Is Goldman’s Share Offering an Attempt to Further Ensnare the Government?
By Shah Gilani
Contributing Editor
Money Morning
Not a fan of socialism? Me either. But, if the federal government has to backstop free market excesses with taxpayer dollars, how will it eventually unravel the veil, or tarp of intervention? Or should it? The answers are about to unfold before our eyes.
In the case of the government and Goldman Sachs Group Inc. (GS), a decision on whether Goldman can repay government bailout money and be freed to pay its employees whatever it wants, may determine the winners and losers coming out of this financial collapse, and what kind of government Americans will end up with.
In her extraordinary 1999 book, “Goldman Sachs the Culture of Success,” Lisa Endlich vividly chronicles the “history, mystique and remarkable success of the world’s premier investment bank.” That same year, the storied partnership structure of Goldman was junked in a wildly successful initial public offering (IPO).
I still keep three pages of notes distilled from Endlich’s book on how to create and foster a culture of success, a la the Goldman model. They now seem quaint in light of the winner-take-all at the expense of the shareholders mentality that eviscerated the old-school standards.
That’s not to say that Goldman isn’t still wildly successful. On Monday, Goldman pre-announced first quarter net income of $1.81 billion. Record net revenue of $6.56 billion from trading fixed income, currencies and commodities was offset by losses in stock trading, real estate, investment banking and money management. Nonetheless, earnings were almost twice analysts’ expectations.
Yesterday (Tuesday), on the heels of its good performance, Goldman announced that it had priced a public offering of 40,650,407 shares of common stock at $123 per share. Goldman will be its own sole underwriter and total gross proceeds are expected to yield approximately $5 billion.
Ironically, $5 billion is what Goldman needs to pay back the U.S. government in order to escape the salary and bonus caps imposed on bailout recipients.
A brief history.
On the remarkable day of September 15, 2008 Lehman Brothers Holding Inc. announced its intention to file a Chapter 11 bankruptcy petition. On the same day, venerable investment bank Merrill Lynch disappeared into the waiting arms of Bank of America Corp. (BAC). Six short days later, on a Sunday afternoon, the U.S. Federal Reserve announced approval of expedited applications by Goldman Sachs and Morgan Stanley (MS) to change their status from investment banks to bank holding companies. The rapid approval of their applications would, the Fed said, “provide increased funding support” allowing both banks to borrow directly and permanently from the Fed’s Discount Window and its other capital liquidity enhancing facilities.
But that wouldn’t be enough. As the crisis mounted, on Sept. 23, Goldman raised $5 billion from billionaire investor Warren Buffet’s Berkshire Hathaway Inc. (BRK.A, BRK.B). And with the storied investor now onboard, Goldman rushed to raise another $5.75 billion in a common stock offering.
On Oct. 14, with the mushrooming cloud of the crisis enveloping seemingly every major bank in the country, then-Treasury Secretary Henry M Paulson (formerly Goldman Sachs’ Chairman and CEO) and Federal Reserve Chairman Ben S. Bernanke summoned the nine largest bank chief executives to Washington where they were told that they would each take a piece of government capital. Only Wells Fargo & Co. (WFC) is on record as saying it didn’t need the money, but the handout was forced on it too. Goldman itself took $10 billion.
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On Wall Street, and nowhere more so than at Goldman, it’s about compensation. But recipients of bailout money are now facing the full disclosure of their executive compensation deals, as well as having to obtain nonbinding shareholder voting on compensation issues.
The Treasury is advocating a salary ceiling for recipient senior executives of $500,000 and any additional compensation to be paid in restricted stock that vests only when government funds have been entirely repaid. And there are restrictions on golden parachutes and threats that Congress will impose a 90% bonus tax.
It’s enough to make Wall Street quake in its canyon.
With the public backlash against the taxpayer-funded bonuses paid to executives and traders at crippled firms, banks are desperate to return government bailout money so they can be freed from government salary and bonus oversight.
But unfortunately for many of these banks, oversight is mandated for any recipient of “exceptional assistance,” which is defined as assistance of more than $5 billion.
No wonder Goldman wants to pay back $5 billion of the $10 billion it got.
I have nothing against the free market setting compensation benchmarks, or private companies paying successful executives whatever their shareholders vote to be acceptable. And I’m not singling out Goldman Sachs. But, nowhere else in the U.S. economy – or at the highest levels of government – is there anything like Goldman’s visible and invisible hands at work. And they’re working in the open and more insidiously, behind the scenes and through lobbyists, to make themselves a lot of money.
There is simply not enough space in any book, let alone any article, to list the power, placement and influence of current and former Goldman Sachs alumni pulling the levers of hedge funds, corporations, politicians and governments. If you want to enlighten yourself about what you don’t know about these players, simply Google: “List Goldman Sachs alumni.”
Goldman, as much as any investment bank, got its hands dirty in the subprime securities business and the credit default swap business. As to its influence and its claim to premier bank status, the first question that comes to my mind is: Would Goldman even exist today if Hank Paulson hadn’t had Goldman’s current CEO Lloyd Blankenfein in on meetings about saving American International Group Inc. (AIG)?
Out of the $185 billion that AIG received from taxpayers, Goldman got $12.5 billion for exposure it had to credit default swaps written by AIG. I’ve been told by some of my hedge fund and investment banking friends that Goldman deserved that money and that the entire counterparty structure related to almost every credit default swap was a risk.
But I like to point out that Goldman is only smarter than its peers because its trading desks are lighter on their feet. I remind them that Goldman stuffed the pipelines with toxic structured collateralized debt obligations (CDOs), and then was nimble enough to cover themselves better by buying credit default swaps to hedge their exposure to their own toxic slime and institutions that are too-big-to-fail, exactly like AIG.
What happens now with Goldman Sachs will set the precedent for everything else that the government will do or allow in the future with bailout recipients and industries. Will Goldman be freed up to overpay its risk takers and to make greater wagers as it also seeks to become too-big-to-fail? Will impositions be made on the corporate level, industry level, systemic level? Will free markets be free to leverage taxpayers indefinitely?
The argument, most recently made in yesterday’s Wall Street Journal op-ed page by Jonathan Macey, a law professor at Yale, that “demonetizing executive pay will also drive the best managers out of private companies and into hedge funds and other boutique investment firms” implies that there is a limited amount of talent available in America, which is a supposition that I find myopic, at best.
Besides, aren’t these the same people that got us into this mess?
And while letting public companies be run by shareholders – as Macey suggests – is supposed to work in principle, shareholders have been marginalized by the same Wall Street system that protects the institutions whose stocks and bonds they sell, trade and profit from.
All eyes should be on the curious relationship between government and Goldman for clues as to what shape the landscape will take when we eventually exit this calamity.
I don’t want our companies, our institutions or our economy socialized any more than Adam Smith would. But I do want to see the public tail wagging the dogs of Wall Street and government.
News and Related Story Links:
- Wall Street Journal:
‘Say on Pay’ and Other Bad Ideas
- Money Morning:
Not Just a Price Floor, Treasury Programs May be a Stable Foundation for Economic Recovery
- Money Morning:
Stock Markets Move Past Gloom and Doom in Anticipation of the U.S. Economy’s Recovery
Comment by mark stewart on 15 April 2009:
bottom line they’re paying back uncle sam with uncle sams 12.9 bil that was funnelled to them thru aig
and look at the list if you want to know how this happens
greatest scam of mankind
Comment by Steve Jossem on 15 April 2009:
If memory serves me correctly, going way back, I recall the Government bailing out Goldman Sachs on Mexican Pesos and on Penn Central bonds. Goldman is the Haliburton of finacial companies.
Comment by Barbara on 15 April 2009:
Just as important is the last paragraphs of your article. Why isn’t more light shone on government’s role in all this mess? I have been expounding on the fact that in forcing executives to curb what they take in compensation and trying to get money back from those executives in companies that were bailed out by taxpayer money, the media doesn’t demand that our congressmen, senators and president who were in bed with them, voted them the bailouts and basically NEVER REGULATED them in the first place are KEEPING THE LOBBYING MONEY AND CAMPAIGN DONATIONS they received from these companies. Why isn’t the media focusing on this and putting similar pressure on them to return that money to the American taxpayer as they are in their focus on bank executives? Why isn’t the focus NOT JUST on bank executives like GS and how their fingers are everywhere in this mess but how involved various congressmen and senators are responsible as well for all this by failing to regulate: Phil Gramm in getting rid of Glass Steagall, Barney Frank and Christopher Dodd on failure to regulate Fannie Mae and Freddie Mac after being the #1 and #3 (or maybe it was #7) recipients of Lobbying money from Fannie Mae, Barack Obama whose #1 campaign donor was Franklin Raines with the millions in severance he took from Fannie Mae and which he used to fund Obama’s presidential campaign, Rahm Emanuel, Obama’s chief of staff, who served on the board of Fannie Mae and took money from them several years ago when all this crap was going on but couldn’t bother to check into this and do something about it, Nancy Pelosi who is incensed by auto CEOs arriving in private planes to ask Congress for more money but who wants a bigger jet to go home to California to do the people’s business and who is allowing the automatic pay raises to members of Congress to go through while millions of Americans are laid off thanks to failures by Congress to properly control and regulate this stuff, Chris Cox at the SEC getting rid of the uptick rule on short selling which was not broken and didn’t need to be fixed, Eric Cantor who took money from AIG – AD NAUSEUM! They should all be forced to pay this money back and the press should shine a HUGE LIGHT on these shenanigans and metaphorically tar and feather them in print until they either do so or go to jail.
Comment by Gary on 15 April 2009:
This article lacks basic research, and spreads the wrong picture. What has occurred is not “the excesses of the free-market”. It really has nothing to do with the exercise of free-market practices, and everything to do with the dismantling of the free-market, as predicted and warned of over at least the past 2 centuries by the likes of Thomas Jefferson, Frederick Bastiat, Andrew Jackson, and dozens of others who spoke of the dangers of central banking. What has occurred is the straight out of the playbook of the cartel that initiated the Federal Reserve in 1910, and sold it to a corrupt government for inseption in 1913. Read, “Creature from Jekyll Island”, by G. Edward Griffin for a documented play by play…a book that was written 10 years ago.
Comment by richard avard on 15 April 2009:
Wall Street as we know it should be shut down, It is nothing but a big Casino that is able to pocket proftis but pass losses onto the taxpayer
It creates no new wealth It merely plays games with real weath that has been converted to dollars It exactly like Vegas. No new wealth is created. Old wealth is merely robbed from its creators who to make more dollars through Speculatin (gambling)
The fact that the Fed Govt did not put Wall Street and the Big Banks through a formal Bankruptcy which would have exposed its exesses and coruption proves beyond any doubt who the Feds really really work for, and it aint the People
I think both major Parties signed their death warrants when they both went along with the Bailout. The People will prevail
Comment by Tom Beach on 15 April 2009:
We, the investors of America and the world, have a choice. We now know that Goldman and a lot of others play fast and loose with our money. We are now asking some hard questions about how they made the Ponzi scheme work all these years. And the answers are not satisfactory when one knows the methods used.
Goldman planning to sell a lot of stock to finance their attempt at ‘management indepedence’ is a major dilution of their already thin stock. And for what? So they can go back to business as usual, ie. pay themselves obscene salaries and bonuses. Masters of the Universe and Bonfires of the Vane.
Excuse me, but I think that I will no longer play these games.
Knowledge is power. My money is leaving town and NOT coming back. Those who think that Goldman is the place to invest after all this light has shown just what they are will get exactly what they deserve….taken to the cleaners….again.
Mr Rogers has it right. Invest in real things that are needed by real industry and businesses that create things. These manipulations of money are non productive except to the manipulators themselves.
I for one actively hope Goldman fails. That may be hoping that our government also fails (they so infiltrate it) but maybe then we can start over a with relatively clean beginning.
When one pulls off a leach one bleeds for a while. But then one is free of the blood sucker and can begin to use what it was stealing to built strength again.
I invested with Goldman for many years. They made me money. But in all consciousness, I can not allow them to use my wealth ever again. That is final.
Aloha from Hawaii.
Comment by li jackson on 15 April 2009:
If memory serves me correctly, Mr Paulson had his root in GS — this goes a long way in explaining why GS seemed “that much smarter” than the rest of the pack.
Talk about “curious relationship!”
Comment by David Wieldt on 15 April 2009:
Shah,
Please stop referring to Wall Street as a ‘free market’. The cozy relationship of Wall Street Banks with the Federal Government, a relationship controlled through a Private Bank called The Federal Reserve, who counterfeits fiat currency at will, earning interest paid by you and me – that’s not a free market. (Even Alan Greenspan admitted in an interview that The Federal Reserve is not beholden to the President of the United States).
By referring to this system as a ‘free market’ or even ‘capitalism’, you are giving ammunition to all those socialists who hold this failure up as a justification for destroying what capitalist vestiges we have left.
Thanks.
Comment by John Adair on 17 April 2009:
We need to get off our ass and throw all these incumbents out and have an open investigation on all these crooks who took money from these institutions. I agree someone should shine the light on these crooks but it won’t happen because the major newspapers and television are in on it also. If the people of the U.S. don’t take care of this with revolts and uprisings this will continue. Thanks and keep informing people of this highway robbery that is going on.
Comment by Carlos Comesana on 19 April 2009:
Repayment could be legal but not moral. Ex- secretary Paulson asking for taxpayers money with a “don’t question” condition and thereafter looking for Congress approval in knees in front of Ms. Pelosi shows a case of conflict of interest.
Comment by Louise Montgomery on 19 April 2009:
I’m on the same page with Adair and a couple of other who hinted at the same thing: Throw the (ostensibly “elected”) bums out! All of them, GOP and Democratic. They represent the wealthy top 0.01 percent, not the rest of us. The inside-the-beltway crowd is at least as corrupt, morally if not legally, as the GS and Fed Reserve crew.
But the ultimate responsibility for house cleaning belongs to We The People. And we have been to busy amusing ourselves to death to make our elected officials do their jobs.