Beware Goldman’s “dutiful” TARP repayment
(Republished to clarify time period of data in fifth paragraph)
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?
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.
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.