Goldman Sachs Group and Morgan Stanley, the two biggest securities firms before they converted into banks last year, will repay the $10 billion they each received from the US government as soon as possible, analyst David Trone said.
The government is likely to waive its requirement that the companies raise new common or preferred equity before paying back the money from the Troubled Asset Relief Program, or TARP, wrote Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, in a note to investors dated yesterday.
Goldman Sachs Chief Financial Officer David Viniar said yesterday the company wants to repay the money to signal the firm is healthy and to escape limitations that were imposed with the money.
Both companies would also benefit from any government plan to buy troubled assets because they have already marked their illiquid holdings at 20 percent to 25 percent below their rivals, Trone wrote. Even if they don’t sell assets to a new government- backed “aggregator bank,” the creation of one will improve secondary market demand for bad assets and allow Goldman Sachs and Morgan Stanley to sell holdings at a premium, Trone said.
The two companies could forgo the aggregator bank option, “and sell at 10 per cent or more above current marks in a thawing secondary market,” he wrote.
Trone estimated that if Goldman Sachs does use an aggregator bank, it could sell as much as $16.1 billion of securities and reduce its ratio of problem assets to total equity to 12 per cent from 37 per cent. For Morgan Stanley, the plan could rid the company of $29.3 billion of assets, cutting the ratio to 11 per cent from 69 per cent, he said.
Trone doesn’t expect that Goldman Sachs or Morgan Stanley would participate in any government-backed plan to insure troubled assets, he wrote.
“We believe these developments could be a positive for the shares” in the short term, Trone wrote.
“Thereafter we believe they will languish in a range as the investment community waits for the cycle to turn and seeks clues that managements will be able to find a new profitability model.”
Goldman Sachs, which lost 4.2 per cent of its value this year through yesterday, rose $1, or 1.1 per cent, to $88.97 in composite trading on the New York Stock Exchange at 9:55 am. Morgan Stanley, down 37 per cent this year, gained 19 cents to $22.20.
