It's easy to hate
Goldman Sachs (NYSE: GS). It has connections.
It has cash. It has influence. It knows what it's doing. And
it uses all of these advantages to pay each of its employees,
on average, far more than half a million dollars a year. That
we keep a suspicious eye on Goldman is not only expected, but
warranted.
But if there's ever been a sign that public hatred has
gone too far, it was yesterday's reaction to news that
Goldman could receive $1 billion, should troubled lender
CIT (NYSE: CIT) file for bankruptcy.
Meanwhile, taxpayers would lose 100% of the $2.3 billion
invested from TARP last year. Nearly every financial news
outlet covered the story with undertones of how Goldman has
yet again used its influence to unfairly capitalize off
others' misfortune.
"If CIT fails, Goldman wins -- with a $1 billion-plus
payoff," says one site. "Some times it seems like Goldman
Sachs has a single-sided coin that always comes up heads,"
says another.
Skimmed over, if mentioned at all, is that there's no
windfall or special treatment of any sort here: $1 billion is
the net present value of what Goldman is contractually owed,
spelled out clear as day, from a June 2008 secured lending
facility. By "secured," we mean that, in the event of
default, Goldman holds collateral it can seize to make itself
whole, as is customary in something called "responsible
lending." As
The
Wall Street Journalput it in June 2008:
Given that any investment in financial services these
days is a risky one, Goldman took care with the terms of
the financing. To address the risk Goldman was taking, the
facility was structured as
 a total return swap, backed by CIT's
investment-grade asset-backed securities, such as aircraft
leases. Goldman can seize the collateral if it needs
to.
Or as CIT's own regulatory filing explained last year:
In the event that [CIT] exercises its right to terminate
the Facility early, [CIT] will be required to pay [Goldman]
a makewhole amount equal to the discounted present value of
the facility fee for the remaining term of the
Facility.
That discounted "makewhole" amount is exactly what Goldman
will receive if CIT fails -- as was spelled out in clear
terms several months before anyone whispered the words
"taxpayer bailout." Anyone -- yes, even the government --
could have asked for the same terms to cover their backs.
There were no secrets here.
But what makes this uproar seriously pointless is that CIT
has more than one secured lender.
Wells Fargo (NYSE: WFC), for example, lent
CIT $500 million on a secured basis as well. It, too, will
have dibs on the lender's assets, even as taxpayers get wiped
out. As will the other holders of CIT's $17.6 billion of
secured borrowings. Continued... |