NEW YORK (
image has for months taken a beating in the court of public opinion and from Congress, but now its stock is getting hammered in the wake of new regulatory proposals from the White House. Why doesn't it just go private?
On the surface the idea seems attractive. The key to getting it done -- the key to getting anything done in corporate finance -- is being able to put the money together. And probably no institution in the world does that better than Goldman.
Has the bank's management at least discussed the option since the crisis began? A Goldman spokesman declined to say.
Goldman's Private Rumors
The idea has gained a bit of traction in the media lately, with both
musing on the concept this week,
following the lead of RealMoney.com's Doug Kass
. Several bloggers also raised the prospect in the Fall of 2008 when the stock was in freefall on concerns it wouldn't be able to continue to tap short term funding.
Fueling the debate now is a potential ban on private equity and proprietary trading for the big banks proposed by President Obama. Though details are scarce, the proposals would appear to go to the heart of Goldman's business.
"Going private -- if it can be financed -- would eliminate the main problems of publicity and soundbyte politics," writes Charles Ellis, author of
The Partnership: The Making of Goldman Sachs
, via email.
It does not appear it would be helpful in addressing Obama's proposals, however.
"It's like all these crazy people who believe if you paid back TARP, the government would all of a sudden evaporate and go away," says Richard Bove, analyst at Rochdale Securities, of the idea, adding "It makes no sense whatsoever: That's my bottom line."
One of the most obvious obstacles to Goldman's going private is access to funds to support its trading operations. Goldman dwarfs even the largest hedge funds, and hedge funds have shown very limited ability to tap debt markets, which is one reason why some of the largest ones, like Citadel, were hoping to go public before the crisis.
But transaction itself -- just the mechanics of putting such a deal together -- may be the biggest obstacle of all. It appears such a big and obvious roadblock to William Cohan, a former
investment banker who has written books on
and who is now working on one about Goldman, that he seemed to worry I'd embarrass myself by even broaching the topic in print.
"You do what you need to do, but I wouldn't write that story if I were you," Cohan told me. "The whole idea is insane."
He points out that, with a market cap of $80 billion, which must be taken out at a premium -- say $90 billion -- the deal would already double the size of the largest leveraged buyout ever, and that's without even thinking about the all-important leverage.
To date, the largest LBO on record is the $43.8 billion purchase of
in 2007 -- the top of the market. Total leverage on the deal was 6.9X, according to data provider
. In other words, the private equity firms --
Kohlberg Kravis Roberts & Co.
and somewhat ironically Goldman itself -- that went in on the TXU deal together put in just over $6 billion in equity.
And that's the reason the so-called smart money was willing to pay so much for TXU in the first place. The inclusion of so much debt meant they had the potential to make a killing. If they could sell TXU for $50 billion -- just $6 billion more than they paid -- they would double their money. That's the magic of leverage.
Goldman couldn't take on much, if any, more leverage than it already has. That means the potential returns for investors are much less interesting, as Goldman would have to structure much more of that theoretical $90 billion valuation figure in actual equity.
In the event that I screwed something up, let me be clear these calculations are mostly mine. Cohan was too incredulous to walk me through them, and his investment banking credentials would seem to make his view especially persuasive.
After all, making these determinations are what investment bankers do for a living. I couldn't find another banker to go on the record, but one who works at a Goldman rival told me that while he admitted the idea was far-fetched, he didn't think it impossible. Still, he imagined Goldman would not be able to even double its leverage.
Then he threw out the same name that Cohan did, in frustration, when asked who might be able to facilitate such a deal. Charles Ellis also mentioned the same name in his e-mail to me. Who else, of course, but
Don't hold your breath.
Written by Dan Freed in New York