Goldman Sachs taps private capital to refund US taxpayer

$5bn offer is first such deal by US bank in credit crisis / Bonuses to rise 18 per cent on back of record profits

Goldman Sachs last night launched a $5bn (£3.4bn) share offer, raising funds that it promised to use to pay back money from the American taxpayer and becoming the first US bank to tap private capital since the financial panic that engulfed the industry last autumn. The move was announced alongside financial results that showed the investment banking giant's trading division made record profits in the battered financial markets over the past three months.

As a result, the company said that it will set aside $4.7bn to pay salaries and bonuses for the quarter. That is 18 per cent higher than the same period a year ago, despite a 7 per cent reduction in the number of Goldman employees, and looks likely to put the bank on a collision course with politicians and campaigners against the bonus culture on Wall Street. As well as planning to pay more in bonuses in absolute terms, it is also paying more as a percentage of its revenues, up from 48 per cent last year to 50 per cent.

Goldman has been operating with a $10bn loan from the US government since last October, when it and other banks appeared in danger of collapsing.

It has not yet received permission to pay the money back because the Treasury department is still to conduct a "stress test" on Goldman and other banks, to judge their solvency. However, it said last night that planned to hand back the money as soon as possible.

Part of the money will come from at least $5bn and perhaps as much as $5.75bn, to be raised by the sale of new common shares, it said. The bank also said it had excess cash of $164bn at the end of March, up from $111bn at the end of November.

While the mortgage derivatives and corporate loans commonly called "toxic assets" continued to decline in value, Goldman's trading desks more than made up for this with strong profits in interest rate products and other credit derivatives. In all, the trading division posted $7.15bn in quarterly net income, up from $5.12bn in the first quarter of 2008, and compared to negative net income in the final three months of the year.

The dramatic turnabout is expected to be reflected, to a lesser extent, in the results of other banks which are reporting from tomorrow and over the next few weeks.

Goldman hopes that the forecast-busting results, announced a day earlier than expected, will allow it to raise funds without having to offer the new shares at a substantial discount. After having risen 5 per cent yesterday, before the announcement, its share price declined less than 2 per cent in after-hours trading.

If successful, Goldman's fundraising could mark a major milestone in the clean-up of the financial crisis. Ben Bernanke, chairman of the Federal Reserve, said last month that a private fundraising by a major bank would be one of the first signs of recovery.

By allowing Goldman to repay the capital put in by the US government, under the Troubled Asset Relief Program, known as Tarp, it could also shield the bank from some of the restrictions on executive pay and the wider political pressures that have come with Tarp funds.

In another example of those, it was revealed yesterday that the retail banks which took bailout money were under investigation for hiking interest rates, fees and penalties for customers. Elizabeth Warren, the Congressional appointee overseeing the Tarp, said would soon issue a report on whether taxpayers are, in effect, "paying twice" to bail out the financial industry.

Banks have been cutting credit limits for credit card borrowers, and the average credit card interest rate has risen by a percentage point to 12.4 per cent in the past six months, despite official interest rates being held at near-zero.