Goldman: It’s not the bonuses, it’s the profits

[...] Justin Fox sier, Goldman leverer titalls milliarder i overskudd i år fordi (1) myndighetene grep inn og reddet [...]

“So it’s the windfall we ought to be yelling about. Not the bonuses.”

It seems to me that we should be yelling at both. ‘Employees come first’ is an elastic concept that needs to be watched very carefully. Especially if it leads to egregious behavior that threatens the economic well being of the entire world.

The U.S. tax payer is clearly the dominant source of Goldman’s positive balance sheet this year. I’m not saying that the comfortably paid executives don’t deserve to get rewarded for their strategic decision making that pumped many Dollars into Goldman’s account. I’m also not asking the comfortably paid executives to be fair and reject bonuses this year to show their gratitude towards their country for saving them. Take your bonuses from the money you made yourself, and kindly disregard the taxpayers contribution. If there is any money left, Merry Christmas.

You forgot one final point: Goldman’s cost of capital is lower because it has an implicit government guarantee of its liabilities. The spread between this almost risk-free rate the what an independent institution would pay would also account for a sizable slice of that profit. So lets say three-fourths of their profits this year are the result of government intervention.

“…bonuses for its top 30 managers will be paid out entirely in stock.”
“…they had to know when they bought in to Goldman that employees came first.”
.
…but do employees come first or do employers? If top brass and select middle mgrs. split most of the bonus pot, whither the remaining staff? What table scraps are left for them?

Aw, Mr. Fox. You forgot a key source of their profit –$12 billion paid 100 cents on the dollar for their worthless AIG Credit Default Swap (read gambling markers) with AIG using –you guessed it –taspayer money! And the decision was made by –you guessed at again! –former Goldman employees.

“Several panel members questioned why the government had paid A.I.G’s major business customers in full for their complicated transactions with the failed company — dealing with them much like small depositors in a bankrupt bank. The counterparties included major institutions like Goldman Sachs that had also received bailout money….”

http://www.nytimes.com/2009/12/11/business/economy/11tarp.html?ref=business

I think I covered that in items 1, 2 and 3. (Especially 2.)

While I agree that it would’ve been nice if the NY Fed had negotiated at least some of a haircut on the swap settlements (I particularly enjoyed the Epicurean dealmaker’s take)…Your comment seems to be blind Goldman-hating without regard for the underlying facts of that transaction. As Geithner said, you either prevent default or you don’t, but you can’t just prevent default and not pay out on contractual obligations. And if you think they shouldn’t have prevented default, then you haven’t realized how much fun that scenario would’ve been.

As noted above, the real driver of the success has been the access to the discount window (aka low cost of capital), and opportunistic growth due to the failure of other firms. Let’s not also forget that one of the reasons that Goldman has been so successful post-crisis is that they were largely in a better position than most other peers pre-crisis (i.e. much less exposed to the really bad securities), and why was this? Mostly cause they are usually the smartest guys in the room. And that, as they say, is why they pay them the big bucks.

[...] Sachs (GS) throws the world a bone on executive compensation.  (Deal Journal, DealBook, The Stash, Curious Capitalist also Aiki14, John [...]

[...] 30 executives will be paid only in stock. But Time’s Curious Capitalist blogger Justin Fox says people shouldn’t be outraged by bonuses and compensation, but rather Goldman’s [...]

You’re right, it is the profits. It’s the amazing amount of profit this company makes, and the perception that a lot of that profit is made irresponsibly.
Taxpayers feel like they ponied up to backstop these guys with the implicit agreement that they would take less risk. We’re glad to have the TARP paid back, but it feels like business as usual.

I believe we can have a successful economy without hedge funds and derivatives.

[...] that it will pay 2009 bonuses for its top executives in stock should be met with a collective yawn. But not because these executives were already set to be compensated mostly in stock or even [...]

Well when they use the bailout of AIG to reimburse them for their CDS insurance and probably book that as a profit not a liability, and the failure of Cit Group that netted them another billion, what do you expect? And, to think it’s chalked up to aggressive trading they got their risk reimbursed not earned.

I’m not a big fan of the banksters thus my handle WaltWriston.