Bailout

Goldman?s Abacus fee

By Felix Salmon

A reader writes in with an extremely good question — does anybody know the answer?

Paulson reportedly paid GS $15 million to construct the transaction. Was this a standard practice for GS to charge an explicit fee outside of the transaction from one party to arrange a transaction versus charging a fee within the deal to all parties to the transaction? It is also a reasonable question to ask if this was the going rate.

This was I think the only Abacus deal which was done on behalf of an outside sponsor, rather than being created in-house at Goldman Sachs. In the other deals, presumably Goldman paid itself a fee by getting money from the cash investors in the deal — the people on the long side. It makes sense that banks would extract fees from the long side of the deal because that’s where the money is: the long side is made up investors who put up a large amount of cash upfront, in return for getting a stream of insurance payments in the future. It’s a lot easier for a bank to skim off a small percentage of that cash as a fee than it is to ask the people paying insurance premiums to pay the bank an extra fee for the privilege.

More generally, was $15 million a normal fee for a deal of this size? The total cash invested was only I think about $200 million, which implies that Goldman’s fee was a whopping 7.5% of the cash size of the deal. Is that the kind of money that synthetic/hybrid CDO arrangers normally took on these things? It seems high to me.

As economists love to say, incentives matter, and if you have unusual incentives, either in the way your fee is structured or in its sheer size, then that surely increases the chances of an unusual outcome or non-normal behavior. So it would be great to see what the fee structure was on other, similar deals.

Full post as published by Macroprudential on April 22, 2010 (boomark / email).