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Goldman Sachs Caves under Public and Political Pressure

December 11th, 2009
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12.11.2009 original publish date
12.14.2009 update
03.17.2011 repaired broken links

Goldman Sachs Caves under Public and Political Pressure

original article written by Net Advisor

One of Wall Street’s premier investment banks, Goldman Sachs (GS) decided to cave in to public and arguably more likely political pressure by not paying cash bonuses that were EARNED by key partners of the firm in 2009.

Instead, Goldman will pay bonuses in the form of stock. These insiders are not able to sell the stock for 5 years for compensation that should have been paid in 2009 (Source: Los Angeles Times).

[wikichart align=”right” ticker=”GS” showannotations=”true” livequote=”true” startdate=”03-05-2010″ enddate=”03-11-2010″ width=”390″ height=”245″]

Goldman Sachs makes most of their money from proprietary trading (buying and selling in the market) and through private equity (Source: wikipedia.org). Goldman doesn’t sell books, TVs, cars, or other tangibles. They are professional traders, and their job, like millions of other professional traders world-wide is to try and earn a living by buying and selling securities, commodities and other financial instruments. Goldman has a track record known to have some of the best traders on the Street.

Like most all major financial firms, Goldman has been known to be a very charitable.

In September 2009, Goldman was ranked among the “2009 Working Mother 100 Best Companies for its unwavering dedication to family-friendly benefits (PDF)” (more from workingmother.com).

In November, 2009 Goldman launched an effort for small business. Goldman will invest $300 million through a combination of lending and philanthropic efforts.

On December 2, 2009 Goldman announced $61 million to help preserve affordable low-income rental homes (PDF news release) in their home area of New York.

You won’t read these or similar stories by Goldman or other Wall Street firms because special interests don’t what you know that corporations big and small are actually are the ones who provide almost all the jobs in the USA. It is not the U.S.’s government’s role to give people work. The government can lay down the rules and create incentives, but not employ everyone by them self.

Further, these politically motivated groups and certain members of government want people to think that anyone who makes more money than they do to feel guilty. Punish those who make “too much money” – whatever the arbitrary number is; and only they know what that number is, and it will forever change. This is not worker incentive my friends. This is how you lose worker incentive; this is how you lose productivity; this is how you lose tax receipts; this is how you lose jobs; and this is how you lose a global competitive edge in a so-called free market or what may be left of it.

How Wall Street Earns Money.
What many people may not be aware of is the investment community is largely driven by performance. A person does not get say a $500,000 bonus just because they just so happened to work at a particular company. Typically for many people, they are lucky to even get a small salary, and most people in the brokerage business earn money by way of what they produced. Others such as in the hedge fund industry make up to or about 99% of their income based on successful trading. They get paid little to nothing if they don’t perform.

So when a company (such as Goldman Sachs) had the foresight to short sub-prime (believing housing and credit markets would deteriorate over time) and if they made the right call, they make money. If they were wrong, they lose money. Fair enough, right?

Thus, if a company or individual feels it is a good time to invest, and then makes money doing that, guess what? They make a profit. And now they have income.

How Most of Main Street Earns Money.
Most normal American jobs are hourly or salary based. There is little to no incentive to work in some jobs, especially government jobs. Have you ever known someone who got fired from a government job because they didn’t really work at their job?

Can you imagine if all U.S. businesses were based on incentive? Meaning you would only get paid if you could demonstrate that you produced a profit for the company you worked for. So if you were sitting on your ass all day, playing on the company internet, emailing and texting people, socializing around the water cooler, or spending 1/5th of your day outside smoking, guess what, you don’t get paid because you didn’t produce.

So should we penalize and chastise those people who did produce?
Now if it can be found that profits were ill-gotten, or if the compliance managers who are supposed to supervise the traders, find that the trading risk was outside the scope of the stated objectives as the parameters are generally set forth by the firm, then one can take aim at that.

If someone does the job they are told to do, they do it successfully, and because other people did not pull off that same success, don’t reward them is the mantra now. In fact, in the United Kingdom (UK), bankers are now subject to a 50% tax on bonuses. Of course the UK government won’t call that a tax, they call it a “levy.”

“Under the British plan, any bonus exceeding $41,000 will be hit with a 50% levy.”
Call it a cow with horns, if someone takes ½ of your pay check that you earned because you earned it, you tell me what is that called to you? The UK government’s move is really to shore up the country’s own economic problems. Hint: It won’t fix the problems. In fact, what will likely happen is that firms will pay people more in salaries and benefits, and less on bonuses, or else top talent won’t go to work in a county where most of their earnings will be accessed a special tax, in addition to the high taxes they already pay.

The Social Mantra: Work Hard, Get Less; Work More or Less, Get the Same

According to a 2005 study by Microsoft, many American workers tend to go to work, but the actual productivity of that work is low, but they are paid the same anyway.

“People work an average of 45 hours a week; they consider about 17 of those hours to be unproductive (U.S.: 45 hours a week; 16 hours are considered unproductive)”

This translated to that workers tend to have only 3 productive days of the week (study).

Separately in 2007, AOL and salary.com found that “workers actually work a total of three days a week, wasting the other two” (Source: New York Times).

In contrast, the investment business is highly demanding, and pay is largely performance. You are paid on your successes and nothing if you fail. This is not an easy task, it can be highly stressful at times, and those working in this business can often make huge social sacrifices to devote to their work.

In the investment banking world, one is expected to work 70+ hours a week, to 120 hours a week sometimes all night, including weekends and don’t forget some holidays too. Vacation? What is that? That is something you do when you retire or have made a strong foothold where you can afford to take time off.

The cost of leaving work is not just based on the actual cost of the vacation; it is also lost deals, and revenues for not working which can be $1000’s to $100,000’s or more. Are you sure you want to go on vacation? When you are on vacation, the rest of the financial world is not only working, but looking to cut into your business.

So, we now know that the work is very demanding, and your pay is pretty much determined by what you produced. So should companies like Goldman Sachs receive bonuses for performance?

To Pay or Not to Pay, Is That The Question?
In the case of GS, there are “claw-back” provisions to insure that paper profits (unrealized gains) don’t end up as losses later on [sources: Business Wire and Goldman Sachs Press Release (PDF)]. However there is this department called “compliance” at these firms, and it’s not as if management doesn’t have access to what the traders do all day.

When I worked at a top Wall Street firm, trades were reviewed every day by branch compliance. They were audited at times to insure that clients written objectives (such as “growth,” “speculation,” or “low risk,” and that these client objectives matched to insure that what the broker was actually doing for the client. Management had full access to everything we did. So please don’t tell me management has no clue what traders do.

Sure, there has been the occasional “rogue trader” (film based a on true story) but these are rare occurrences, and when they do happen, smart companies up their compliance and audits to insure that they are not at unusual risk beyond the scope of their objectives.

I would also only have people get paid on the result of profit. Not paid on paper profits. I have not seen everyone’s pay for performance agreements, but it is more common that people in the financial industry are paid on the profits they generated, not unrealized profit.

If Goldman’s or any firm’s profits are done trades (where there is an opening and closing transaction on the same position; such as in basic terms – there was a buy and a sell), then if a profit has been realized, and there are no outstanding positions that could impact that closed trade, it’s a done deal. Take the money and go home. If on the other hand, there are mitigating factors that these trades are not closed, and are still subject to market risk, and then of course no one should be paid a dime on those trades during this time.

Opposition Says No Bonus Should Be Paid If You Took TARP Funds
Now, there are arguments against bonuses especially in this recession, and questions surrounding about government backed “bailouts” is largely debated whether bonuses should be paid at all. There are those who have argued that Goldman should not pay performance bonuses even when they are earned, because Goldman ‘took TARP money.’ Article: Goldman Sachs received $10 Billion in TARP funds

Analysis on Goldman Sachs
I have collected, read, and analyzed nearly 1,000 published articles, reports, video interviews, documentaries, etc, just on banking and finance during 2008-2009 thus far. I have generally concluded:

1. That Goldman Sachs (and a couple other institutions) did not need TARP funds to stave off from a potential bankruptcy risk;

2. That Goldman Sachs was not in immediate danger of collapse especially during September-November 2008. GS stock was being sold off like anyone financially related, but GS was probably one of the strongest financial entities at the time;

3. That Goldman, among others was either coerced, forced, threatened, pressured, or just “strongly encouraged” (choose your semantics) to take TARP funds like all the big financial firms in order to save the other financial institutions from being perceived that they were significantly weak, which they all were at various degrees.

“…the concern about banks repaying TARP money is twofold. One, if stronger banks all repay the money, the weaker banks could face customer withdrawals, creditor demands and other situations that would exacerbate their problems” (source: Fox News).

Some have argued that Goldman would have failed without 2008 TRAP money.

“It has been debated whether the firm would have failed without the $10-billion infusion it received from the government last fall — money the firm paid back, with interest, in June. But Goldman’s survival would almost certainly have been in doubt without the government’s many actions to rescue the financial system at large” (Source: Los Angeles Times).

I completely disagree. I argue that Goldman was not in immediate danger, and the entire economy was more likely to collapse first before Goldman and maybe couple other financial institutions [JP Morgan (JPM), and Morgan Stanley (MS)]. Can anyone cite any headlines that discusses GS, JPM, or MS in immediate danger or near danger of collapsing or high bankruptcy risk? If the economy collapsed, then those and all firms that had not gone under would have followed accelerating the damage. But note the prerequisite: a collapsed economy first.

President Obama’s Economic Recovery Advisory Board and a former FED Chairman Paul Volcker stated that Goldman Sachs should not have received any government (TARP) aid in the first place. Volker cited that GS is more into “proprietary trading” and not lending like a traditional bank. Thus GS should not get government help in terms of a bailout (Source: Bloomberg)

What Really Saved Goldman and Morgan Stanley?
What saved Goldman and Morgan Stanley from further risk is the FED allowing them to have a charter to become banks. That’s was actually a brilliant plan, and that plan that was not going to be a burden to government or tax payers – no need to bail them out now.

Why? As charter banks, Goldman and Morgan Stanley can now borrow if need be from the FED’s Discount Window just like banks do. This happens at times, even in good economies, so there would not be a need to have a special bailout for these firms. It worked.

After a technical retest of 2008 market lows (October 9 and Nov 18, 2008 for MS-chart; Nov 21st for GS-chart), Goldman Sachs and Morgan Stanley’s stock significantly improved and has since stabilized.

Like several other major firms, Goldman Sachs wanted out of this government monster called TARP that was going to control the firm’s future and could have placed greater risk to the financial markets – permanent government socialization of the financial and banking industry.

Goldman’s Chief Financial officer (CFO) stated in February 2009:

 

“Operating our business without the government capital would be an easier thing to do…We’d be under less scrutiny and under less pressure…It would send a very good signal…if the firm could repay the money” (Source: Bloomberg).

Mr. Viniar was correct. Just look how the market has reacted to GS’s stock since. Look at the profits GS has been able to make since coming out of government control.

Goldman Sachs not only repaid 100% of the money they “borrowed” from TARP, they also bought back all the government warrants (rights that would have allowed government to own/control more GS stock) and repaid all of this in a very short order. The Treasury reportedly that they made an annualized profit of 23.15% from Goldman alone.

“A Treasury spokesman says that overall, the Goldman Sachs investment/bailout made taxpayers an annualized return of 23.15 percent” (Source: NPR.org).

The Chairperson for the non-partisan TARP Oversight Panel for Congress, Elizabeth Warren stated on July 22, 2009 that they money Goldman paid the Treasury to buyback the warrants from the Treasury was “right on” in terms of fair valuation and price (Source: Reuters).

Since coming out of TARP and being able to take advantage of the low priced securities, Goldman has been making money – a lot of money. That is what the firm is supposed to do. That is what any business is supposed to do, right? Most people aren’t in business to fail?

Part of why Goldman has been able to succeed is that competition has been reduced with the failure of Lehman Brothers, the effective failure of Bear Stearns (JP Morgan-US government financed takeover), and Merrill Lynch still in a rough spot since acquired by Bank of America. Then you have no competition from Citigroup and UBS has a book full of issues that are still being sorted out [Source: TimesOnline(UK)].

As one unnamed alleged Goldman banker bluntly describes it:

“We didn’t f*** up like the other guys. We’ve still got a balance sheet. So, now we’ve got a bigger and richer pot to piss in.”

If one has not figured this out yet, Wall Street traders typically do not like to sugar coat things. They tell you exactly how they see it, and in all color and description, and the aforementioned is a classic example. It is their reality, and probably seems like a very accurate one.

Freedom to earn a living, as long as it isn’t too good of a living?

So if Goldman Sachs no longer owes the government any money, paid in full with big interest; is running their business on their own; is showing growing signs of success by way of improved quarterly earnings, thus earning money for their stock holders, we still can’t bear the thought of someone making money in a recession can we?

So what exactly do these people have in mind?

It seems however the REAL opposition is simply control over how companies should be run, how much companies can earn, and we have seen this happen all year long since the new Administration took office. There are people who just don’t want to see other people succeed as individuals or as a business.

The L.A. Times reported, “I do believe you’re finally beginning to see some small signs that some of the folks [on Wall Street] may be getting the message, but not enough,” said Rep. Chris Van Hollen (D-Md.), a member of the House Democratic leadership team.

So what is the message?
That we are not allowed to earn as much as we can? Or it’s not fair if you earn more than the other guy? America was built on entrepreneurship, and calculated risk taking. Penalizing those who legitimately earn it, sends the wrong message.

Further Reading:
Career process at Goldman.
Thinking Like a Professional Trader
A day in the life of a Wall Street Trader (note times are east coast, market open 9:30 EST).
Wanna Be A Bigwig? Try Investment Banking
Goldman Sachs: The Culture of Success

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Disclosure:
I do not currently or in the past have worked for Goldman Sachs, nor have any current or past business relationships with the firm or their subsidiaries. I am currently not a shareholder in any of the stocks mentioned in this report. Please see full disclaimers below.

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