Yesterday, Goldman Sachs quietly paid $1.1 billion to get out from under the thumb of Ã¢â‚¬â€œ I mean Ã¢â‚¬â€œ to redeem the US Treasury for the warrants held by the government since last fall. With this transaction, and the earlier repayment of the original $10 billion loan received as part of the massive taxpayer-funded bank rescue plan last October, Goldman Sachs is now free of its government debt. And what great timing! Now there is no need to figure out how to divide the record $3.44 billion profit the firm made last quarter with 300 million or so additional share holders.
Seriously though, it must be somewhat heartening for taxpayers to see that a major bank that appeared so close to collapse just nine months ago, is now able to pay back its public debt obligations. In fact, according to a statement released by Goldman Sachs, all told, the government received an annualized rate of return of 23 percent on its $10 billion investment in Goldman Sachs. Not too shabby at any time Ã¢â‚¬â€œ especially now considering the current state of the economy.
Dig a little deeper however, and there may be more to this miraculous turnaround than first appears. Yes, Goldman Sachs did manage to make a healthy profit and pay off its government loans in a timely manner; a fact that both parties are eager to share with the public for obvious PR reasons. However, neither camp is really talking much about the AIG connection and the role this had in improving Goldman SachsÃ¢â‚¬â„¢ fortunes.
American International Group Ã¢â‚¬â€œ which sold about $440 billion or so in credit default swaps Ã¢â‚¬â€œ imploded in spectacular fashion when the financial crisis came to a head last fall. When its credit rating was subsequently downgraded, AIG found itself unable to meet the resulting increase in collateral obligations on its swaps and the government felt compelled to come to the insurerÃ¢â‚¬â„¢s rescue to the tune of $85 billion. The total cost of this rescue has since grown to more than $180 billion, and in return, the government Ã¢â‚¬â€œ read, the taxpayer Ã¢â‚¬â€œ now holds 80% of the company. Finding itself suddenly flush, AIG immediately settled a series of its default swaps obligations; and at the top of its list of recipients was Goldman Sachs which received a payout of nearly $13 billion.
You can decide for yourself if Goldman Sachs could have turned its ship around so quickly without this payment. Nevertheless, by clearing its debts with the government, Goldman Sachs once again controls its own destiny and any talk of moderating compensation levels Ã¢â‚¬â€œ even in a show of goodwill Ã¢â‚¬â€œ was tossed out the window when the firm announced that $11.4 billion has been earmarked for employee pay and benefits. This works out to around $900,000 per employee so clearly, things are back to normal at the nationÃ¢â‚¬â„¢s largest investment bank.
But honestly, was there ever a real expectation that we would see meaningful changes on executive compensations? Even President Obama Ã¢â‚¬â€œ whose administration has been hinting at implementing more Ã¢â‚¬Å“controlÃ¢â‚¬Â over executive pay practices Ã¢â‚¬â€œ seemed particularly resigned to the return of the status quo. When responding to a question in a recent interview, the President acknowledged that since Goldman Sachs has paid back its government loans, the government no longer Ã¢â‚¬Å“has the same kind of levers on them we might haveÃ¢â‚¬Â.
Perhaps taxpayers should just be happy they received their investment back and move on.
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