The speed with which Goldman Sachs, JPMorgan – even Citi and Morgan Stanley – raised equity capital at the end of last month, even as stocks sold off, banks failed and Congress voted down the Paulson bail-out plan, shows that markets still function but are open only to the strong.
In the week when Dick Fuld led Lehman Brothers into bankruptcy, John Thain sold Merrill Lynch to Bank of America, and AIG collapsed, Goldman Sachs’s shares had been beaten down to the point where they traded at just 80% of book value. Even though the firm had just $1.7 billion of sub-prime and $1.6 billion of alt-A mortgages on a $1 trillion balance sheet, it didn’t take a genius to see where this might be heading.
What did CEO Lloyd Blankfein do? Two things. First, he asked the Federal Reserve to allow Goldman to convert to a bank holding company – something it had been discussing since the collapse of Bear Stearns and at this point felt a sudden urgency to get on with.
This amounted to no more than de jure recognition of the fact that Goldman had been subject to regulation by the Fed since March, with Fed staff permanently stationed in its offices and access to Fed funding and liquidity. Conversion to a bank holding company reassures investors that it will have this access permanently.
Taking a few jokes about Goldman chequebooks and ATMs was a small price to pay for this. The firm already has FDIC-insured deposits from its high-net-worth private clients. It might now acquire more deposits in the wholesale market but, unfortunately for those of us that would love to have that Goldman chequebook, it won’t be opening branches.
Goldman sees itself as one of the strong that will survive this cram-down of the financial system. At one point, it even offered to buy a 9.9% stake in Merrill Lynch. Opportunism is an instinct.
So, with debate raging over a bail-out plan and the prospect of distressed assets tumbling out into the marketplace at attractive prices, Blankfein decided to make a visit to the capital markets. If it could gather the capital resources to leverage up and buy quantities of these assets, Goldman saw a chance eventually to make huge profits.
Even Goldman, in these panic-stricken times, needed an anchor investor to get a public deal off the ground. A few phone calls from senior Goldman executives to Warren Buffett secured this in a matter of hours – albeit on excellent terms for the Sage of Omaha.
As the announcement of the Buffett stake hit the wires at 5:40pm, Goldman’s salesforce stood poised to pick up the phones to Goldman’s existing institutional shareholders in a race to raise $2.5 billion of commitments. Twenty minutes later, the book was covered. By 8pm Goldman had the orders for a deal double the original size and could leave it to the following morning to price and allocate $5 billion of stock.
Even if the distressed asset market for which it raised opportunistic capital does not flourish after all, that capital might help it survive a financial nuclear winter.
