If CIT (CIT) Fails, Goldman Sachs (GS) Wins The Jackpot

This weekend is reported that Government Sachs, I mean Goldman Sachs (NYSE: GS) could reap as much as $1 billion if CIT (NYSE: CIT) files for Chapter 11 bankruptcy protection, according to the FT.

Goldman Sachs would earn approximately $1 billion, while us, US taxpayers, would stand to lose approximately $2.3 billion.

The $1 billion payment originates from the structure of a $3 billion rescue finance package that GS extended to CIT last, about five months before the Treasury bought $2.3 billion in CIT preferred shares to assist it at the height of the credit crisis.

CIT's agreement with Goldman Sachs says that if CIT defaults or goes bankrupt, it "would be required to pay a make-whole amount" that equals $1 billion to Goldman.

While Goldman is actually entitled to the full amount, people close to the situation said GS is likely to agree to postpone payment on a portion of the total sum.

Goldman told the Financial Times in regards to its potential windfall from CIT, "The credit default swaps Goldman Sachs purchased to prudently manage the risk associated with the CIT financing are not a directional 'bet' on CIT, but were bought to protect against the possibility of a precipitous decline in the value of the collateral."