Goldman, Give It All Back

If Goldman Sachs CEO Lloyd Blankfein wants to put his money where his mouth is, he won't stop with just giving back the $10 billion in federal bailout money the investment firm got last autumn. He'll also offer to return some of the $13 billion Goldman (GS) got from the U.S. government by way of the bailout of American International Group (AIG).

Goldman's decision to sell shares and raise the necessary cash to repay the government is being seen by some as a show of strength. That's especially so after the firm posted a better-than-expected profit for the first quarter of $1.81 billion—largely driven by its proprietary trading desk. That's the same group of bond and commodity traders responsible for much for Goldman's outsized profits during the credit boom. So everything old is new again at Goldman. Right?

But more than anything, the move to repay the TARP money is being motivated by Blankfein's desire to free his firm of all those nettlesome government mandates on executive compensation and bonuses. Now there's nothing wrong with Goldman giving back the TARP money if it really doesn't need it. After all, government officials have always said they expected the banks to repay Treasury at some point.

AIG's CDOs: How Different from TARP?

Still, if Blankfein really wants to help U.S. taxpayers out, he can go the extra mile and give back some of that AIG money the firm got, too. If the government had allowed AIG to file for bankruptcy, Goldman likely would have incurred an even bigger fourth-quarter loss than it reported. So Blankfein owes a bit of gratitude to Uncle Sam. And as my BusinessWeek colleague Roben Farzad pointed out on CNBC on Mar. 27, Blankfein can thank taxpayers by forking over its AIG largesse.

Now we know Goldman will object that the AIG bailout money is different from TARP. The firm will argue that the dollars that passed through AIG were nothing more than money it was owed on all those credit default swaps it had purchased to insure some of its portfolio of collateralized debt obligations, or CDOs. In Goldman's world, all the government was doing was allowing AIG to live up to its contractual agreements.

But, as we have seen in this financial crisis, some contracts can be broken. Maybe it was a smart move for the government to indirectly bail out AIG's trading partners to prevent a systemic financial collapse. But the government didn't have to make firms such as Goldman completely whole by paying face value for the CDOs that AIG had insured.

If nothing else, maybe Goldman should now take the haircut it probably should have taken on those CDOs at the time of the AIG bailout. The bank could start by offering to give some of that $13 billion back, too.

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