IT’S BEEN DUBBED the apology with a half-billion-dollar gift attached. In an attention-grabbing move this week, Goldman Sachs (GS: 172.83, -4.07, -2.30%) said it would launch a $500 million initiative to help small businesses with Warren Buffett as a key adviser, an announcement that coincided by hours with a public mea culpa from CEO Lloyd Blankfein for mistakes in the financial crisis. But it turns out Goldman’s program includes its own discount — the kind that only an investment banker could love.
According to a review of Goldman’s program by SmartMoney in consultation with corporate tax experts, the ultimate price tag of the initiative could be far less than the heavily publicized $500 million. A big chunk of the money is destined for charitable institutions, creating potentially sizable tax deductions for Goldman, while other portions are being made as loans that Goldman confirms it expects to be repaid with interest.
All in all, tax experts say, the ultimate cost to Goldman could total roughly $136 million to $150 million—70% or more below the half-billion figure that helped generate so much publicity for the firm this week. Interest income from the loans could lower the final bill even more. Asked about the estimates, a Goldman spokesman didn’t comment on the specific figures but defended the program as a boon to small businesses, while giving Goldman “a modest economic return.” Buffett didn’t return requests for comment.
The program, titled 10,000 Small Businesses, drew a wave of media attention. Its advisory board includes Buffett, a big Goldman investor who is well known for his philanthropy, as well as Harvard Business School professor Michael Porter. While Goldman said explicitly that the small-business program was not designed as a public-relations move, many have interpreted it otherwise. Goldman has been the target of criticism for getting ready to pay out billions in bonuses to executives this year after benefitting from the U.S. government’s Troubled Asset Relief Program, or TARP, during the financial crisis—as well as for missteps that some say contributed to the meltdown.
On Tuesday, the same day Goldman announced 10,000 Small Businesses, Blankfein appeared before a room full of CEOs and journalists at an awards ceremony in which he was named CEO of the year by the Directorship Forum, and said Goldman had “participated in things that were clearly wrong and have reason to regret.” Those comments suggested a turnaround from earlier this month, when Blankfein drew notice for being quoted in an interview with The Times of London saying he is a banker doing "God's work."
Here’s why the cost of 10,000 Small Businesses is likely to be lower than the $500 million figure. Half of those funds will be charitable contributions to community colleges and other nonprofit institutions to sponsor business education. At an all-in tax rate of 40% for state, local and federal obligations, that could give Goldman a $100 million savings on its taxes over the next five years, says Robert Willens, an independent tax and accounting analyst in New York and a former managing director at Lehman Brothers.
The rest of the Goldman discount is even simpler: Goldman should get back most or all of the $250 million it is also providing for loans to small businesses that a Goldman spokesman says are to be repayed in three to five years at “market rates” for nonprofit institutions that lend to small businesses. Market rates for that type of loan would generally range around 7% to 8%, according to Mark Pinsky, who consulted with Goldman on the program. Pinsky is president and CEO of the Opportunity Finance Network, a Philadelphia-based association of Community Development Financial Institutions, or CDFIs, which are nonprofit institutions that lend to small businesses.
“They’re not paying $500 million,” says Benjamin Leff, a tax law professor at American University’s Law School in Washington, D.C. “They’re not even paying $250 million.”
The Goldman spokesman confirmed that the firm expected tax benefits from the charitable contributions and that it expected the funds being disbursed as loans would be repaid. “The program has a triple bottom line: We’re providing capital to underserved businesses, capacity building for CDFIs and a modest economic return to ourselves,” says the Goldman spokesman.
To be sure, at a time when the credit crunch has made it much more difficult for entrepreneurs to secure loans, Goldman’s money will no doubt be welcomed by beneficiaries regardless of how the investment bank’s accounting works out. Already, the program is drawing widespread praise in the small-business community. Says Bill Dunkelberg, the chairman of Liberty Bell Bank, a community bank in Cherry Hill, N.J.: “Even though it’s like 1% of the company’s bonuses, it is nice to fund these things and I’m sure community colleges will appreciate the money.” Adds Dunkelberg, “Small businesses can certainly use the money.”
Goldman is also taking an obvious risk that it won’t get repaid on the loans. The default rate for these types of loans has traditionally been low – less than 1% prior to the recession, says Pinsky. However, since the downturn, Pinsky expects the default rate to reach 1.5%.
To limit potential defaults, Goldman has tasked the program’s advisory board — including Buffett and Porter along with Blankfein — to select CDFIs that have track records of helping successful businesses. In addition, Goldman says it plans to lend only to companies that are at least two years old, have four employees ore more, and pull in revenue between $150,000 and $4 million in the most recent fiscal year.
