I saw this on the cover the Wall Street Journal last week and had to share it. I think it does a good job of showing how far beyond reasonable government we have gone and are going to. I had no idea that banks were forced to take the loans from the government - both stable and unstable banks were forced to take them. I also think it intresting how the banks were forced to receive the money and therefore they were forced to accept the strings attached as well - such as regulations on executive compensation.I can understand the need to save the financial system and support certain efforts to do so. However, I can't understand how the Government has the right or the ability to compel institutions and people to receive money and the regulations along with it. This is the equivalent of marketplace emminent domain - a place where they have no emminent domain capabilities. What happened to Freedom? What happened to choice and accountability? Goldman doesn't even have to ask for help now - the government will step right in before they need it. At any rate, I thought it was worth sharing.
By SUSANNE CRAIG, KATE KELLY and DEBORAH SOLOMON
Goldman Sachs Group Inc., frustrated at federally mandated pay caps, has been plotting for months to get out from under the government's thumb.
On Monday, Goldman took fresh steps to break free: It announced, as expected, that it plans to raise $5 billion by selling new common shares to investors, and that it would like to use the money to repay government bailout money received last year. The firm also reported stronger-than-expected first-quarter earnings of $1.81 billion.
Goldman managers have a big incentive to escape the state's clutches. Last year, 953 Goldman employees -- nearly one in 30 -- were paid in excess of $1 million apiece, according to people familiar with the matter. But tight federal restrictions connected to the financial-sector bailout have severely crimped the Wall Street firm's ability to offer such lavish pay this year.
At a meeting President Barack Obama hosted with bank executives at the White House in late March, Lloyd Blankfein, Goldman's chief executive, argued that banks needed freedom to repay the loans the U.S. forced them to accept in October. Eight large institutions received a total of $165 billion in capital, including $10 billion for Goldman. The pay restrictions were tied to those loans. The banks were told then that everyone had to accept the money so it wouldn't be obvious who needed it most.
"Those who could pay it back have an obligation to do so," Mr. Blankfein urged the president, according to attendees. Mr. Blankfein, who was paid $68.5 million in 2007, added that the pay caps and other factors are "going to limit our ability to compete, both here and abroad."
The federal government's management of the financial crisis is entering a new phase. The trillions of dollars Washington has committed to help stabilize companies and thaw frozen credit markets have enmeshed the government deep in the affairs of investment banks, insurers and auto companies. Now that stock and bond markets have rebounded a bit, and pressure is easing for some financial firms, the government has to begin deciding how tight a grip to maintain on some companies, and for how long.
If Goldman is permitted to repay its loan, it would be the first big bank to do so. That would set the stage for the firm to once again pay its executives, traders and bankers -- long among Wall Street's highest paid -- as it sees fit.
But an early repayment could pose a risk to other banks that received government money, by rekindling investor concerns about their health. Morgan Stanley, for example, which is expected to report a first-quarter loss, isn't likely to quickly repay the U.S., according to banking executives and government officials. Will other profitable banks rush to repay, deepening the divide between the haves and the have-nots? And what would happen if there's another financial shock and banks are forced to ask for more U.S. funds?
A handful of smaller banks already have taken steps to repay the government. The U.S. has indicated it won't allow any major banks to do so before the government considers the results of financial "stress tests," which are expected by April 30. The tests measure banks' ability to continue lending through a severe and prolonged economic downturn. Because of the technicalities of the loans, it could take months before Goldman or any other big bank that repays will escape the government's clutches.
The 140-year-old firm long has boasted a culture of lucrative compensation. Although overall Goldman pay fell last year, the firm, which has about 30,000 employees, paid 953 people more than $1 million in salary and bonus, according to people familiar with the matter. No one got more than $1 million in cash; much of the pay was through stock grants that vest in the future, these people say. (At Merrill Lynch & Co., which had roughly twice as many employees, 696 executives were paid more than $1 million last year, according to data released by New York Attorney General Andrew Cuomo.) In 2008, the pay of Mr. Blankfein and three top Goldman lieutenants fell 97%, to a total of $9.3 million.
Firms are chafing under new legislative rules dictating that bonuses can account for no more than one-third of the total annual pay to top earners at companies receiving government money. The Obama administration also has endorsed capping salaries at $500,000 at some firms receiving significant U.S. aid. The government also restricts companies accepting U.S. funds from increasing dividends and from buying back their own stock, among other things.
Mr. Blankfein now uses Amtrak's Acela Express train to shuttle between New York and Washington to make his case with government officials. That's a far cry from the private plane Goldman executives have used in the past. Some Goldman partners, careful not to appear to be spending taxpayer money, now use their personal credit cards when paying for client entertaining. Employees visiting New York now stay at an Embassy Suites hotel rather than the tony Ritz-Carlton where they used to bed down.
Goldman has fared better than most rivals during the crisis, but was hammered nonetheless after Lehman Brothers Holdings Inc. filed for bankruptcy protection in September. Goldman's stock sank to $108 on Sept. 18, less than half its high of more than $247 a share in October 2007.
Even then, Goldman executives didn't believe the firm needed U.S. money. On Sept. 23, as the financial crisis intensified, Goldman raised $5 billion from Warren Buffett's Berkshire Hathaway Inc. Goldman hoped the investment -- preferred stock with a steep 10% annual return -- would reassure investors. Goldman raised another $5.75 billion in a common-stock offering.
Mr. Blankfein spoke up when nine big banks were called to the emergency meeting in October where the Treasury Department unveiled its plan.
"This is pretty vague," Mr. Blankfein told then-Treasury Secretary Henry Paulson, attendees say. "What are the terms?"
The U.S. did more than give the banks money. In exchange for the capital, it also received warrants, a security that gives the holder the right to buy common stock at a certain price. Paying back the money doesn't end the government's ability to exercise those warrants and own common stock in the banks. To formally end the government's involvement, the Treasury must sell the warrants back to the bank or to private investors.
It didn't take long for Goldman investors to raise concerns about Washington's grip. At a Nov. 11 conference at New York's Grand Hyatt hotel, an audience member grilled Mr. Blankfein.
"Some of the politicians are questioning companies who have accepted...money as to whether they should be paying bonuses this year," the attendee said. "And I'm wondering...how you're thinking about your ability to continue to compensate your staff the way you have in the past?"
Mr. Blankfein replied: "We hear those voices and we take it into account."
Six days later, Goldman said its board decided that senior executives would take no bonuses. The numbers were released in mid-December. Money set aside for pay and benefits fell 46% to $10.93 billion. Most partners, the firm's elite, saw bonuses fall by about 70%, according to people familiar with the matter.
All costs were being scrutinized by then, due to heightened public scrutiny and declining profits. Goldman employees working late now are entitled to only $20 in reimbursement for dinner, a 20% reduction. Car-service rides home aren't free until 10 p.m., an hour later than before.
At a Goldman partners meeting in early January, Mr. Blankfein said repaying the federal money was a priority.
The firm took the message public at an investor conference on Feb. 4. "Operating our business without the government capital would be an easier thing to do," said David Viniar, Goldman's chief financial officer. "We'd be under less scrutiny and under less pressure." Goldman's shares rose 6.2% that day, to $87.97.
Goldman aimed to spin the message more broadly at a congressional hearing on Feb. 11. It was Mr. Blankfein's first-ever congressional appearance, and he spent hours preparing.
Mr. Blankfein played diplomat. "When conditions allow, and with the support of our regulators and the Treasury, we look forward to paying back the government's investment so that money can be used elsewhere to support our economy," he testified.
On Feb. 26, the Treasury sent an email to Goldman's finance department containing the financial stress test. Mr. Viniar, Goldman's CFO, ordered his staff to work around-the-clock so Goldman could return the questionnaire by Monday, four days later.
But the Treasury told the firm it had to wait until its review was concluded later this month before the U.S. would entertain a repayment of the money, according to people familiar with the matter.
A public uproar last month over bonuses paid to American International Group Inc. employees only heightened Goldman's urgency. The AIG bonuses prompted a House bill to slap a 90% tax on bonuses for those receiving pay of $250,000 or more at firms that received more than $5 billion in government funds.
Some Goldman executives privately discussed repaying $5 billion -- half its government loan -- or more, say people familiar with the matter. That would have exempted Goldman from the bill taxing bonuses.
The bonus-taxing measure fizzled after President Obama expressed reservations.
Soon, a prominent government official indirectly suggested a course of action that might pave the way for a payback. On March 15, Federal Reserve Chairman Ben Bernanke said in a "60 Minutes" television interview that the day a bank could raise private capital would be an important milestone. "Right now, all the private money is sitting on the sidelines saying: 'We don't know what these banks are worth. We don't know that they're stable,'" Mr. Bernanke said.
Two days later, at a monthly meeting of Goldman's nearly 400 partners, Mr. Blankfein said it may be "prudent" for Goldman to raise capital, say attendees.
He has sought political backing. Mr. Blankfein has met twice with Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee. Messrs. Blankfein and Frank discussed repaying government funds, among other things, says Mr. Frank.
"I think it's a sign of strength" for Goldman to seek to repay U.S. money, Mr. Frank said in a recent interview.
Some Goldman rivals are less likely to repay their loans right away. At the March 27 White House meeting with President Obama, Morgan Stanley's Chief Executive John Mack struck a different tone. Analysts estimate that his firm faces a first-quarter loss of approximately $100 million. A quick payback of U.S funds would "undercut the purpose" of the Treasury's Troubled Asset Relief Program, or TARP, for large banks, Mr. Mack told President Obama, attendees say.
Treasury Secretary Timothy Geithner indicated recently that healthy banks will be able to repay bailout money, and that the Treasury was considering those repayments in its calculations about how much TARP money remains. The Bush administration had said that even healthy banks had to keep the money until the crisis passed.
A provision in the recently passed stimulus bill mandates that TARP recipients be allowed to repay the funds, as long as their primary regulator approves the move.
At least one Goldman shareholder has benefited with the government in the picture. The 10% annual payout Mr. Buffett's Berkshire Hathaway receives on its $5 billion investment earns it more than $1.3 million each day.
As long as Goldman holds the government's money, it can't pay off Mr. Buffett without U.S. approval.—Damian Paletta, Susan Pulliam, Jon Hilsenrath and Aaron Lucchetti contributed to this article.
Found at http://online.wsj.com/article/SB123966372945715013.html on April 20th, 2009.
