Earlier this week, I argued that the rage surrounding Goldman Sachs'
Why is Goldman getting pies flung at its face? If CIT files for bankruptcy, Goldman is owed $1 billion linked to a credit facility it extended to CIT last year. That set off a swarm of stories suggesting Goldman would reap a $1 billion windfall off a struggling company's death.
Which would be awesome, if it were true
First, understand that Goldman will receive the equivalent of $1 billion in fees even if CIT doesn't go bankrupt. There's no windfall here.
As CIT struggled last summer, Goldman extended a $3 billion loan at not-so-cheap terms, as responsible lenders do. The duration of the loan was 20 years. If CIT cancels the loan early, it's required to pay Goldman the net present value of the fees that Goldman would have earned, had the loan stayed active for the full 20 years.
In English, Goldman made a risky but lucrative loan. To discourage CIT from canceling that loan, it asked for a prepayment penalty clause in order to lock in returns. This is where people stomped their feet over Goldman's "one-sided" bet.
But you know what company also has to suffer through such "one-sided" terms? Goldman Sachs.
How soon we forget
Last October, as Goldman itself was on the verge of collapse, Berkshire Hathaway
As part of the deal, Goldman, just like CIT, agreed to a prepayment penalty. If Goldman ever chooses to repurchase the preferred shares from Berkshire, it has to pay a 10% penalty, equal to about $500 million.
Yet no one ever called Warren Buffett a cheater, manipulator, pirate, conspirator, or pillager. They called him a hero. A shrewd investor at worst.
The only difference between Goldman's loan to CIT and Berkshire's loan to Goldman is that Goldman can go after a bankrupt CIT. In contrast, Berkshire can only receive the prepayment penalty if Goldman voluntarily chooses to repurchase its investment. In the case of bankruptcy, Berkshire would only recover principal on the preferred-share investments if bondholders were already taken care of.
But this is an irrelevant point: Goldman can go after a bankrupt CIT only because it's a senior secured creditor. Just like every other bankruptcy in history, secured creditors get in line first, and receive what they're contractually owed ahead of other investors, who are usually wiped out.
The only thing unique about this deal is the public's desire to vilify Goldman at any cost. So please, let's put this feud to rest.
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