Sunday, February 8, 2009


After digging into the report and the appendices, a few things stand out:

1.  The biggest complaint is that the pricing was weak on the preferred shares.  That was part of the idea, like a shot of adrenaline to the heart.  Mainline some capital.  It reminds me a little of the overdose scene from Pulp Fiction where Uma Thurmon gets a hypo straight to the heart.  

2.  They didn't mention that the Treasury gets their return TAX FREE.  

3.  The terms and conditions were based on the Berkshire/Goldman deal!  See footnote 29:
It is customary in corporate legal practice to prepare transaction documents bystarting with documents from another transaction and “marking them up”, and the Berkshire Hathaway papers appear to have been the starting point for Treasury.
All I can say is that it is nice work if you can get it -- just pull another deal off the shelf and fill in the blanks.  So what would be called plagiarism in academia is simply "marking them up" in corporate law.  Cool.

4.  In some ways, excluding pricing, the CPP program had more stringent terms and conditions then Buffett's deal.  
The terms of the CPP agreements in most other areas [excluding price]  are as good as, and in some cases better than, those in the Berkshire Hathaway agreements, although these other areas are typically less important to investors. Such other provisions include voting rights of the preferred stock, covenants restricting common stock dividends and stock repurchases, exercise period of and anti- dilution adjustments for the warrants, transfer restrictions, representations and warranties by the issuer, conditions to closing, and amendment provisions.
However, the CPP [Capital Purchase Program] missed the single most important Berkshire covenant. Namely the requirement that the top 4 executives hold and continue to hold at least 75% of their personal net worth in GS shares.
On September 28, 2008, each of Lloyd C. Blankfein, Gary D. Cohn, Jon Winkelried and David A. Viniar (each an “Executive”) executed a letter agreement with The Goldman Sachs Group, Inc. (the “Company”) in which the Executive agreed that, with certain exceptions, until the earlier of October 1, 2011 and the date of redemption of all of the Company’s 10% Cumulative Perpetual Preferred Stock, Series G, par value $0.01 per share and having a liquidation value of $100,000 per share (the “Series G Preferred Stock”), (i) the Executive will continue to satisfy the Special Transfer Restrictions (at the 75% level) which are set forth in the Amended and Restated Shareholders’ Agreement and described in the Company’s 2008 proxy statement; and (ii) the Executive, his spouse and any estate planning vehicles will not dispose of more than 10% of the aggregate number of shares of the Company’s voting common stock, par value $0.01 per share (the “Common Stock”), they beneficially owned on September 28, 2008.
In other words, they have to eat their own cooking. This is much better then trying to micro manage executive compensation. Plus, it was a deal they couldn't refuse. How could they possibly object to a deal like this in the middle of a pitch regarding how great the company is, etc.  You could argue that they will still be wealthy by conventional standards, regardless of what transpires.  However, being investment bankers and all, the fact they are chained to the company has to add to their sense of commitment.  

The Treasury is a "free rider" on this part of the deal.  They get virtually the same benefit as Buffett without doing anything.  However, this would have been great to negotiate on a company by company basis -- had that been the process.  

5.  The preferred stock of banks, especially BAC and C, has seriously tanked since the CPP was done.  However, if the banks survive, it gets redeemed and all is well.  If not, there are bigger problems.

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