Financial services major Goldman Sachs will receive $1 billion, while US taxpayers will lose $2.3 billion if embattled commercial lender CIT files for bankruptcy protection, says a media report.
The payment stems from the structure of $3 billion rescue finance package that Goldman extended to CIT on June 6, last year, about five months before the Treasury bought $2.3 billion in CIT preferred shares to prop it up at the height of the crisis, the Financial Times said in its report.
US taxpayers would lose $2.3 billion if CIT files for Chapter 11 bankruptcy protection, it said.
The potential loss for taxpayers would be the biggest to crystalise so far from the government's capital injection plan for banks.
The agreement with Goldman states that if CIT defaults or goes bankrupt, it "would be required to pay a make-whole amount" that totals $1 billion, the report said citing people familiar with the matter.
While Goldman is entitled to demand the full amount, it is likely to agree to postpone payment on a part of that sum.
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According to the paper, CIT filing last week said that it was in negotiations with Goldman "concerning an amendment to this facility".
Quoting Goldman the report said, "This would not be a windfall payment. The make-whole payment is simply the present value of the spread to be earned over the life of the facility."
In an effort to prevent bankruptcy, CIT is working on a debt exchange offer that would virtually wipe out equity holders. In the event of bankruptcy, Goldman would reap more than $1 billion because it also holds credit insurance that would be paid off.
"The credit default swaps Goldman Sachs purchased to prudently manage the risk associated with the CIT financing are not a directional 'bet' on CIT, but were bought to protect against the possibility of a precipitous decline in the value of the collateral," quoting Goldman the report said.