LEVERAGE: IT HELPS US MAKE (LOSE) MORE MONEY

Leverage, which is usually expressed as a ratio, is a comparison between a company's debt and its equity. Put more simply, a company's leverage ratio expresses how much it borrows (debt) versus how much it owns (equity). Thus, if(a) Investment Bank X has $100 million in cash and securities on its balance sheet; and (b) $10 million of X's balance sheet is equity capital; and

(c) the remaining $90 million is funded by debt (bond issues, bank loans, commercial paper, repurchase agreements, etc.), then (d) Company X has $90 million in debt and only $10 million in shareholder equity, so it is leveraged 9:1 (If the company was separated into little $10 segments, shareholders owned only about $1 dollar for each of those segments. Segment company x borrowed the other $90) creditors paid for owned $90 of each $100 dollar segment of the company it borrows $90 out of every $100). Reduced to its least common denominator (remember algebra?), Company X has a leverage ratio of 9:1. NOW, by the end of 2007, some of Wall Street's old school investment banks -Bear Stearns, Morgan Stanley, and Lehman Brothers -- were leveraged at ratios above 30:1. Bear Stearns, as an example, was leveraged somewhere around of about 33:1. By any measure, this is excessive leverage, and it is very risky. Leveraged 33:1 meant that the former investment bank owned only about 3% of a balance sheet worth nearly $400 billion. The other 97% percent of Bear's assets were encumbered (subject to claims by Bear's creditors because Bear borrowed so much). Here is the kicker - the reason why it is incredibly risky for a company to to have equity represents only 3% of its balance sheet... Creditors have superior claims to equity-holders (typically shareholders). In other words, losses are, as a rule, allocated to shareholders only until all equity is gone.

Therefore, if Investment Bank Z is leveraged at 33:1, and declining market conditions cause the value of Z's balance sheet assets to drop by just 3%, Bank Z's equity is wiped out. It is insolvent. We can illustrate with a hypothetical. (a) In May, Z's entire balance sheet consists of collateralized debt obligations (cdos) valued at par (they are valued at 100 cents on the dollar); but (b) Market conditions deteriorate in June, causing cdos values to fall from par to 97 cents on the dollar. A security trading at 97 cents on the dollar doesn't sound too bad. But for Investment Bank Z, leveraged at 33:1, 97 cents on the dollar is a complete disaster. This 3% decline in the value of its balance sheet assets means the bell is tolling. Z's entire equity stake is wiped out. The company is insolvent. THIS IS THE DOWNSIDE OF EXCESSIVE LEVERAGE.

Goldman's leverage ratio once hovered at 30 to 1; now it stands at around 12 to 1. A considerable drop but still insufficient to be safe enough for investors.

CDO, CDS AND DERIVATIVES ALL THE THINGS WE WERENT SUPPOSED TO UNDERSTAND
CDO A Collateralized Debt Obligation, or CDO, is a synthetic investment created by bundling a pool of similar loans into a single investment that can be bought or sold. An investor that buys a CDO owns a right to a part of this pool's interest income and principal. For example, a bank might pool together 5,000 different mortgages into a CDO. An investor who purchases the CDO would be paid the interest owed by the 5,000 borrowers whose mortgages made up the CDO, but runs the risk that some borrowers don't pay back their loans. The interest rate is a function of the expected likelihood that the borrowers whose loans make up the CDO will default on their payments - determined by the credit rating of the borrowers and the seniority of their loans. CDOs are created and sold by most major banks (e.g. Goldman Sachs, Bank of America) over the counter, i.e. they are not traded on an exchange but have to be bought directly from the bank. Securities Industry and Financial Markets Association estimates that US$ 503 billion worth of CDOs were issued in 2007. CDOs played a prominent role in the U.S. subprime crisis, where critics say CDOs hid the underlying risk in mortgage investments because the ratings on CDO debt were based on misleading or incorrect information about the creditworthiness of the borrowers. CDS: A credit default swap (CDS) is a form of insurance that protects the buyer of the CDS in the case of a loan default. If the borrower defaults (fails to repay the loan), the lender who has bought traditional insurance can exchange or "swap" the

defaulted loan instrument (and with it the right to recover the default at some later time) for money - usually the face value of the loan. The significant difference between a traditional insurance policy and a CDS is that anyone can purchase one, even those who do not hold the loan instrument and may have no direct "insurable interest" in the loan. The buyer of the CDS makes a series of payments (the CDS "fee" or "spread") to the seller and, in exchange, receives a payoff if the loan or any credit instrument named in the contract (typically a bond or loan) defaults, creating a credit event. Credit default swaps have existed since the early 1990s, and increased in use after 2003. By the end of 2007, the outstanding CDS amount was $62.2 trillion, falling to $38.6 trillion by the end of 2008. Most CDSs are documented using standard forms promulgated by the International Swaps and Derivatives Association (ISDA), although some are tailored to meet specific needs. Credit default swaps have many variations. In addition to the basic, single-name swaps, there are basket default swaps (BDS), index CDS, funded CDS (also called a credit linked notes), as well as loan only credit default swaps (LCDS). In addition to corporations or governments, the reference entity can include a special purpose vehicle issuing asset backed securities. Credit default swaps are not traded on an exchange and there is no required reporting of transactions to a government agency. During the 2007-2010 financial crisis the lack of transparency became a concern to regulators, as was the trillion dollar size of the market, which could pose a systemic risk to the economy. In March 2010, the DTCC Trade Information Warehouse (see Sources of Market

Data) announced it would voluntarily give regulators greater access to its credit default swaps database. Goldman Sachs profited from creating and selling highly rated sub-prime ...These securities turned to junk and investors lost their money. ... is suing the Koreanbased Goldman Sachs executives for selling them fraudulent CDOs. ..... then they bet against the bonds buying CDS derivatives. Goldman Sachs did all right from that deal. ... Goldman Sachs executives for selling them fraudulent CDOs. ....They forced the FASB to accept a rule-change in the accounting .... to push California into bankruptcy and make those CDS bets pay off big. ... By definition a CDS has a short and a long side, so from a purely theoretic perspective it should have no effect on the price of the ... this point is that the buyers and sellers of CDOs(and CDS via CDOs) definitely did not ... Here Goldman is making it clear that no market exists for the Abacus CDO and there is .. Goldman's Ethical Conflict of Interest: Obviated or Enabled? According to U.S. Senator Carl Levin, Goldman Sachs profited by taking advantage of its clients reasonable expectation that it would not sell products that it did not want to succeed and that there was no conflict of economic interest between the firm and the customers that it had pledged to serve. Not only was the bank secretly betting against housing-related securities while selling them to clients, in at least one case a client shorting such a security was allowed to have a hand in picking the bonds. What is perhaps most striking, however, is how little Goldman Sachs has had to pay for acting at the expense of some of its clients. One might predict on this basis that the unethical culture at the bank is ongoing. To rebuff Sen. Levins charge, Blankfein retorted that the discounted price on a given security corresponds to the risk acceptable to the purchasers. However, in this particular case, the Funds managers further claimed that the Fund would not have bought the bad deal had they known Goldman employees viewed it as crap (that the bank was secretly shorting it in proprietary trading would presumably

have also made a different in the Funds decision to buy), even at the discounted price. In other words, the risk corresponding to discounted price was understated by Goldman. For the risk/price relation to work, the information given by the seller to the buyers must be accurate. As part of its $550 million settlement with the SEC in July 2010, Goldman Sachs stated that it acknowledges that the marketing material for the ABACUS 2007AC1 transaction contained incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was selected by ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulsons economic interests were adverse to CDO investors. In other words, Goldman admitted that its marketing material on the security contained a conflict of interest wherein Paulsons involvement, which was averse to the value of the security, was omitted in line with Goldmans financial incentive to sell the security. To have obviated the conflict of interest would have meant less profit. Without a probable loss of much greater profit upon the discovery of the unethical exploitation of the conflict of interest, the financial calculus is unavoidably on the sordid side of the equation and a business is an economic enterprise. One might wonder if a firm such as Goldman, whose culture condones or looks the other way when ethical conflicts of interest are acted upon in an unethical direction, is eventually to be held accountable by the market if not by a servile government. It would be sad indeed, or at least enabling, were the market (if not the government) not to sufficiently penalize the bank for its unethical expediency. For a business to act unethically with financial impunity is to enable the sordid conduct and its enabling culture to go on, unfettered. As an alternative, we might look for moral leadership from CEOs concerning institutional conflicts of interest. Even if they are not disabled, a moral leader does not exploit them for financial gain. Such leadership can be relevant, meaning that it can be in line with the business calculus. In particular, the financial value of a unsullied reputation can outweigh profits from exploiting a conflict of interest (less probability-adjusted penalties). In other words, moral leadership can dovetail with cost/benefit analysis if the time-line is extended sufficiently. As John Fullerton, a former banker at J.P. Morgan observed, "At its core, Wall Street's failure, and

Goldman's, is a failure of moral leadership that no laws or regulations can ever fully address." Fullerton adds to this realistic assessment an implied pessimism regarding the likelihood of such leadership manifesting (even in sync with the business calculus) in suggesting that the SEC settlement "is the tipping point that provides society with an opportunity to fundamentally rethink the purpose of finance." That is, the value of Wall Street itself can and perhaps should be reassessed relative to business system overall. The Lawsuit: Securities and Exchange Commission v Goldman Sachs & Co. and Fabrice Tourre On April 16, 2010 the Securities and Exchange Commission, in a scathing civil lawsuit, alleged that Goldman, Sachs & Co as well as its employee, Fabrice Tourre made materially misleading statements and comissions in connection with a synthetic collateralized debt obligation (CDO), called Abacus 2007-AC1 that it sold to its investor clients in early 2007. Because the transaction occurred at a time when the U.S. housing market was beginning to show signs of weakness, the SEC believed that certain activities and misrepresentations of Goldman and Tourre constituted misconduct in violation of Section 17(a) of the Securities Act of 1933, Section 10(b) of the SEC Act of 1934, and Exchange Act Rule 10b-5. (Securities and Exchange Commission v. Goldman, Sachs & Co., 2010). Collectively, these federal anti-fraud statutes make transactions that constitute a scheme or artifice to defraud, and other untrue statements or comissions a clear violation for which liability would attach. (U.S.C. Sec. 77q(a)(The Securities Act); 15 U.S.C. Sec. 77j (b) (Authority: Sec. 10; 48 Stat. 891); 15 U.S.C. 78 (j)).Goldman had structured Abacus 2007-ACI with Paulson & Co. Inc, a hedge fund notable for winning huge profits by taking short positions. (Zuckerman, 2010; Teather, 2010). The marketing materials that Goldman provided to its foreign institutional investors stated that the underlying mortgages contained in the Abacus investment were selected by ACA management, an independent third-party whose role it was to analyze credit risk in mortgage backed securities. Goldman represented that these were sound investments but at the same time the marketing materials presented did not disclose that Paulson & Co. Inc. with economic interests directly opposite to Goldmans clients played a significant role in the selection of the underlying portfolio mortgages. Paulson was bearish on the housing market and

helped to choose mortgage backed securities that were expected to experience a negative credit event and subsequently default. After the Abacus portfolio selection, Paulson entered into Credit Default Swaps (CDS) and shorted these securities, essentially betting that the mortgages contained in the Abacus deal would fail. It was alleged that Goldman may not have disclosed any of these facts in the marketing materials provided to its clients, and that this omission was a statutory violation. (Securities and Exchange Commission v Goldman Sachs & Co. and Fabrice Tourre, 2010). Furthermore, the SEC claimed that Fabrice Tourre, who was the Goldman representative on the deal worked directly with Paulson, personally devised, and marketed the transaction, and misled ACA into believing that Paulsons interest in Abacus was long and that his interests in the collateral selection were aligned with ACAs. In point of fact, nothing could have been further from the truth. (Goldman Sachs & Co.Settlement with the SEC, 2010; SEC. gov 2010, New York Times DealBook, 2010). By January 29, 2008, just 9 months after inception, 99 percent of the portfolio had been downgraded. According to the litigation, Paulson profited in the amount of 1 billion dollars while deal investors lost a commensurate amount. Goldmans response in opposition to the suit was that they were merely mitigating business risk and operating within a legal zone of business as usual and filed an Answer denying such accusations. (Jeffers and Mogielnicki, 2010). Nevertheless, in April, 2010 a settlement was announced, and Goldman agreed to pay a total of 550 million dollars to defrauded clients and the SEC as well as to review and revise its ethical policies and procedures. Goldman, in its settlement only admitted to making a mistake in not disclosing the role of Paulson in the marketing materials. (Goldman Sachs & Co. Settlement with the SEC, 2010).

HOW CAN MY BOND BE IN DEFAULT? ITS RATED AAA. CAN YOU REALLY RELY ON WHAT S&P TELLS YOU.
Goldman Sachs has arguably been the most successful firm on Wall Street for decades, with some of the world's biggest private equity and hedge funds and investment bankers and traders who practically minted money. The bank was humbled along with the rest of Wall Street in 2008 when the financial markets crashed, turning itself into a commercial bank holding company and surviving the meltdown with federal assistance. In 2009, it led the Street's resurgence and was the first to seek to pay back its bailout money. But its hardball tactics and supersized profits drew new scrutiny and criticism. And in April 2010, the bank was accused of securities fraud in a civil suit filed by the Securities and Exchange Commission that claimed the bank created and sold a mortgage investment that was secretly devised to fail. The move marked the first time that regulators have taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market. Goldman later paid a settlement $550 million in 2010 to settle accusations that it had misled investors who bought the Abacus mortgage security. Goldmans biggest challenge may well be the public relations blows resulting from the crisis. It was called a great vampire squid by Rolling Stone and denounced in Congress. The damage to its reputation could take years to repair. A reminder of those issue came in April 2011, when a 650-page report on the financial crisis published by the Senate Permanent Subcommittee on Investigations offered the stark conclusion that Goldman Sachs executives had not told it tell the whole truth about whether they bet against the mortgage market in 2007 and 2008. With the settlement, no other Goldman employees have been named other than Fabrice Tourre, a midlevel banker who the S.E.C. accused of misleading clients. In June, though, the bank received a subpoena from the office of the Manhattan district attorney, which is investigating Goldman's role in the financial crisis, according to people with knowledge of the matter. Senator Carl Levin, Democrat of Michigan, who headed up the Congressional inquiry, had sent his findings to the Justice Department to figure out whether executives broke the law. The agency said it was reviewing the report.

GOLDMAN AND THE FINANCIAL CRISIS When the housing bust began to take its toll on Wall Street, Goldman seemed to be the firm best positioned to weather the storm. In 2007, a year when Citigroup and Merrill Lynch cast out their chief executives, Goldman booked record revenue and earnings and paid its chief, Lloyd C. Blankfein, $68.7 million the most ever for a Wall Street C.E.O. And as 2008 progressed, Goldman appeared to persevere through deepening economic crisis that consumed rivals Lehman Brothers and Merrill. In September, the company reported modest, though diminished, profits for the third quarter, beating expectations. But the company was not invincible, as the credit crisis escalated later that month. American International Group, an insurance giant facing collapse due to its exposure to the mortgage crisis, was Goldman's largest trading partner. When A.I.G. received an emergency $85 billion bailout from the federal government, jittery investors and clients pulled out of Goldman, nervous that stand-alone investment banks even one as esteemed as Goldman might not survive. Company shares went into a free fall. On Sept. 21, in a move that fundamentally changed the shape of Wall Street, Goldman and Morgan Stanley, the last major American investment banks, asked the Federal Reserve to change their status to bank holding companies. Goldman would now look much like a commercial bank, with significantly tighter

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regulations and much closer supervision by bank examiners from several government agencies. The radical shift represented an assault on Goldman's culture and the core of its astounding returns of recent years. Goldman received $10 billion from the federal government as part the Bush administration's $700 billion rescue of the financial industry. Goldman also benefited from an indirect subsidy adopted by the federal government that allows them to issue their debt cheaply with the backing of the Federal Deposit Insurance Corporation. It was the first bank to take advantage of the debt program when it was introduced in November, when the financial crisis made it nearly impossible for companies to raise cash. The program will continue to bolster scores of banks through at least the middle of 2012.

A SENATE GRILLING Politicians like nothing more than a convenient foil, and in April, 2010 Democrats still locked in a stubborn impasse with Republicans over new rules to govern Wall Street believed they had found a gold-plated one in Goldman Sachs. In an April 27 hearing, members of the Senate Permanent Subcommittee on Investigations interrogated Goldman's mortgage men for over 10 hours, putting them on the spot over Wall Street's questionable conduct at a legislatively propitious moment. Through the day and into the evening, Goldman Sachs officials met with confrontation and blunt questioning as senators from both parties challenged them over their aggressive marketing of mortgage investments at a time when the housing market was already Mr. Blankfein was pressed on the deal at the center of the S.E.C. case. He said the investment was not meant to fail, as the S.E.C. claims, and in fact, that the deal was a success, in that it conveyed "risk that people wanted to have, and in a market that's not a failure." To which Senator Jon Tester, Democrat of Montana, replied, "It's like we're speaking a different language here."

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GOLDMAN SACHS IS FILLED WITH POLITICIANS, THAT MUST MAKE IT EASY TO GET FAVOURABLE LAWS PASSED Hank Paulson He joined Goldman Sachs in 1974, working in the firm's Chicago office under James P. Gorter. He became a partner in 1982. From 1983 until 1988, Paulson led the Investment Banking group for the Midwest Region, and became managing partner of the Chicago office in 1988. From 1990 to November 1994, he was co-head of Investment Banking, then, Chief Operating Officer from December 1994 to June 1998; eventually succeeding Jon Corzine as chief executive. His compensation package, according to reports, was $37 million in 2005, and $16.4 million projected for 2006. His net worth has been estimated at over $700 million. In January 2003, Paulson was criticized for stating, "I don't want to sound heartless, but in almost every one of our businesses, there are 15 to 20 percent of the people who really add 80 percent of the value. I think we can cut a fair amount and not get into muscle and still be very well-positioned for the upturn." He later issued an apology to all of the company's employees via voice-mail. Paulson was nominated on May 30, 2006, by U.S. President George W. Bush to succeed John Snow as the Treasury Secretary. On June 28, 2006, he was confirmed by the United States Senate to serve in the position. Paulson was officially sworn in at a ceremony held at the Treasury Department on the morning of July 10, 2006. Many people wondered how he would react to going from one of the highest paid men in America to a civil servant. However taking the job as treasury secretary turned out to be the best move Paulson would ever make. As a mandate for taking public office he could not hold any shares in the sector he regulated i.e. he had to sell all his shares in Goldman Sachs, in order to be impartial. As it turns becoming treasury Secretary was the best decision he ever made. He received $ 500 million and thanks to a law passed by the earlier George Bush he was not required to pay any taxes on this money. Just a year later the entire market collapsed and his shares would not even have been worth a quarter of that amount.

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Another interesting thing to note is that virtually the entire US Treasury Department was stacked with ex-Goldman Sachs employees. They literally ran the treasury department. The picture shown below gives us a more definitive idea of how bad the situation is. A congresswoman said the treasury department is an arm of wall street. An economist said We call it Government Goldman in the modern era. At the end of his speech Hank Paulson says I think we saw the best of the United States in the speakers office tonight. As filmmaker Michael Moore points out its actually the best of Goldman Sachs.

The crucial point here is the bailout. As is common knowledge by now the US financial services companies went bankrupt in September 2008, at which pint Paulson was still the treasury secretary. He urged the treasury to issue $ 700 billion to bail out these companies. Now there are two problems with this approach. Firstly when Paulson was CEO of Goldman Sachs he had presided over the largest issue of Junk CDOs, perhaps I should also mention that many of them were sold to retirement funds which are prohibited from investing in any bonds except for those rated AAA so as to avoid default. Just think he robbed senior citizens of their life savings. These were specifically designed to make them millions of dollars when their clients lost the same amount. Secondly instead of having AIG negotiate a reasonable price to pay on the Credit Default Swaps he issued $ 170 billion to AIG on the condition that they pay 100 cents on the dollar to the holders of such

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CDS. Lastly Goldman paid out $ 16 billion in bonuses in 2009 despite having this quantum of debt they needed to repay.

More like blow up the world! At this point it becomes essential to mention Robert Rubin (pictured on the left). He was the US Treasury Secretary all the way from 1995-1999, he was instrumental in the large scale deregulation of the derivatives market which sold toxic CDOs, CDS etc. when Broksley Bourne of the Futures Exchange Corporation wanted to bring them under control it was his fiery speech as well as aid from then Chairman of the Federal Reserve, Alan Greenspan and known orator Larry Summers (who says he made millions of dollars through speaking engagements some of them pegged at over $ 100,000 a speech) which sealed the deal for derivatives deregulation. The Glass Spiegel Act formed after the Great Depression forbid two large companies from merging together. In 1998 when Citi Bank wanted to merge with Travellers group to form Citigroup he was the guy who introduced the GrammLeach-Bliley Act over turning Glass-Spiegel. The company became so big that its

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failure could result in the full scale dismantling of the nations financial infrastructure. Which did eventually happen. He served as a board member on Citigroup for 8 years and he received in exchange $ 126 million in bonuses and stock. Guess what where else he worked? Goldman Sachs for 26 years. He served as cochairmen from 1990-1992. Goldman Sachs employees also regularly used the services of prostitutes. Apart from the moral and ethical implications of that (they would use a prostitute and then have no problems going home to their wives), consider the financial implications. These expenses were as high as 5% of the firms total revenues. They were written off to entertainment expenses, computer repair, trading research. The price a whopping $ 1000- $ 1600 per hour, add service tax. Wow.

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Lloyd Blankfein
Blankfein earned a total of $54.4 million in 2006 as one of the highest paid executives on Wall Street. His bonus reflected the performance of Goldman Sachs, which reported record net earnings of $9.5 billion. The compensation included a cash bonus of $27.3 million, with the rest paid in stock and options. While CEO of Goldman Sachs Group in 2007, Blankfein earned a total compensation of $53,965,418, which included a base salary of $600,000, a cash bonus of $26,985,474, stocks granted of $15,542,756 and options granted of $10,453,031. Blankfein was named as one of "The Most Outrageous CEOs of 2009" by Forbes magazine. Taking a different position, Financial Times, which named Blankfein as its "2009 Person of the Year," stated: "His bank has stuck to its strengths, unashamedly taken advantage of the low interest rates and diminished competition resulting from the crisis to make big trading profits." Critics of Goldman Sachs and Wall Street have taken issue with those practices. On January 13, 2010, Blankfein testified before the Financial Crisis Inquiry Commission, that he considered Goldman Sachs's role as primarily a market maker, not a creator of the product (i.e., subprime mortgage-related securities). Goldman Sachs was sued on April 16, 2010 by the SEC for the fraudulent selling of a collateralized debt obligation tied to subprime mortgages, a product which Goldman Sachs had created. With Blankfein at the helm Goldman has also been criticized "by lawmakers and pundits for issues from its pay practices to its role in helping Greece mask the size of its debts." Blankfein testified before Congress in April 2010 at a hearing of the Senate Permanent Subcommittee on Investigations.[improper synthesis? He said that Goldman Sachs had no moral or legal obligation to inform its clients it was betting against the products which they were buying from Goldman Sachs because it was not acting in a fiduciary role.

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IF YOU DONT HELP THE WORLD WILL CEASE TO EXIST: WE NEED A BAILOUT
AMOUNT RECEIVED DURING BAILOUT GOLDMAN SACHS collected nearly $3bn (1.9bn) from bailed-out US insurer American International Group (AIG) as a payout on bets it placed on its own account with the bulk coming directly from taxpayers after AIG's rescue. The revelation was made in the Financial Crisis Inquiry Commission (FCIC) report into 2008's financial meltdown. According to the US government-sponsored FCIC, AIG's $182bn bailout was necessary because the insurer's collapse threatened "cascading losses and collapses" throughout the financial system. Goldman received $12.9bn of the bailout funds a move that drew heavy criticism and allegations of cronyism. The then treasury secretary, Hank Paulson, had previously been Goldman's chief executive. Much of that money went to Goldman clients. The FCIC breaks down exactly how much Goldman itself received and showed it got $2.9bn for "proprietary trades" trades made on its own account. Of those funds, $1.9bn was paid after AIG had received its enormous taxpayer bailout. "Thus, unlike the $14bn received from AIG on trades in which Goldman owed the money to its own counterparties, this $2.9bn was retained by Goldman," the report states. Wall Street sources strongly disagreed with the FCIC's characterization of the Goldman transactions.

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PAYBACK PLANS OF BAILOUT Goldman announced that it will return $10 billion in bailout money by first offering $5 billion through an equity offering. The bank also announced that it made $1.81 billion in profits in the first quarter. A New York banking attorney said Treasury pressed Goldman to accept a capital injection from the government against its will, in part, to encourage other banks to participate. He added that Treasury sought Goldman's participation so that other banks would agree to accept allocations without fearing that it would portray them in a negative light. As a result, Treasury and Goldman's primary regulator, the Federal Reserve, could seek to delay its repayment for fear of how the effort might be perceived by investors of other large financial institutions, such as Bank of America Corp and Citigroup Inc. which may not be in a position to pay back the funds. The government's response will vary depending on stress tests bank regulators are performing on financial institutions expected to be completed in a couple weeks. A provision in the American Recovery and Reinvestment Act, which was approved in February, impedes Goldman and other financial institution recipients of bank bailout funds ability to return capital. The statute requires Treasury to negotiate with each bank's primary regulator before it approves a repayment. However, some banking attorneys believe that Goldman's ability to return the bank bailout funds would be embraced enthusiastically by Treasury Secretary Timothy Geithner and other bank regulators.

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