It seems almost certain that Goldman Sachs is planning a multibillion-dollar offering of its shares very soon, and that the proceeds from the offering could be used to pay off $10 billion Goldman borrowed from the TARP. This is being celebrated by both free-marketeers who want the government’s role in banking reduced and by market bulls, who figure the offering will boost investor confidence in the financial sector.
But the move has come under criticism from two angles.
- Dick Bove released a note on Saturday arguing that this was basically management exploiting shareholders so that they can pay themselves bigger bonuses. The new offering would dilute current shareholders while also freeing Goldman from government constraints on compensation. “You shouldn’t be diluting existing shareholders to pay off TARP so you can pay management more money,” Bove notes.
- Felix Salmon, who is now at Reuters, argues that the Goldman offering could be counter-productive. “Buying shares is a bet on steady future growth,” he writes. “And Goldman is too big already. I want it to get smaller, not bigger. It was the imperative to grow which caused many of the problems at places like Merrill Lynch and Bear Stearns. Which makes this kind of equity offering part of the problem, not part of the solution.”
Salmon’s objection is important because it points toward the longer range, fundamental changes that many would like to see in the financial sector. Basically, the large, complex financial entities may have to be forced to become smaller and less complex. That government rules may be necessary to accomplish this strikes some knee-jerk free-market types as noxious. But this is a misplaced response: the bailouts have proven that large complex financial firms are not creatures of the free market and won’t be for the foreseeable future. If we’re going to move away from privatized profits and socialized losses, its going to be the profit side of that equation that is going to be addressed.
This raises the question of what exactly Goldman’s new investors will be buying. Are they betting that we won’t get regulations that will effectively constrain the financial sector? If so, shouldn’t the taxpayers–who will be on the hook if a newly emboldened Goldman once again needs a financial rescue–have a say in how the TARP is repayed?
At the very least, the government’s role as guarantor of last resort means that these are appropriately public questions rather than questions that should be decided solely by the board of directors and managers of Goldman. Failing that, those considering buying into the Goldman offering should at least be put on notice that future financial regulations may include caps on the size of a business such as Goldman and may intentionally reduce the profitability of the firm by reducing the amount and type of risk it may take on.