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Goldman Sachs Tried to Pile on Its Profits in Facebook Deal

The Goldman Sachs (GS) saga of a Facebook shares special investment vehicle for its wealthiest clients seemed over. Goldman withdrew its offer to US clients and focused overseas to avoid additional SEC scrutiny on Facebook. Or so the story goes. But a report from Bloomberg Markets magazine suggests another possible motive: Goldman wanted to avoid manslaughter raps, because the profit it would have tacked onto Facebook share prices would have sent some into cardiac arrest.

Common wisdom said that with its own $450 million investment and a total cash injection of $1.5 billion for Facebook, Goldman had sewn up the social networking giant's IPO. But the money that would have come in at some future point clearly wasn't enough. So Goldman ensured that it would see its own nice payday in the process of raising money for someone else.

Take a gander at the list of charges that it would have added, according to a Goldman document that Bloomberg Markets writer Richard Teitelbaum had obtained:

  • a 4 percent placement fee
  • a 0.5 percent "expense reserve" fee
  • 5 percent of "carried interest," otherwise known as profit from the trade
That was 4.5 percent up front to buy shares and then an additional 5 percent of a client's profit.

Apparently, Goldman Sachs Asset Management, the division that manages most of the firm's mutual funds and hedge funds, has managed to create many unhappy investors. No wonder. One of them who received the Facebook offer is Jim Clark, founder of Netscape and Silicon Graphics:

Clark turned Goldman down. In June, 2009, he had yanked most of the roughly $400 million he had invested with the firm due to what he considered bad advice and poor performance, including a big hit from GSAM's Global Alpha hedge fund. This offer, he says, just irked him further. A few months earlier, he had purchased a stake in Facebook through another firm for a lower price, he says, and without the onerous carried interest."I don't think it's reasonable," Clark says. "It's just another way for them to make money from their clients."
Perhaps the only reason Goldman went only outside the US was because of the media attention it attracted, which the SEC might have found effectively the same as advertising the deal -- a no-no in such a private placement.

Or maybe Goldman took a quick count and found that it didn't have enough domestic suckers customers to keep the money machine going.


Image: Flickr user trialsanderrors, public domain.