permanent capital.?

?That Minute?

?The minute that an institution is allowed to return the money and is capable of returning the money, while still carrying out its obligations and its role in the capital markets effectively, then it should do it that minute,? Blankfein said.

Goldman Sachs has gained 55 percent this year to close today at $130.15 in New York Stock Exchange composite trading. The price is more than double the stock?s closing low of $52 on Nov. 20.

The company will hold a conference call tomorrow at 7 a.m. New York time to discuss the firm?s results, outlook and related matters.

Credit-default swaps protecting against a default by Goldman Sachs dropped 15 basis points after the earnings announcement to 210 basis points, according to broker Phoenix Partners Group. The contracts have fallen 58 basis points the past week and are trading at the lowest since Oct. 14, prices from CMA DataVision show.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.
Last Updated: April 13, 2009 17:11 EDT