What Makes Goldman Sach’s CEO Worth A $100 Million Bonus?
February 2, 2010
By Joe Rothstein
A few months ago Rolling Stone magazine published a long and damning article about Goldman Sachs written by political commentator Matt Taibbi. Taibbi’s view of Goldman Sachs was summed up in this graphic sentence: “The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”
Taibbi’s article was roundly criticized for being histrionic in its critique of Goldman Sachs. But a few days ago the company he characterized as one that jams “its blood funnel into anything that smells like money” turned up with a $5 billion quarterly profit. That’s $5 billion profit for just 3 months’ work…in an economic environment where other businesses, large and small, are gasping for oxygen.
The “bonus pool” Goldman Sachs maintains for its employees averages out to about a half million dollars per worker. The word from Davos is that Lloyd Blankfein, Goldman’s chairman, will get a bonus of $100 million for 2009.
Now, let’s dial back a year and a few months, to the swirling vortex of the 2008 financial crisis. To do this, I’d point you toward Too Big to Fail, a remarkable account of the meltdown, in all of its day-by-day sweaty, fingernail-biting drama. New York Times reporter Andrew Ross Sorkin wrote this book, and it’s a real page turner.
For instance, turn to Chapter 18. The date is September 19, 2008. The Masters of the Universe are in a panic. Morgan Stanley is only hours away from bankruptcy. Wachovia is looking for anyone and everyone to merge with. Fast. Bank of America and Merrill Lynch have just merged, a process that began on a Saturday morning and concluded on a Sunday night. (Talk about desperation!) The Secretary of the Treasury is frantically designing what would become a $700 billion taxpayer doorstop to keep the financial dominos from falling. Boards of directors of all of these companies are on what amounts to a 24 hour death watch, or on call to ratify company salvation, whichever comes first.
The take-aways from Sorkin’s account render down to these:
1) Wall Street is a very clubby place. The heads of all these commercial and investment banks were on a first-name basis. And Goldman Sachs people turn up everywhere. In the companies. In the law firms. In the U.S. Treasury Department.
2) To describe the executives of these major Wall Street financial firms as irresponsible hardly gets it. Most borrowed $30 or more to invest for every dollar of collateral they reserved. AIG guaranteed hundreds of billions of dollars of investments even though it had no ability to pay off if its bets failed. When the crunch came, neither AIG’s executives or an army of accountants could figure out how much money AIG owed. A year or so before the crash, when Wall Street realized that its mortgage investments were in deep trouble, these pillars of world finance used Enron-type (fairy tale) accounting to cook their books.
A few weeks ago I sat in on the first public hearing of the commission Congress created to dig into the causes of this calamity. Goldman’s Blankfein was the first witness Here’s his explanation of why Goldman teetered on the edge of extinction just 14 months earlier:
“We rationalized because a firm’s interest in preserving market share, as a competitor, is sometimes blinding.” “Another failure of risk management concerned the fact that risk models…..were too often allowed to substitute for judgment.” “Risk monitoring and activities often failed to capture the risk inherent in off-balance sheet activities.”
(Translation: Everyone was doing it so we had to, too. When our professional assessments of risk went off the rails we didn’t switch to another gear: good judgment. We created phony off-balance sheet entities to avoid taxes and to make our profits look better. It didn’t occur to us that this was risky, if not dishonest.)
And then this from Blankfein: “We should resist a response, however, that is solely designed around protecting us from the 100-year storm.”
(Translation: What occurred was akin to an earthquake in Haiti, or a tsunami in Thailand. Stuff happens. Goldman’s near death experience came as a result of the “forces of nature” rather than my own irresponsible management.)
Would you give this man a $100 million bonus?
Goldman is making big bucks today not because of any inherent newly-acquired genius in its management or because of any extraordinary benefits it is providing for society, but rather because it has corrupted and artfully gamed the system of moving around money. Over the past 30 or so years, Goldman and the other leaders of high finance have bought for themselves the good graces of enough members of Congress to tear down the legal shields that once protected them (and us) from their own stupidity.
With restraints largely gone, and up against underfunded regulators who at times behaved as if they themselves didn’t believe in regulation, Goldman Sachs and its cohort have substituted wishful thinking, competitive zeal and greed for good judgment. Today, with much competition having disappeared through merger or failure, Goldman and the other survivors are bigger, stronger and more dangerous than ever.
In another post-meltdown book, Freefall, by Nobel winning economist Joseph Stiglitz, we see a professional examination of all of this. Stiglitz comes to this conclusion: “America’s financial markets failed to perform their essential societal functions of managing risk, allocating capital and mobilizing savings while keeping transaction costs low. Instead, they created risk, misallocated capital and encouraged excessive indebtedness while imposing high transaction costs.”
The way out of this mess won’t be guided by anyone associated with “the giant vampire squid.” Blankfein offered no apologies during his testimony in Congress. Neither did any of his competitors. A $100 million bonus provides fertile feeding ground for continued wishful thinking and bad behavior.
A lot of someones will have to get a lot more aggressive about driving a stake through the heart of this system before it bites us again. For that we have to rely on someones like President Obama, Barney Frank, Chris Dodd and others who see the continued danger and have the strength and fortitude to untangle themselves, and all the rest of us, from the deadly tentacles.