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The Great Debate

Beware Goldman’s “dutiful” TARP repayment

April 15, 2009

(Republished to clarify time period of data in fifth paragraph)

Trading specialists work on the floor of the New York Stock Exchange trading shares of Goldman Sachs, in New York, April 14, 2009. REUTERS/Chip East Patriotism, as Dr Johnson once observed, is the last refuge of a scoundrel. So when you hear words like “duty” drip from the lips of a senior executive at Goldman Sachs, you instinctively count the spoons.

You’d be right to do so too. Chief financial officer David Viniar’s observation that Goldman has a duty to repay the money it received last autumn from the U.S. government as part of the Troubled Asset Relief Program may be marginally less cynical than the apercu flung out recently by his boss, Lloyd Blankfein, that investment bankers should be paid less and shouldn’t be rewarded for failure.

But not much less.

And my, do Blankfein’s comments seem cynical in light of the bank’s first quarter results. After all, Goldman accrued 50 percent of its quarterly revenues (yes, that’s revenues) against payments it plans to make to its employees. That is broadly the same proportion that it paid out to them throughout the boom. No question, then, that Goldman’s bankers should do without to pay back the TARP money. With breathtaking cheek, Goldman has also used taxpayers’ cash to bail out Jon Winkelried, one of its wealthiest and most senior executives, after he lost too much money in its own hedge funds. And as for clawing back past rewards that turned out to be excessive — well what about that $70 million you got in 2007, Blankfein?

A SURVIVOR

But no senior Goldmanite ever says anything without a purpose. And so it is with Viniar. Goldman may have been through the wars like its rival investment banks — but it has survived. Because of its controversial hedging strategies (especially the enormous payments received from the taxpayer via AIG) it has thus far weathered the crisis better than rivals. Indeed it has been able to exploit a profitable niche borrowing money cheaply from the Fed and punting it on its own account. In the latest weekly data, for instance, the volume of Goldman’s principal equity program trades was 4.2 times the business it did for customers, according to the NYSE.. So much for serving the client. Meanwhile, along with its fellow survivors it has enjoyed the reduction in competition the slump has brought. It would like to make this reduction permanent.

“Mighty” Goldman is actually quite vulnerable to the changes that have taken place in the banking world. A large chunk of its shares are still held by employees, whose loyalty to the firm is unlikely to extend to bailing it out — even were they financially able to support a firm with $850 billion of liabilities. This is not a sound basis upon which to build a diversified financial services firm.

TARP STRATEGY

By repaying the politically-charged TARP money quickly, Goldman aims to draw a distinction between itself and other large recipients, such as Bank of America and Citigroup, which have no hope of paying back their government cash any time soon. Goldman can then get down to the serious business of lobbying Washington to widen the definition of activities that it is permitted to carry on while remaining a bank holding company. Deploying its $164 billion of resources to buy distressed debts with the financial backing of the U.S. Treasury is merely the start. In the long run, given its limitations, Goldman’s objective must be to persuade the government, in effect, to treat it as a “broker dealer” (a non-bank securities firm which is able to gear its balance sheet to a far higher level than any Fed-regulated institution) while continuing to enjoy the benefit of being a bank, including the yummy cheap funding. It is a sign of investors’ confidence in Goldman’s ability to swing this that it has been able to sell $5 billion of equity, at a mere 5 percent discount, much of it to new investors.

The strategy is an odd mixture of cunning and desperation. After all, Goldman genuinely needs to release itself from the TARP to ensure it can pay employees the vast sums they still expect. That requires a free hand to do what business it likes and to remunerate as it sees fit. Without those two preconditions, the firm could start to break up. Achieving either is not a certainty. Although the administration sees Wall St firms as important financial assets to serve U.S. companies around the globe, the AIG saga — especially the suggestion that Goldman may in effect have got paid twice by AIG because it hedged its counterparty exposure to the insurer by shorting its shares — is political poison. This is something Goldman should clear up before any decisions are taken about its future.

In any event, it would be a historic error to hand Goldman the “get out of jail” card it craves. American taxpayers may regard the repayment of a few billion of TARP money as a good result. But they should be careful what they wish for. They may pay a long-term price for Goldman’s “dutiful” act if it leads to a deal in Washington that results in higher prices for investment banking services and greater moral hazard.

Comments
7 comments so far | RSS Comments RSS

The word “scoundrel” used in the first sentence by Jonathan Ford is spot on in regard to Goldman except it needs to be plural. Goldman’s influence on the US government is breathtaking as well as frightening.

In Goldman’s case the term “too big to fail” should be modified to “too big to continue”. Goldman should be broken up so that at the very least its research and trading departments act independently to serve clients first rather than its proprietary trading operations. If ever there was a company with excessive greed and no morals as its standard mode of operation it has to be Goldman.

 

It’s probably a good idea for Goldman’s to repay the TARP funds. Just imagine the positive publicity that they will get out of it especially with public sentiment turning strongly against any kind of bailouts now.

Unfortunately, one side effect of Goldman’s paying back the TARP money is that there won’t be quite as much oversight as there should be. Personally, if there had been more oversight over activities we wouldn’t have had as much of a problem as we’re having now. Come to think, lack of oversight was a major contributing factor in the last 3 depressions.

Posted by Brian Bigelow | Report as abusive
 

they shouldn’t of gotten the money in the first place,afterall warren buffett bailed them out with 5 Billion. If congress wants to stimulate the economy, give us a 700 billion bailout instead of wall street. the probelm is the jobs left pay only a small fraction of what the jobs lost paid leaving people with less purchasing power which has caused a cascade effect on the economy in a negitive way

Posted by shane | Report as abusive
 

Goldman Sachs esentialy runs the Treasury, The Federal Reserve and the US government. This company is a cancer on the world economy. They got paid twice for their losses excuse me if im not happy they want to pay their ill gotten money back. Deuche bank knew in 2004 CDS market was going to implode. This whole thing stinks to high heaven. They should be in jail not counting bonuses.

Posted by Rich | Report as abusive
 

Goldman Sachs enty into sub-prime loans bundled in Collateral Debt Obligations, CDOs,and subsequently hedged by buying, basically an unregulated insurance device, the Credit Default Swap,CDS, sold by AIG. Our bail-out money to AIG went directly to those like Goldman to pay off a lousey investment based on greed. They should pay that back before paying off TARP.

Posted by David Eisbach | Report as abusive
 

Financial regulators and congress could solve two severe problems. Eliminate the present FICA cutoff of $102,000. and tax 100% of all remuneration at the time it is paid. This solves the long term solvency problem of Social Security.

Charge a progressive flat tax on 100% on all remuneration at the time it is paid. The only allowable deductions should be(1)one single family home, interest, edcuational and medical expenses.

Prohibit interlocking boards. Many of the outrageous pay packages are the result of interlocking boards that make up the compensation committees.. “I’ll scratch your back if you scratch mine” is their motto.

Companies should pay reasonable salaries with bonuses paid on performance averaged over a period of years. It is too easy to manipulate the books on how bonuses are paid in many of these companies. This is white collar theft from our 401k’s and retirement plans

Any compensation package that exceeds twenty five times the average salary of all employees in any company must be approved by a two thirds vote of all outstanding common stock.

White collar theft should be prosecuted as a first degree felony and given the same maximum sentences as any armed robber would get. The robber barons of wall street should be treated as what they are, thieves.
Dick Bowen
El Paso

Posted by Dick Bowen | Report as abusive
 

I loathe and hold Goldman in deep contempt as much as anyone for the damage they have done and will do the commonweal, I assure you. I think, however, that in Machiavellian terms one has to admire them and acknowledge their skill. Their interpenetration with government is as widely noted extensive and they have used it very much to their advantage. The simple fact is that democracy has proven an infinitely less capable player in the game of power and influence than has a financial oligarchy. Is it really so surprising? Unfortunate from a populist perspective, yes. Surprising? Not really. The sharpest knives, most skillfully wielded, generally win the fight. Goldman is the sharpest knives. If you want to see their power limited whining and complaints mean less than nothing. Find another way.

Posted by Big Al | Report as abusive
 

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