Goldman Sachs Group Inc (NYSE:GS) is accused of making a $41.5 million mistake in its handling of the bond offering for Ford Motor Company (NYSE:F) last week. Bloomberg’s Matt Robinson cites two sources who said the firm did not use the correct Treasury note as a benchmark for the bond.
Ford compensated for the error
According to the sources, Ford was compensated by being charged an underwriting fee that was lower than expected. The company offered $1 billion worth of five-year 2.875 percent notes through its finance unit. Regulatory filings show that Ford Motor Company (NYSE:F) paid .1 percentage point less in fees than the fees reported in the two past sales of debt with similar maturities.
Goldman Sachs Group Inc (NYSE:GS) is the sixth biggest underwriter of corporate bonds around the world this year. The firm handled Ford’s initial public offering in 1956, and John Thornton, who was once an executive at Goldman Sachs, is currently on the automaker’s board of directors. Ashish Shah of AllianceBernstein Holding told Bloomberg that this type of mistake is rare in capital markets.
How prices are set in bond offerings
Spokespeople for Goldman Sachs and Ford could not comment on the bond sale. Bloomberg data shows that Goldman has raised $141.3 billion for companies through debt offerings so far this year.
Usually, banks set the price for new securities using Treasury bonds which have similar maturities. If the U.S. government issues notes toward the middle of the week though, underwriters aren’t supposed to use those securities as a benchmark for new corporate bond offerings until the next Monday.
In Ford Motor Company (NYSE:F)’s Sept. 26 bond offering, Goldman Sachs Group Inc (NYSE:GS) was said to have added a 1.45 percentage point spread to the 1.375 Treasury note, which is due September 2018 and was auctioned off on Sept. 25. The price of those bonds should have been determined by the 1.5 percent security, which will mature in August 2018.