The Goldman Sachs Bonuses

From CNBC, I gather that Goldman Sachs received $10 billion in TARP funds, and paid out $10 billion in bonuses.

Of course, the typical CNBC crew resorts to this news with shouts of ‘class warfare!,’ but I think there’s an interesting problem here.

I was under the impression that the TARP was to stabilize institutions whose failures were otherwise unavoidable and whose downfall would lead to massive jolts to the global economy.

Instead, it appears that Goldman Sachs faced a choice between going bust and perhaps losing those employees who could other jobs in this bad economy, and of course would face higher rates of employees quitting in the years ahead.

How “needed” are these TARP funds if the choice is not between bankruptcy and TARP, but between reduced marginal ability to retain staff and TARP?

23 thoughts on “The Goldman Sachs Bonuses”

  1. I fail to see any evidence of individual brilliance or exceptionalism based on performance in the past year from any of these bailed out banks or investment firms. Arguably, most of the employees who received these bonuses failed miserably, violating most of their own admittedly low standards on everything from money management to fraud prevention. They should get a pink slip, not a bonus.

  2. Even if it meant losing good people, why should the government serve to subsidize Goldman Sachs’ salary budget?

    Companies lose people all the time.

    I thought the TARP was for short-term stabilization, not long-term retention of workers.

    Having the top-whatever sales, management, IT, etc. guys leave would be bad for Goldman Sachs. How would it be an economically destabilizing event?

    On CNBC, one commentator said “But these people would have left to stat their own companies!”

    That’s a bad thing for our country?

  3. Eddie nailed it. These should be reqrds for excellence in work.

    The evidence is that the sucked and were wealth-destroyers, not wealth creators. They did not serve the best interest of their customers as a means to being handsomely compensated…they severed their own interest at the expense of their customers.

    The feds should go after the abusers in civil court to recover damages for torts.

    Policy makers must keep in mind that most business owners are anti-free market and anti-competition. They don’t want competition. The want safe secure income sources.

    US policy must oriented toward supporting stuff entrepreneurial activity, enabling creative destruction, enabling informed consumers (who really drive economic activity), protecting property rights, having a predictable legals systems, minimizing USGOV distortions on the economy.

    Propping up zombies or guaranteeing bonuses for “important” people who haven’t earned them is not on that list.

  4. The response CNBC kept repeating was:

    “The bulk of these bonuses are not to executives. They are either commisions for salesmen, or bonuses to other workers who share in profit sharing (IT types, etc.)”

    CNBC’s hosts were saying that such bonuses were needed to retain the best workers, the best salesmen, programmers, etc., or else they would leave.

    Even if this was true — even if these guys were not incompetent — it is shocking that emergency stabilization funds are being used for such long-term planning. The TARP funds were hardly needed at all, if the consequences were simply less employee trust in 3-5 years.

  5. Leave to where? Lol. Is the economy on Mars rockin’!

    I think the numbers are a coincidence. These companies have always paid people with this system. If they had instead paid straight salaries, we would not be having this conversation.

    I think TARP was needed. Maybe not as much with Goldman Sachs, but with no TARP for all the others Goldman probably would have been squashed like a bug.

  6. The numbers probablare a coincidence. Still, it is an illustrative coincidence.

    We were told that the TARP was needed to prevent the implosion of the economy. Instead, at least in the case of Goldman Sachs, it was needed to pervent a marginal change in employee retention over the medium-term. Those are radically different issues.

    Political favoritism looks like it is and has been playing a large role in the TARP. UAW employers get it [1]; ethanol farmers don’t [2]. Henry Paulson’s former employer gets it.[3] Home owners don’t.

    The TARP apperas to have brought LIBOR rates down to low levels while keeping us on-track for a Great Depression-like crash. [4] I’m not sure if that is an net accomplisment or, if it is, how much systemic embezzlemen and damage it is worth.

    As Dr. Philip mentions, without transparency, corruption breeds. But considering how broken the TARP is, would sun-shune really a sufficient disinfected as long as the fertilizer of TARP is available?

    [1] http://www.tdaxp.com/archive/2008/12/19/bush-bails-out-the-uaw.html
    [2] http://gas2.org/2008/11/01/verasun-one-of-usas-largest-ethanol-producers-files-chapter-11/
    [3] http://www.tdaxp.com/archive/2008/09/28/sould-we-trust-hank.html
    [4] http://www.calculatedriskblog.com/2009/01/four-bad-bears-january-update.html

  7. Krugman has a great term for this:
    “lemon socialism”- taxpayers bear the cost if things go wrong, but stockholders and executives get the benefits if things go right.

    He also damns these idiots crying for a bonus:

    “Say I’m a banker and I created $30 million. I should get a part of that,” one banker told The New York Times. And if you’re a banker and you destroyed $30 billion? Uncle Sam to the rescue!”

    http://www.nytimes.com/2009/02/02/opinion/02krugman.html?em=&pagewanted=print

  8. Reports are out that the average bonus was $112,000, yet how many bonuses far in excess of that were given out to management?

    I don’t think anyone employed in the national banking or investment industry that received a dime of taxpayer welfare should get a penny in bonuses this year or next year.

    These people are the new welfare queens, adopting an adversarial attitude towards their benefactors who dare question why they should get anything at all for their lack of production.

    We should be going after these crooks with the RICO statutes. Anybody employed in these institutions at any level of management or analysis is likely guilty of fraud or doing nothing about it.

  9. Not going to defend GS. Indeed, once they went public, all bets were off anyway. Most of the firm ceased taking on risk and simply became a conduit for wealth management advisers.

    Will say this though: if you think you are going to get a handle on the economic problems we face without dealing straight-up with executive compensation, you are crazy. The GS bonuses are just a part of the much bigger executive compensation (and I’ll admit it: fund manager compensation) crisis that has perverted the capitalist system.

    I know that sounds strange. But a public corporation that pays its executives 10-20M at signing is a public corporation being looted. That is quite literally the mentality. Loot the place and hide what you stole.

    I think the problems with fund mgr compensation are similar in nature, but because they aren’t public corps., I think its less of a problem (still a major problem of course, just not as major).

    If we gave shareholders slightly better tools with which to effectuate oversight, I think you would see an equilibrium take shape. But, for example, how pissed is Mr. Buffet right now? And what can he do it about? Not a damn thing.

    Anyway, you are right that the TARP funds are being mishandled, but thats the mentality we’re in right now. Steal what you can and hope you don’t get caught. Its not at all dissimilar from post-Katrina looting.

  10. Eddie, RICO is tougher. Clearly civil tort actions could be taken though. They won’t get jail time, but there ill-gotten gains can be stripped from them.

  11. FedX, one way to deal with the Principal-Agent is to use anti-trust laws to keep companies smaller. Larggness and complexity leads to an executive class disconnected from shareholder.

    A second way, would be better financial statements as too much can be hidden the current way.

    A third way…USGOV should take an active role in civil litigation against faile corporate execs to get back the loot.

    A Forth Way….split the CEO and Chairman jobs, and the Chairman may not have served as CEO or any other officer inthat company. He has no loyalty to those folks. Also, the CEO, Chairmen and other execs can not serve on other boards. Corporate Audit should report to the Chairman, not to a C*O.

    Any other ideas?

  12. Well, they could go back to what actually worked: tax brackets that topped out at 90-plus percent. Funny how people don’t want those last millions when the government takes 90% of it.

    And what is amazing is the rational decision making that it caused.

  13. 90% is a good start. could lead to HQ shopping though. but a good start. splitting chairs and CEOs is done in many places, and the same outrages occur (its what led to the org. arb. market). if the doj goes after the loot, they will be lost on a wild goose chase. there were never any strings attached to the money in TARP I.

  14. This is a debate about which is the best form of band-aid to use.

    I don’t mind Obama’s ‘maximum wage’ [1,2] in bailed out companies, but it’s not much of a fix, either.

    The real issue is the broken systems of corporate governance and corporate democracy. Whether or not executives are rewarding themselves through salaries, or perks, or prestige, or large offices, or whatever, the point is that shareholders are nearly helpless in the day-to-day-running of their firms.

    This problem is compounded by the manner of corporate elections, in which shareholders who are involved but lose faith in management are likely simply to share the shares, transferring ownership to those who do not care (instead of fixing the problem).

    [1] http://www.gather.com/viewArticle.jsp?articleId=281474977584181&grpId=3659174697241980&nav=Groupspace
    [2] http://www.halfsigma.com/2009/02/executive-compensation-too-bad-about-the-loophole.html

  15. “The real issue is the broken systems of corporate governance and corporate democracy.”

    Exactly. It is a big problem…seeking some good controls.

  16. Razib has a very balanced piece on this [1], which is an example of his analysis at its best.

    After presenting a number of the objections to the salary cap, he sums the issue up this way:

    Our banking system is quasi-nationalized, it should be no surprise if the heads of these firms are going to be more in the mode of utility CEOs in the future. There is a lot of talk about zombie companies right now, banks which are insolvent and companies like Chrysler which really have no way of making more money than they lose. There’s no way that the best talent is going to save these companies, rather, the best outcome is probably to unwind them in a manner which isn’t catastrophic. “10 business rules for retards” is all you really need here, not a fine-grained understanding of financial mathematics. Other firms, such as Wells Fargo, probably have a potential future as profitable businesses, but right now their primary goal is to make it through tough times. Rather than risking-taking geniuses who increase value by being audacious, what companies like Wells need are non-retards who make sure not to put a gun in their mouths and pull the trigger (the fact that banks aren’t lending isn’t because they’re stupid and all the geniuses are gone).

    [1] http://scienceblogs.com/gnxp/2009/02/the_500_k_salary_cap.php

  17. AIG was saved so that Goldman would not go under. I see a conflict of interest when Paulson & Co did what they did. I am sure Paulson still owns millions of GOldman shares in his or his relatives names.

    Shorting the CDOs and MBS and getting your customers to buy the same is a despicable act which no company should be doing. The executives who are responsible for this should be punished not rewarded.

    Every excess in the history of the world which gets the crowds against it and robs people of the world of their bare necessities have lead to revolultion and I foresee the Goldmans of the world instrumental in creating the next one. The government, be it Obama or any one else is ineffective beacuse of the catch 22 situations they get into. They get resolved only when it becomes unbearable and it is resolved with a nonviolent or in a violent form.

  18. Venkat,

    AIG was saved so that Goldman would not go under. I see a conflict of interest when Paulson & Co did what they did. I am sure Paulson still owns millions of GOldman shares in his or his relatives names.

    Well said. Geithner, who oversaw the billions of Goldman once claimed it wasn’t owed by AIG, also worked for Goldman Sachs.

  19. Jeremy,

    Glad to see that Goldman Sachs and AIG are on the list.

    Not sure what the other companies did to deserve such scorn, however…

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