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Goldman CEO: Laughing all the way to the bank?

In what was characterized by Reuters as a “Humbled Goldman CEO,” one cannot help but think what was not contained in the story of contrition and the suggestion for regulatory reforms.


As reported by Reuters … 

“Humbled Goldman CEO offers pay, regulatory reforms”

“The chief executive of Goldman Sachs called on Tuesday for reforms to executive pay and a broadening of financial regulation in a contrite speech that was twice interrupted by protesters.”

Contrite: “Feeling regret and sorrow for one's sins or offenses; penitent.”  Yes, it is extremely easy to appear to be contrite in the face of an unmitigated financial disaster in which your firm allegedly reached the abyss of insolvency; stayed only by the graciousness of the government allowing investment banks to become regulated financial institutions (bank holding companies) and pumping in billions of taxpayer funds in a bailout attempt.

And it is always a good public relations ploy to call for increased regulatory reforms when you know that your paid industry lobbyists and friends in the government will insulate you from adverse effects by creating legislation written by lawyers in the language of loopholes and exceptions.  

Of course, it is always nice to know that when you leave the harsh glare of the spotlight shining on the public stage, you can retreat to one of your many homes, secure in the knowledge that your multi-million, tens of millions or hundreds of millions is safely protected and that you will not be feeling any of the effects of the financial crisis swirling about ordinary citizens. How nice it must be to live on Olympus and make “contrite” pronouncements?

“Lloyd Blankfein, whose firm has taken $10 billion in taxpayer funds, said the economic crisis had been ‘deeply humbling’ for financial firms, and banks receiving taxpayer bailout money need to pay back the funds as soon as possible.”

“Blankfein said Wall Street firms got caught up in the pursuit of profits and ignored risks. He said they needed to dramatically change compensation practices to bring responsibility back to the industry.”

Classic case of misdirection …

This is a classic case of misdirection. Yes, overly generous – some might say criminal – compensation policies allegedly played a part in motivating key executives of financial institutions to ignore prudent business guidelines, shareholder interests and regulatory guidelines to use a combination of leveraged borrowing and the promotion of specious securities to make outsized paper profits for their respective firms and equally outsized personal bonuses based on these paper profits. It could also be said that the moral hazard of having almost unlimited access to the global capital pool also factored into the creation of more and more risky securities to fulfill the demands of investors seeking higher yields than those offered by ultra-safe Treasuries and cash-equivalent securities.

But the bottom line is that the regulatory process was ignored, subverted or bastardized in such a manner as to bridge the gap between simple malfeasance and prosecutable criminal actions.  Admittedly their was also an extreme failure on the part of Congress to curtail enabling legislation and on the Administration’s regulatory agencies (OTS, OCC, FED, FTC, OFHEO, FHFA, NCUA, SEC, etc.) to enforce existing laws, rules, regulations and guidelines.

"Decisions on compensation and other actions taken and not taken, particularly at banks that rapidly lost a lot of shareholder value, look self-serving and greedy in hindsight," Blankfein said.”

No! They did not “look” greedy and self-serving, they “were” greedy and self-serving. How many pizza-delivery boys that became loan executives making $50,000 per month or more did not see that something was wrong with the system? When an executive takes home a $50 million dollar bonus for doing little or no real work, overseeing those who were trading securities which must be valued by complex computer computations designed by rocket scientists and mathematicians, are you telling me that he doesn’t expect that something is systemically wrong?

Things which are easy to say …

“He laid out reforms to pay, including rewarding long-term performance, instead of short-term gains, through deferred compensation and ‘clawbacks.’"

Individual compensation should not be set without factoring in the performance of the business unit and overall firm, Blankfein said.”

"’Employees should share in the upside when overall performance is strong and they should all share in the downside when overall performance is weak,’ he said.”

Bullpucky! This is a sop to public sentiment and is often counterproductive. If a multi-division corporation has a successful “cash cow” division and there are people responsible for this performance, they should be rewarded by a combination of salary, perks, benefits and bonuses. If the CEO decides to sponsor a racing team, name a sports stadium or makes poor executive decisions; thus resulting in a drag on income and profits, not to reward your brightest and best people will result in valued employees moving to other firms with not so profligate CEOs. However, awarding outsized bonuses to executives and should be a matter between the Board of Directors, the Compensation Committee, the executives and the shareholders. Not a matter for government intervention.

What is not being articulated is that bonuses based on unrealized “paper profits” or suspect transactions should be rescinded and reclaimed by the company treasurer. And when it comes to mismanagement and criminal fraud, that’s another story.  How many people remember the accounting scandal at Fannie Mae and Freddie Mac? Where cooked books resulted in multi-million dollar bonuses for the top executives? Bonuses which were politically protected and only partially recovered (less than 30%). Since the investigation was handled much in the same manner as today’s investigations, by internal self-serving government investigations and administrative sanctions. One wonders why there were no criminal prosecutions, indictments and jailed executives. The short answer is that is appears to be related to a conspiracy between the financial institutions, the government and the politically-connected executives.

We already have enough laws …

“Regarding regulation, Blankfein said financial institutions needed to accept more oversight, including hedge funds.”

We had sufficient laws to prevent lying, cheating and stealing. They were often overridden by “interpretive” legislation or ignored by both regulatory agencies and the industries they regulated.

“He voiced support for a systemic risk regulator that can look at every firm, product or practice that may pose a danger.”

This is the Administration’s party line. We need someone to keep a lid on the true facts before the American citizen sees the extent of the theft of public and private assets and demands the heads of politicians and executives. Why else would executives be allegedly threatened with FDIC audits if they didn’t take bailout funds and become a willing participant to the cover-up. Know why Treasury Secretary Timothy Geithner is hesitant to replace financial CEOs and only threatens to do so – could it be because the new CEO and executive team would have to make a finding of fact regarding past wrongdoing and report these facts in a public forum (via the Securities and Exchange Commission). Facts which might not only be embarrassing, but may result in criminal charges being brought against executives and charges of conspiracy being brought against legislators and their intermediaries: the lobbyists.

" ‘In this vein, all pools of capital that depend on the smooth functioning of the financial system, and are large enough to be a burden on it in a crisis, should be subject to some degree of regulation,’ Blankfein said. ‘Yes, that includes large hedge funds and private equity funds.’”

This is not a stupid man. He knows full well that he can call for the regulation of hedge funds and other major institutions, but they will simply transfer their operations offshore. Ask yourself why any financial institution needs entities domiciled in the Cayman Islands or other tax-havens?  Especially since they profess that their transactions are open and transparent to the Administrations regulatory agencies such as the SEC and IRS? Or, there are those legislators and government agencies who want to regulate hedge funds by requiring them to register with the SEC while exempting the collection of meaningful, substantive and timely data. Want to bet which legislators are receiving campaign funding from the financial community?

Really, only $10 billion?

“Goldman Sachs, the fifth-largest U.S. bank, received $10 billion from the government in October under the Troubled Asset Relief Program. It plans to pay back the funds this year, as the money comes with strings attached, such as caps on executive compensation, dividend restrictions, and limits on share repurchases.”

Even though the Treasury Department and the Federal Reserve Bank has been less than forthcoming about the disposition of money that was disbursed as bailout funds, it seems that the legislature forced executives of AIG to reveal some of their counterparties who may have received funds via payments on credit default swaps. And, if I am not mistaken, I saw the name “Goldman Sachs” down for at least $12.9 billion. Many saw the additional payment to AIG as a method to channel funds to select trading partners without additional public scrutiny.

How many people in the public knew that Goldman Sachs was AIG’s largest trading partner when bailout funds for AIG were being discussed. How many people knew that Blankfein or his representatives may have sat in meetings – apparently with nobody pointing out a significant billion-dollar conflict of interest.

How many people knew?

“This [Goldman Sachs] is an investment bank that earned more than $12 billion and paid its CEO $68 million in 2007. Even in 2008, this self-proclaimed home to the ‘Masters of the Universe’ paid out more than $10 billion in compensation and received its own $10 billion in taxpayer funding.” <Source>

“Blankfein told the protesters it was important for the public to understand the capital provided to banks was meant as a broader stimulus effort to get the financial system back on its feet, not a bailout of individual firms.”

Blankfein, once again shades the truth. In government reports, it was revealed that much of the TARP money was used by financial institutions to purchase other financial firms or to shore up their own balance sheets. Very little of the bailout money was used in the support of significant consumer or commercial lending activities.

“He said it will take years for the financial industry to earned back public confidence. One way to shore up that confidence is through mark-to-market, or fair value, accounting, Blankfein said.”

Mark-to-market, also known as fair value accounting, is aimed at giving investors an accurate view of financial companies' books.”

This is a gross misstatement. Mark-to-market valuations has great worth in short-term securities and commodities transactions, but has a deleterious effect on long-term securities where the value steadily increases over time or is subject to the whims of a fickle market. What the discussion conveniently avoids is that the underlying value of many of the mortgage derivatives was based on fraudulent loans, loans made to people who couldn’t afford to purchase the property or even to rent an equivalent property and toxic combinations of these mortgage-backed securities. Unless the housing market is stabilized, the underlying collateral for the great majority of these securities remains impaired and subject to risk.

Another nasty subject which isn’t being discussed is that these securities are supposedly rated by the ratings agencies which are now seemingly reluctant to perform the due diligence to re-rate these  offerings lest they turn out to be valueless or discover that there is no legal way to perfect the security-holder’s interest in the property underlying the mortgage backed security.

Where are Blankfein’s comments on the estimated $55 trillion dollars worth on non-insurance issued as “collateral default swaps” that were enabled by legislation that explicitly exempted this class of securities from being prosecuted as gambling under state gaming regulations? This non-insurance is part of the AIG product line. An unanswered question – mostly because most reporters are afraid to ask it – is how do you unwind the extreme leverage of financial institutions where potential losses exceeded the net worth of the issuing and purchasing companies by a factor of 10 or more?  

“But some banks and investors have blamed the rules for accelerating the financial crisis by triggering billions of dollars in writedowns, leading to reduced capital levels and less lending. Last week the Financial Accounting Standards Board approved guidance to ease the impact of fair value accounting in illiquid markets.”

"’Fair value accounting gives investors more clarity with respect to balance sheet risk,’ Blankfein said.”

Yeah right! More accounting tricks to simply re-state the value of already booked assets in order to legally cook the books. (See my blog entry: The New Valuation Rule: PFM – Pure F*ing Magic)

The Goldman Gang …

I think a fairly strong case could be made for a Goldman Sachs conspiracy involving government officials at the highest levels of our financial and regulatory agencies.

“Goldman Sachs has been everywhere in the crisis, yet has almost entirely escaped critical public attention. Goldman Sachs alumni have been in the forefront of the government’s response to the crisis under both the present and former presidential administrations. Tim Geithner served in multiple roles at the Treasury Department in the Clinton administration when long-time Goldman Sachs head Robert Rubin was Treasury Secretary. Geithner then worked closely with Bush Treasury Secretary Henry Paulson, another long-time Goldman Sachs executive, in crafting the $170 billion AIG bailout. Also among the many other Goldman Sachs alumni who have served in key Treasury Department positions under recent presidents is Assistant Secretary of Treasury Neel Karshkari, who heads the Office of Financial Stability.”

There is no doubt that Goldman Sachs remains one of the most powerful and politically-connected financial firms in the world. And one destined to escape the judgmental scrutiny of the government if reports regarding a pay-back in TARP funds are to be believed.

According to a February 4, 2009 report by Bloomberg Financial News  …

“Goldman Sachs Group Inc. wants to repay the $10 billion it got from the U.S. Treasury last year to signal the firm is healthy and to escape limitations that were imposed with the money, Chief Financial Officer David Viniar said.”

’Operating our business without the government capital would be an easier thing to do,’ Viniar said today at a conference hosted by Credit Suisse Group AG in Naples, Florida. ‘We’d be under less scrutiny and under less pressure.’ He added, ‘It would send a very good signal’ if the firm could repay the money.”

Ironic and reprehensible …

I think it would be both ironic and reprehensible if Goldman Sachs was allowed to repay the $10 billion (+ interest) to the government from funds channeled to it by AIG which itself received government funding.

Almost as ironic as AIG sending billions to the Swiss bank who was complicit in defrauding our government of tax revenues by withholding reporting information on those high-income individuals and corporations which were hiding taxes. AIG sent UBS $5 BILLION in government-provided money as counterparty payments while the U.S. government received $780 million in fines and penalties in connection with an alleged 52,000 American citizens who may be hiding up to $14.8 billion in Swiss accounts. Sounds awfully low to me considering the trillions looted from the American treasury over the past years.

Perhaps a government investigation of itself and of the key financial players is in order. Something that is not likely to be done under the aegis of the current Obama Administration which seems as incompetent and inept as Congress in sorting out the financial crisis.

The only answer is to change the government in 2010 and 2012 by refusing to listen to misleading rhetoric coming from those who created the financial crisis for their own personal profit.

Be well and be safe. Take care of yourself family first.

-- steve

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Reference links:

Humbled Goldman CEO offers pay, regulatory reforms | Reuters

Goldman Sachs: Masters of the Bailout |

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