The Fed Won't Let Goldman Sachs Pay Warren Buffett Back

Goldman Sachs will not pay back Warren Buffett his $5 billion loan just yet, says the Wall Street Journal.

Apparently Goldman officials believed they’d get some sort of special treatment from the Fed.

The WSJ says the bank thought that the payback transaction would be approved swiftly by the Fed because compared to some of the other banks, their finances are in much better shape.

And yes, of course Goldman does deserve to do some gloating, since:

  • At the end of the third quarter, the bank had $75.66 billion of shareholder equity. 
  • The bank’s share price has “rebounded sharply.”
  • Under the new Basel III rules the bank definitely has enough money to return Buffett’s cash.

But the Buffett decision isn’t theirs to make.

According to the WSJ, before the government approves the payback, it wants new dividend increase policies to be in place. And even then, if it allowed Goldman to increase its dividend payments, it would probably need to forbid other, less healthy institutions from doing so. And it probably won’t.

Which is too bad for shareholders! Because Berkshire’s cash injection has already cost the bank $1 billion in dividend payments.

Chances are that the Fed’s first approvals for banks to amplify dividends won’t be issued until first quarter, next year. “Banks will need to show they can meet high capital hurdles before they can increase payouts to shareholders,” according to a the Fed’s governor, Daniel Tarullo.

From the WSJ:

Goldman has the option to redeem the preferred shares held by Berkshire at any time for $5.5 billion, subject to Fed approval, though the move would trigger a charge of $1.6 billion. The infusion was announced in September 2008.

Redeeming the shares would save Goldman dividend payments of 10% a year on the investment.
Berkshire would retain warrants allowing the company to purchase as many as 43.5 million Goldman common shares at about $115 apiece before Oct. 1, 2013.

For more details, go to the Wall Street Journal >

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