Goldman Sachs stands to receive a payment of US$1B, while US taxpayers would lose US$2.3B, if the embattled commercial lender CIT files for Chapter 11 bankruptcy protection, LTN learned today. The payment is based on the structure of a US$3B rescue finance package that Goldman extended to CIT on June 6 2008, about five months before the Treasury bought US$2.3B in CIT preferred shares to prop it up at the height of the US financial crisis. The potential loss for taxpayers would be the biggest 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 US$1B, people familiar with the transaction said. While Goldman is entitled to demand the full amount, it is likely to agree to postpone payment on a part the amount. In a CIT filing last week it said that it was in negotiations with Goldman “concerning an amendment to this facility”. Goldman 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.” CIT declined to comment. In an effort to prevent bankruptcy, it is working on a debt exchange offer that would virtually wipe out the equity holders. In the event of bankruptcy, Goldman would reap more than US$1B because it also holds credit insurance that would be also be paid off. Goldman said in a statement that: “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.”
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