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Goldman Sachs Pays $1.1 Billion to Redeem Warrants

Goldman Sachs has redeemed the outstanding warrants the US government received through the TARP program for $1.1 billion, the company announced Wednesday.

Goldman Sachs logo
Goldman Sachs logo

Though the initial Goldman offer was around $600 to $650 billion, a spokesman for the firm said in a press release that the valuation "represents full and fair value."

In June, Goldman Sachs repaid the U.S. Treasury's investment of $10 billion, and during the eight months of the investment, it paid $318 million in preferred dividends. Through the dividends and warrants, which total $1.418 billion, the government earned an annualized return of 23 percent.

"This return is reflective of the government's assistance, which benefitted the financial system, our firm and our shareholders," Goldman chairman and CEO Lloyd C. Blankfein said. "We are grateful for the government efforts and are pleased that this additional money can be used by the government to revitalize the economy, a priority in which we all have a common stake."

Goldman is the first of the major US banks to redeem the warrants.

Many banks have faulted TARP for its stigma as a sign of weakness, and its restrictions, including curbs on executive pay. JPMorgan Chief Executive Jamie Dimon has said TARP participation is a "scarlet letter" for banks.

Morgan Stanley , which also paid back $10 billion of TARP money last month, remains in talks with the government on shedding the warrants, Chief Financial Officer Colm Kelleher told Reuters Television.

Goldman announced the purchase eight days after it posted an unexpectedly large 33 percent jump in quarterly profit. It also at the time set aside $6.65 billion for compensation, prompting questions about the government's perceived role in positioning Goldman to pay out huge bonuses while the rest of the economy remains under duress.

"The spotlight was on them because we just bailed out these companies, and now Goldman is making billions," said Ken Crawford, a portfolio manager with Argent Capital Management. "It doesn't look good."

Critics of TARP have questioned whether the government has been misusing taxpayer money in trying to prop up the banking sector, following hundreds of billions of dollars of credit losses and writedowns.

Crawford said that for Goldman, "to fully give back everything the federal government gave them, from a publicity standpoint, makes a lot of sense. Earlier this month, a Congressional oversight panel estimated that Goldman's warrants were worth $940 million, but could be worth as much as $1.25 billion.

The U.S. Treasury is pleased with the $1.1 billion Goldman paid, the head of the Treasury's financial bailout fund said. Herbert Allison, assistant secretary for financial stability, told a House Financial Services subcommittee that he he believes that the warrants were priced fairly under a process similar to those used for smaller banks.

In the case of Goldman, however, a liquidity discount was not applied by the Treasury as it was for smaller banks, whose warrants and options are not widely traded. House Financial Services Committee Chairman Barney Frank, a Democrat from Massachusetts, welcomed Goldman's repurchase of the warrants.

"I appreciate that Goldman Sachs did the right thing today, and we urge all the others to follow this example," Frank said in a statement. "I hope that this will lead to greater cooperation by other firms that have outstanding warrants owed to the American taxpayer."

Reuters contributed to this report