Goldman Sachs

As pundits and politicians bloviate about retention bonuses and the citizenry storm the citadels of Wall Street and any other place they can find an AIG executive, the financial mice, i.e. Treasury officials, are scurrying about delivering financial plague to the world’s population.

Well not exactly a plague, more of a Madoffian disease that, if detected early enough, could have been cured – sort of like an STD caught early. As the AIG mess plays out, it seems that the American people look to be the odd men (and women) out in this financial scam. They get the cure, we get . . . well, you know what I mean.

What I am speaking of here in real terms is the gargantuan payouts made by AIG using taxpayer money to the recipients of the financial insurance policies AIG has written to banks around the world. These policies, which we all now know as credit default swaps, are being paid in full to the institutions that have screwed up in investing in bad real estate securities.

After considerable cajoling by the U.S. government, on March 15th AIG disclosed the names of counter-parties receiving more than $108 billion in taxpayer funds. Of that amount, $52 billion was used to satisfy or exit credit default swaps, insurance contracts on securities, which are at the heart of the problem with the failing insurer.

A counter-party, it should be noted, is the insurer provided coverage by the insurance company (in this case, AIG) for its losses suffered from its bad investments, like, securitized mortgages.

In other words, AIG provided insurance to protect the best and the brightest on Wall Street and in other capital markets around the world in the event they did something really stupid. Ooopsie! My bad.

“Though it is now known who the counter-parties are, AIG refused to itemize what exactly it is each of them brought to the table. As a result, it’s impossible to know if some firms got better deals than others, or if taxpayers got a raw deal all together.”  Forbes.com

European banks lead the list with Societe Generale receiving $6.9 billion, Deutsche Bank walked away with $2.8 billion; UBS did a little two-step with $2.5 billion. Back at home, Goldman Sachs received $5.6 billion and Merrill Lynch locked up a paltry $3.1 billion.

Per existing swap agreements, AIG had to post $22.4 billion in collateral where the underlying investments were downgraded. Societe General received $4.1 billion; Deutsche Bank, $2.6 billion; Goldman, $2.5 billion; and Merrill, $1.8 billion. Forbes.com

AIG also had to post $43.7 billion during the quarter to unwind its securities lending business and $12.1 billion to different municipalities that had guaranteed investment policies. California and Virginia received $1 billion each.

Great.

As Elliot Spitzer, former N.Y. Governor and Wall Street pit bull noted yesterday on Slate.com:

It all appears, once again, to be the same insiders protecting themselves against sharing the pain and risk of their own bad adventure. The payments to AIG’s counterparties are justified with an appeal to the sanctity of contract. If AIG’s contracts turned out to be shaky, the theory goes, then the whole edifice of the financial system would collapse . . . But wait a moment, aren’t we in the midst of reopening contracts all over the place to share the burden of this crisis? From raising taxes-income taxes to sales taxes-to properly reopening labor contracts, we are all being asked to pitch in and carry our share of the burden. Workers around the country are being asked to take pay cuts and accept shorter workweeks so that colleagues won’t be laid off. Why can’t Wall Street royalty shoulder some of the burden?

Good point Elliot. Everybody is expected to make some sacrifices here. Oh, except for the banks.

It was only a few weeks ago when investors and “concerned” business leaders were condemning the autoworkers union and its members for having the temerity to maintain their collective bargaining agreements with the U.S. automakers. The average autoworker was making a whopping $70 an hour benefits included. Now, the Treasury Department has somehow overlooked the fact that the counterparties are getting paid in full, no questions asked. Take at $70 and hour, slap nine zeros on it and nobody is the wiser.

Apparently contracts only matter when Geithner’s pals over at Goldman need protection. After all, the world is at risk. What about contracts to protect you and me (think taxes, collective bargaining agreements, and so on). Don’t they matter? Not so much.

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Talking to people in the know around DC, I’ve heard a number of times that, though the Obama Administration is a breath of fresh air, there is serious concern about his economic appointments: Lawrence Summers, Tim Geithner and Mark Patterson figure prominently in these discussions. So who are these guys and why should we be concerned?

Laura Flanders at GritTV gives us a good analysis of the players at the U.S. Treasury Department. Take a look.

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The Wall Street bailout legislation, formally known as the Emergency Economic Stabilization Act of 2008, includes limits on compensation for executives of companies receiving taxpayer support.  So what does this mean for taxpayers who are footing the bill?

Not much.

Unfortunately, as drafted the provisions are practically meaningless and will do little to limit the gross payouts already available for these executives. Section 111 of the Act only restricts compensation paid to the top five executives at these companies. In addition, it provides for the recovery, or “claw back,” of ill gotten compensation, that is, performance pay received based upon materially inaccurate financial information.

The “big” provision that has both Republicans and Democrats squealing to their constituents is the provision in the Act that bans payments of “golden parachutes.” These are executive severance agreements that usually pay executives when there is some sort of change in control in the company or, as is often the case, when the executive is fired.  This later provision only applies as long as the federal government holds an equity or debt position in the company.

As noted in last week’s Wall Street Journal, the stakes are significant. The paper reported that executives of financial institutions receiving federal assistance are owed more than $40 billion for past years’ pay and pensions.  Deferred compensation coming due includes $11.8 billion at Goldman Sachs Group Inc., $8.5 billion at J.P. Morgan Chase & Co., and $10 billion at Morgan Stanley.

Since most of these firms haven’t set aside the cash required, they are a drag on current earnings and will be paid out of the corporate coffers.

The liabilities are an essentially a hidden obligation. Even when the debts to their executives total in the billions, most companies lump them into “other liabilities” and only a few of the companies identify amounts attributable to deferred pay.

In today’s Financial Times, it was noted that these Wall Street firms have promised not to use public support to pay these executives’ bonuses.  Bank of America, Bank of New York, Citigroup, Goldman Sachs, JPMorgan Chase, Merrill Lynch, Morgan Stanley, State Street and Wells Fargo all promised to pay salaries and bonuses from existing cash resources.

So lets walk through this scenario and look at the situation at Morgan Stanley.

The company received a capital infusion of $10 billion from the federal government. They stick their newfound money in their corporate pocket (this is a really big pocket by the way) along with their other cash reserves. Let’s say that tomorrow is “bonus day” at the company.  Colm Kelleher, Morgan Stanley’s Chief Financial Officer reaches deep into the company “pocket” and pulls out $21,015,689, which he intends to use to pay himself (this is the total compensation that Mr. Kelleher received in 2007 according to company filings).

“Ooops! That looks like “government” money. Back in it goes,” he muses. Digging around for “loose change,” he eventually finds some “corporate” money and marches off to his bank in the Hamptons where he can console himself over the terrible financial crisis facing America.  This shell game would be laughable if it weren’t our money!

Meanwhile, our leaders in Congress are calling on the government to tighten restrictions on executive pay for these institutions receiving our money. House Speaker Nancy Pelosi and Senate Leader Harry Reid are wringing their hands with concern.  If their last attempt at reining in executive compensation is any measure, we shouldn’t expect real reform anytime soon.

The task of holding corporations responsible for grossly excessive executive pay falls squarely on shareholders. The only problem is that, in years past, the Securities and Exchange Commission has prevented shareholders from raising compensation issues in the form of shareholder resolutions, arguing that such matters constitute “ordinary business” that is exempt from proper shareholder consideration. Let’s hope that, given the massive public policy issues raised by using public funds for executive compensation, the SEC will reconsider its policy in regard to this important matter.

Stay tuned.

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