“We knew we took risks. When things came out against us, we had no cause for complaint.” Robert Frost (paraphrased)

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Expert Perspective by Grahall’s OmniMedia Editorial Board

expert perspective telescopeIn their December 4, 2009 article for Financial Times, (Goldman looks to quell anger on bonuses) authors Justin Baer, Francesco Guerrera, and Tom Braithwaite say: “Top Goldman Sachs executives are likely to receive their annual bonus in stock this year rather than cash as part of a pay review that could affect thousands of the Wall Street bank’s rank-and-file employees.”   But what does that really mean for Goldman’s executives and Goldman’s investors?

Well, first and foremost it likely means the Goldman executives think that Goldman stock can still increase in value. Giving themselves their bonuses in a currency automatically reinvested in Goldman might be seen as a “buy signal” for shareholders.  It may also suggest that the Goldman executives think their stock is more valuable than cash and more valuable than whatever future profit might come from other investments that cash bonuses could buy. 

Also noteworthy is the tax treatment for stock awards; it can be far more favorable than cash if the receiver plans properly.  Cash is always taxed at the ordinary income rate. But stock can be taxed at the more favorable capital gains rates if the owner holds the stock for the appropriate amount of time after being in “constructive receipt” of the shares.  The rules are different for restricted stock and stock options but there is no doubt that the Goldman executives are receiving excellent tax advice. They will make the decisions that best suit them and their pocket books and not the US Treasury.

The authors also quote Mr. Blankfein as saying (last month) “Human capital in our business is just as important as financial capital… Attracting and retaining the most talented professionals in the world is core to the success of our business.”

Our question is how much money does it really take to attract and retain that top talent?  Is the threshold so high that these folks would leave (or not join) if not for, say, a $20 million bonus?  Wouldn’t a $10 million bonus be enough?  Although the logic that more money attracts more talent makes sense, we wonder how much the threshold has been tested. 

The real issue facing Goldman is one of public relations.  Clearly they have done a “stunning” job of making money this year.  Congratulations!

But let’s look for a moment at one contributor to Goldman success this year: The AIG Bailout.  The US Treasury (using American taxpayer dollars) spent huge sums on the AIG bailout.  In fact, Treasury and the US taxpayers spent far more to bailout AIG than we did to help the automobile companies.  Perhaps that was because the financial services sector (and maybe AIG in particular) did a better job of proving itself sustainable, but the risk of job cuts and the actual loss of jobs in the automobile sector was far greater than that in the financial services sector and those job losses hurt the US economy sigficantly.

As a counterparty to the AIG risk position, when the US taxpayers bailed out AIG, Goldman received downstream payoffs without a “haircut” at 100% of their investment.  What that means is the US taxpayers, some 15 million who are now unemployed, contributed, via the AIG bailout, to the success of Goldman Sachs and will receive zero return on that investment.  All the “compromises” Goldman suggests for restructuring executive pay and all the posturing Blankfein does around talent management, charitable contributions and doing “god’s work” won’t change that fact.

Chairman Bernake actually said (during his Senate confirmation hearing) “in an exchange with Senate Banking Committee Chairman Christopher Dodd (D-CT), … that he could not force the counterparties of AIG to take a haircuts on their CDS positions because he had ‘no leverage’.’’ To which Chairman Dodd looked “incredulous and replied ‘you are the Chairman of the Federal Reserve,’ to which Bernanke replied that he did not want to abuse his ‘supervisory powers.’ Dodd replied ‘apparently not’ in seeming disgust.  (Read Christopher Walen’s December 7, 2009 article in Seeking Alpha “Three Strikes on Ben Bernanke: AIG, Goldman Sachs and BoA / TARP”). 

Was the risk to global financial markets so great that the cost to bailout AIG was justified?  Perhaps, but then why was there not pressure brought to bear at any of the companies who were part of AIG’s counterparty risk to “share the pain” and take a “haircut” on their payout?   We simply do not believe that Bernanke’s inaction is due to his concern for abusing his “supervisory powers”.  Perhaps it was a way to help his friends at Goldman out of a potential slump. 

Contact Grahall’s OmniMedia Editorial Board at edie.kingston@grahall.com

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