Goldman Sachs Group Inc., the sixth-biggest U.S. bank, should repay $5 billion to Warren Buffett before refunding U.S. government aid because it would boost earnings, Rochdale Securities analyst Richard Bove said.
"It would not be appropriate for Goldman to pay back the TARP funds," wrote Bove, referring to the U.S. Treasury's Troubled Asset Relief Program. "They cost less than the funds received from Warren Buffett. These are the funds that should be repaid if Goldman wanted to maximize earnings for shareholders."
Goldman Sachs, based in New York, is considering selling shares as soon as this week to raise money, which would help it repay the $10 billion it received from the U.S. Treasury in October, the Wall Street Journal reported last week. Repaying the government money would free Goldman Sachs from restrictions on compensation and hiring imposed on companies that took government money.
"Goldman may believe shareholders should stand in line while it pays off management first by eliminating TARP," Bove wrote.
Goldman Sachs sold $5 billion in preferred stock to Warren Buffett's Berkshire Hathaway Inc. in September. Buffett gets a 10 percent dividend on the stock, or $500 million a year, and gained warrants to buy $5 billion of common stock at $115 each over the next five years. The investment also requires the company's top four senior executives to keep 90 percent of the stock they own in the company until Buffett is repaid or until Oct. 1, 2011.
A month later the U.S. Treasury bought $10 billion of preferred stock from Goldman Sachs. The Treasury gets a 5 percent dividend, or $500 million a year, which rises to 9 percent after five years, and received warrants worth one-fourth of what Buffett gained, according to data compiled by Bloomberg.