Economist Linus Wilson writes in to tell us that the TARP payback is a win-win for for taxpayers and should make Goldman Sachs less likely to fail:

The Congressional Oversight Panel’s February 6, 2009, report page 1-10 argues that the present value of the U.S. government’s $10 billion investment in Goldman Sachs was worth $6.8 to $8.2 billion on the day the funds were passed out.  That was a $3.2 to $1.8 billion subsidy according to that study. Now taxpayers stand to get almost all of that subsidy back.

Joint work by Wendy Yan Wu and myself, “Common (Stock) Sense about Risk-Shifting and Bank Bailouts,” and solo work, “Debt Overhang and Bank Bailouts,” suggests that $1 of subsidy on a preferred stock recapitalization is equivalent in terms of incentives to $1 of new common stock issued. 

The Goldman Sachs seasoned equity offering is a win-win for U.S. Taxpayers: 

First, if GS pays back TARP, taxpayers get paid back in full and recover most of the subsidy that they offered Goldman.  (Yet, since market prices change every day, a new valuation would have to be done at the day the TARP funds are paid back to see how much of that subsidy would be recovered by GS returning its $10 billion TARP investment.)  

Second, taxpayers benefit by the improved incentives at Goldman Sachs.  $5 billion of new common stock will make it less likely that Goldman will shift losses onto taxpayers and creditors than a $3.2 to $1.8 billion TARP subsidy. 

Nevertheless, I had hoped that Goldman Sachs would have tried to raise $10 billion dollars in new common equity as a symbolic gesture, which would have been even better news for U.S. taxpayers, but possibly not GS shareholders.