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Posts Tagged ‘Goldman Sachs

Another stab at Goldman’s earnings

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2Q0910-Q-GS-cashflow

Accounting statements in accordance with the actual business are more and more becoming complex and bloated fixtures of financial institutions. At the end of third quarter 2008 Goldman Sachs listed six recent accounting developments on its consolidated financial statement 10-Q.

This changed dramatically for the most recent quarter and Goldman’s 17 accounting changes opened a new frontier for wild west style accounting. Though these days reading a financial statement and understanding it is almost impossible, tenacity can pay off and hopefully reveal some insight into the health of Wall Street’s former behemoths.

Under cash flow from operating activities there is a fixture called trading assets at fair value. There is nothing peculiar about this other than the fact that its value jumped beginning with the fourth quarter of 2008. Inquisitive minds might remember that a significant accounting change took place during this quarter.

The Financial Accounting Standards Board (FASB) introduced FAS 157-3 in October 2008. Staff Position 157-3 acknowledged the use of management estimates or assumptions in “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active”. In April 2009 this accounting rule was amended to FAS 157-4 to accept this kind of fair value estimates also to not orderly transactions with significantly decreased trading activity.

Goldman’s worst quarter ever was the third quarter ending August 29, 2008. This was the quarter before the accounting changes were implemented. During nine months ending August 2008 (GS fiscal year used to start in December before the firm changed its status to a bank holding company), cash flow item trading assets at fair value registered a meager inflow of $37.9 billion. A year earlier the company had even outflows of $92.7 billion on the same position.

From January to June 2009, in the first two quarters of the new bank holding company, inflows into this category of cash flow from operating activities had already taken off at $172.39 billion. A year earlier in the six months to May 2008 inflows came in at only $28.8 billion. The firm of course does not further specify trading assets at fair value and which assets create its cash flow. 

Since assets are designated fair value therefore not easily convertible to cash it is reasonable to assume that cash flow generated is associated with non-current assets. Associated cash flows are added back or subtracted from the income statement depending on inflows or outflows respectively. In that sense $172.39 billion of fair value inflows might have substantially contributed to positive earnings during the first two quarters of 2009.

I think is is fair to say that accounting change FAS 157-3 threw a lifeline to even our most venerable institutions on Wall Street. In the Huffington Post Nathan Lewis asked the question: Do We Need Goldman Sachs? Without FAS 157-3 this question would be redundant. Most likely GS would have already drowned in the stormy sea of mortgage backed securities and credit derivatives.

Could it be that recent celebrations on Wall Street are nothing but a smoke screen blowing hot air into the face of investors? In its August monthly report a congressional oversight panel (COP) evaluating troubled assets on the books of large and smaller BHCs came to the conclusion that a substantial portion of toxic assets from mortgage backed securities and real estate whole loans still remains on bank balance sheets.

Goldman Sachs and Bank of America are two examples of masterful deceit sanctioned by the appropriate agencies. I am beginning to think that former New York AG Spitzer is right and democratization of capital markets is no more.

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Written by Alfred

12. August 2009 at 4:53 pm

Goldman’s 10-Q reveals – balance sheet still bloated

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Goldman Sachs Group has tripled their growth forecast for the second half of this year. Inflation adjusted economic growth is supposed to jump to 3 percent annual rate. Yet even the mega bulls at GS do not think this growth spurt is sustainable, and anticipate a decline to 1.5 percent in late 2010.

Will the American consumer be able to return and then keep up with lavish spending habits? This is the 64 thousand dollar question. In the past US consumer spending powered both the US economy and the rest of the world. After the crisis there still exists a possibility of painful adjustments to household and corporate balance sheets mainly in debt fueled economies.

Indebtedness of US private households peaked at 132% of disposable income at the end of 2007. This ratio had fallen to 124% at the end of March, 2009, but is still too high. As a reaction US consumers are spending less and saving more in recent months. As people continue to struggle to repay their debt the savings rate is expected to gradually return to a range of 7% to 10%.

There are also those who disagree and are not convinced that higher savings will ipso facto result in lower output. Michael Darda, chief economist at brokerage firm MKM Partners, anticipates a strong recovery in stocks and the economy. Obviously an increased savings rate is only a temporary phenomenon according to Darda.

Even if Darda is right and we will return to old habits, can we be sure this is really what we want? A return to a debt fueled economy got us into trouble in the first place. These are rather conflicting interests between corporate and business protégés and basically everybody else.

The leader of the pack on Wall Street is investment firm turned bank-holding company, Goldman Sachs. Yesterday GS released its consolidated financial statement for the second quarter of 2009. On first impression we see a great quarter and a reoccurrence of the firm’s unmatched earning power. Taking a closer look reveals quite a different picture. The 10-Q statement for the second quarter tanked GS stock by 2.01% yesterday, down $8.65 since August 6, 2009.

GS 10-Q unaudited condensed consolidated financial statement makes certain estimates and assumptions. Most important are fair value measurements and accounting for goodwill and intangible assets. Actual results could be materially different from these estimates.

The firm’s assets and liabilities are generally separated into two categories, cash instruments and derivative contracts. In determining their fair value, hierarchy levels two and three are significant because of the use of judgment and estimate for price transparency. Government agency securities, certain mortgage products, and certain money market securities are considered to be level two, if not actively traded.

Cash instruments are considered to be level 3 if they are infrequently traded and lack price transparency. Such instruments include private equity and real estate fund investments, collateralized debt obligations (CDOs), less liquid mortgage whole loans and securitization products (backed by either commercial or residential real estate), and acquired portfolios of distressed loans.

Over the counter (OTC) traded derivatives contracts are always valued as level three, and therefore subject to least price transparency. In such cases the transaction price is often used as the best estimate of fair value. In addition the lowest level of input in any financial instrument determines its level within the value hierarchy.

In October 2008, the Financial Accounting Standards Board (FASB) issued FAS 157-3, approving the use of management estimates or assumptions to determine fair value in not active markets. In April 2009 this rule was amended to FAS 157-4 and applied fair value assumptions to not orderly transactions of assets and liabilities with significantly decreased activities.

These new FASB rules have tremendously helped financial firms to hide potential losses of mostly impaired mortgage backed securities under level two and three of fair value accounting. For Goldman Sachs trading assets at fair value increased to $355.2 billion in 2Q09 from $338.3 billion in 2Q08.

Composition of assets held at fair value has changed and Goldman has replaced risky collateralized debt obligations with safer US government agency debt during the most recent quarters. Though the firm has not at all shied away from derivative contracts and as of June 2009 held a net position of $90.0 billion at fair value.

Although compression efforts across the industry have helped to decrease the notional amount of derivative contracts outstanding, the firm’s gross fair value exposure was still a staggering $1.093 trillion. Purchased $3.19 trillion of credit derivatives were partially offset with $2.96 trillion in written contracts. Net of collateral only $90.0 billion contributed to trading assets at fair value.

Net purchased protection total derivative exposure was $227.02 billion as of June 2009, with $212.1 billion level 2 and $15.0 billion level 3. A $137.5 billion cash collateral helped to reduce the risks associated with these derivative contracts. At the end of the fist quarter 2007 cash collateral for derivative contracts at fair value was a meager $27.7 billion, representative of an easygoing and low risk culture on Wall Street at the time.

For the first time the financial statement provided some insight into the composition of the firms staggering exposure to derivative contracts. In the second quarter 2009 the firm held a gross exposure of written high risk credit derivatives with credit spreads of 501 to 1000 basis points or greater over Libor. $73.3 billion had a term exposure of 5 years or greater and a total of $526.9 billion a term exposure of zero to five years or greater.

These contracts were partially offset with purchased credit derivatives and their fair value was also greatly reduced. Nevertheless it poses a staggering exposure to potentially toxic assets in a harmful environment of severe credit contraction.

From trading assets held at fair value at the end of the second quarter $332.7 billion were still level 2 and $54.4 billion, with economic exposure of actually $50.3 billion, at level 3. In the first quarter of 2007 Goldman owned financial assets at fair value of $231.6 billion at level 2 and $47.6 billion at level 3. Fair value of level 2 and 3 assets as determined by FASB 157-3,4 are subject to the firm’s estimates and assumptions and not mark-to-market.

Probably the most contentious issue with the business of accounting in financial firms has been and still is the issue of securitization activities. Goldman Sachs securitizes commercial and residential mortgages and other financial assets. This has undoubtedly been the driving force of a debt fueled economy in the past, but will it remain so in the future? The latest data reveal securitization has virtually come to a standstill, and this shutdown of the consumer is behind rather tepid assertions of economic recovery.

During the three months ending June 2009 Goldman only sold $12.9 billion in securitized products, of which $12.4 billion were primarily safe government agency securitizations and only $496 million of other financial assets. In the first quarter 2007, $16.8 billion in residential mortgage securitizations and $14.8 billion in other securitizations, primarily collateral debt obligations, were transacted.

Total shareholder’ equity was $62.8 billion at the end of the quarter. As of June 2009 the firms equity was about fourteen times leveraged to hold total assets of $889.5 billion. During the first quarter of 2007 shareholder’ equity was still 25 times leveraged. This apparent reduction of leverage in the current quarter is not attributable to general deleveraging. Shareholder’ equity has benefitted greatly from increase in retained earnings and additional paid-in capital.

There were some positive developments as well during the most recent quarter. At the end of the first quarter of 2007 financial assets at fair value subtracted $36.9 billion from cash flows from operating activities. That has dramatically changed in the most recent quarter and trading assets at fair value attributed $172.3 billion to cash flow. This form of associated cash flow from the sale of non-current assets is added back onto the income statement and helps to improve the firm’s earnings.

Overall Goldman Sachs’ balance sheet has improved but is nowhere close to the optimism infused during its earnings report. Fair value accounting with level 2 and 3 still unreasonable high pose tremendous risk. Securitization activities, fuel to a consumer driven economy, ceased to exist. Yet financial firms and other Wall Street combat optimists are again celebrating.

The debate over reigning in the financial industry’s notorious ingenuity and lavish executive compensation is ongoing, all the while bankers are still celebrating. A conflict of interest in this mission impossible to control Wall Street is a done deal with no recourse to moderation. Public outrage is therefore understandable and some are even beginning to ask the question: Do We Need Goldman Sachs?

Formerly disgraced AG from New York and now resurrected from the dead Eliot Spitzer in a recent interview with finance blogger Henry Blodget declared an end to democratization of the market place. He had one advise for retail investors: Don’t play! (video)

Bloated and vague balance sheets of Goldman Sachs and others are testament to a culture on Wall Street hostile to a broad base of a public investment community. They want their game to be elitist and government and regulators have supported them in the past and will continue to do so also in the foreseeable future. Though we must fear that change is nothing but lip service.

Goldman Sachs reports second quarter earnings

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Meredith Whitney, the star analyst on Wall Street who correctly predicted the massive asset problems faced by all major investment firms during the last several quarters, increased her price target on Goldman Sachs. It prompted some to speculate if she had eventually flipped on her bearish posture on financial institutions in general. 

I don’t know if she did but the results of Goldman’s second quarter, blowing past all expectations certainly didn’t make her job any easier. In the latest April to July quarter Goldman’s profit leaped 65 percent compared to the same period of last year.

It certainly makes one wonder what does Goldman have that others don’t. For one thing a Tier 1 ratio that is depending on how you look at it, whether its Basel I of II, at 13.8 or 16.1 percent respectively. In addition the amount of liquid assets averaged $171 billion during the quarter. That is certainly a nice capital cushion in case of a more adverse operating environment in the future.

The most staggering part of Goldman’s earnings release were the huge revenue gains of 93 percent to 10.8 billion within its equities and principal investment unit. Trading and risk taking really paid off and the firm greatly profited from much higher than usual volatility in the markets.

These ups and down in the market prompted Matt Taibbi, a business writer for the Rolling Stone magazine, to call Goldman the Great American Bubble Machine. Maybe after this earnings bonanza it becomes more clear why Taibbi felt compelled to make such an outrageous claim. Goldman promptly dismissed it as the usual conspiracy theory.

Taibbi’s accusation certainly helps to explain some of the investment firm’s wizardry, and his uncompromising look behind the firms machinations reveal a really sinister network of public and private interconnections (see also here). On a more straightforward note the mere fact that Uncle Sam changed financial accounting rules back in April might have laid the foundations for the biggest jump in quarterly earnings since its IPO. 

In April the Financial Accounting Standard Board (FASB) succumbed to financial industry lobbying and lowered its requirements for market-to-market accounting of low liquidity investments without a real market. This move saved US financial institutions tens of billions of dollars in write downs to their balance sheets, which threatened to become an endless open pit.

At that point FASB only leveled the playing field for US financial institutions with their European counterparts, which according to IASB existing rules were not required to strict market-to-market in the first place. These days though IASB has again put the screws on financial institutions by threatening to implement new pro-cyclical rules in market-to-market accounting.

Getting back to Goldman, there is no denying the fact that the firm has a strong desire for excessive risk taking but they obviously seem to be able to maximize shareholder value even in a time more adverse to such high flying objectives. Again, what does Goldman have that others don’t?

Maybe it has to do with a high stake in another firm. Together with  JPMorgan, Bank of America and Royal Bank of Scotland, Goldman is a major shareholder of Markit, a firm which supplies information to financial markets around the world concerning the pricing of credit derivatives. Many believe that these relatively new products are at the core of the financial meltdown.

The US Department of Justice is now requesting detailed information about the pricing of credit derivatives and has launched an investigation into the ways Markit supplies this information and whether the firms owners have unfair access to vital market-making data. 

Markit of course denies any wrong doing, and so is Goldman I am sure, but hopefully the investigation will not stop here or just end in talk.

Regulating Wall Street – just how much change can we expect?

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Obama-Blankfein

On the eve of the G-8/G-20 summit in L’Aquila the presidents of France and Brazil jointly published an article in The Huffington Post, the world’s first and famous internet newspaper, titled ‘Alliance for Change’. Their choice of this outlet speaks volume, men of such caliber never do anything without careful consideration.

The first thing comes to mind is a desire to reach a vast international audience more inclined to follow their vision of a new system of world governance. We can therefore assume that whatever it is they are suggesting is revolutionary enough to stir up some controversy and at least for now made them stay away from more traditional news channels.

What Mr. Sarkozy and Mr. daSilva are jointly suggesting is no less than a redundancy of the Group of 8 (G-8) in favor of a much wider allegiance of nations with respect to issues concerning global governance. A multilateral system that was conspicuously unrepresentative and lacking in coherence must be reformed to build a more just, developed and sustainable world.

The G-20 or similar to L’Aquila the G-8 together with the G-5/G-6 are both multilateral platforms on which to discuss various global issues in an interconnected framework. Those issues are indeed monumental and both presidents acknowledged the urgency of a multilateral system by highlighting most of the challenges that face the global community in the 21st century.

Peace and collective security require a wide-ranging reform of the U.N. Security Council. The voice of workers must be heard and their desire for more social justice and greater security met by strengthening the role and influence of the International Labour Organization (ILO) in global economic governance. Last but not least on the agenda of such an international framework is the enormously challenging task of regulation of international finance.

From Huff Post,  both presidents: The decisions taken by the G-20 to improve the regulation and oversight of international finance, to curb speculation, to crack down on tax havens and money laundering centers, and to foster growth must be implemented.

Politicians are very often a bunch of stoic bureaucrats, but no not this time. Sarkozy, daSilva and hopefully others at the recent summit are ready to see eye to eye maybe for the first time with their constituency and clearly acknowledge the vacuum of social justice pervading all layers of society in the 21st century.

This reinvigoration of literally common sense results on the one hand from the advent of Barak Obama and his new leadership in the U.S. and on the other hand from a massive global financial and economic crisis that threatens the very foundations of global world order.

The president of the U.S. has demonstrated his desire for change in many ways but has he been effective and is change indeed coming to Washington, as he has promised many times? The global economic crisis has made regulation of financial markets and the financial industry as a whole a top priority. 

Today Goldman Sachs, Deutsche Bank, UBS and others are equipped with an almost unmitigated license to gamble and at the same time fall into the category of too big to fail. This is not sustainable and even the Bank for International Settlements (BIS) is now openly debating a breakup of these giant cathedrals of capitalism.

The Financial Stability Forum and its successor the Financial Stability Board (FSB) in Basel is working on new rules to give regulators more oversight in establishing important issues such as excessive leverage and forcing banks to provide for anti-cyclical periods with putting more money aside during boom times.

They are asking for an awful lot given the most recent history of the industry but nobody disagrees bold action is necessary because of the magnitude of the current crisis. At the eve of the London summit Nikolas Sarkozy threatened world leaders to quit the talks if president Obama and chancellor Gordon Brown would resist tough regulation.

They did not and so in the end it provoked Mr. Sarkozy to say that the page of the Anglo-Saxon model of free markets had been turned. German chancellor Angela Merkel called it a victory for common sense and Nobel Laureate and economist Stiglitz hailed it a historic moment for the world to admit the push for deregulation was wrong.

The joint communiqué of the London summit included a statement acknowledging major failures in regulation being the cause of the market turmoil. To avoid another crisis hedge funds, credit rating agencies, risk taking and executive pay are subject to stricter regulation in the future.

Just how much more regulation and who those regulators will be nobody knows at this point. It is hard to fathom that a bunch of bureaucrats will be able to reign in Wall Street executives and their armada of lobbyists swarming the hallways of congress. For regulators to push the breaks when everybody else wants to accelerate seems too much to ask, in particular given the history of failed regulations in the past.

A contentious issue in this whole regulation debate is the use of credit derivatives and their contribution to the current crisis. At a recent congressional hearing on a proposal to regulate over-the-counter derivatives congressman Sherman asked Treasury secretary Geithner: “Can you correct that misconception and make a clear statement now that derivatives that are sold today are not going to be the subject of bailouts for either the issuer or the purchaser?”

The secretary even after being asked several times refused to give an answer (the full transcript of the conversation can be seen here, video in video-center). Mr. Geithner’s refusal to cooperate highlights the difficulty of the enormous task that lies ahead.

On the one hand is the commitment to put on the breaks with tougher regulations for the sake of the sustainability of the system. On the other hand are all the safeguards put into place to make sure that this ambitious goal will not kill the golden goose. It is therefore no surprise that credit derivatives experience sort of a revival in the midst of a still slumping economy, mass layoffs and record taxpayer funded economic stimulus programs.

The president of France, Brazil and other nations are talking tough on regulation but in the meantime BAB is back on Wall Street. Today Goldman Sachs released the results for second quarter earnings and revealed that bonuses are indeed back. Goldman compensation may very well reach a record $1 million per employee this year.

For the second quarter the bank set aside a staggering $226,156 for every employee working for the firm. A couple of months ago with Wall Street and the World at the precipice of catastrophe, Goldman received a $10 billion bailout in taxpayer money.

It is no surprise Wall Street has a very short memory but this development gives me indeed little hope that regulation is being seriously considered in the hallways of power on Wall Street and in Washington. Just how much change will we get in the end? Probably not enough!

Criticizing Goldman Sachs – better late than never!

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During the last several decades Wall Street has become the great American money machine only to fall into disgrace during the current financial crisis. Many blame a proverbial greed that took hold during the great boom for the current financial and economic malaise. Today none of the highly regarded firms that once ruled the street still exist. Some have gone under, taken over by their bigger rivals, and even those that survived changed their status from investment firm into a more humble bank holding company.

One of those firms still around is Goldman Sachs. The firm founded in 1869 by a German Jewish immigrant, Marcus Goldman, has become the leader of the pack among Wall Street investment banks. In 1999 the firm went public and hence started their myth of infallibility and unlimited prosperity that surrounds Goldman up to this day.

The financial crisis on Wall Street reached even into the halls of Goldman’s upper echelons. As part of the Federal Reserve’s effort to save the financial industry from collapsing GS received billions of dollars of taxpayer monies in the from of TARP funds. In June 2009 GS was among 10 firms able to pay back all the money they received from the government. Sure enough some weeks later GS announced that it soon will be in a position to grant the highest compensation package ever to its employees. (see also: CEO needed for some – historic bonuses for others)

No talk about the new modesty on Wall Street now that GS is free from government influence, but the rest of us is still marred by economic contraction and financial hardship the likes of it we have not seen since the Great Depression. So how come that Goldman seems to be invulnerable and does not feel the pain?

Matt Taibbi, writer for the Rolling Stone, a magazine also known for its often enigmatic and controversial political coverage, lashes out at Goldman: The Great American Bubble Machine. He follows through by trying to explain how Goldman Sachs has engineered every major market manipulation since the Great Depression.

from Matt Taibbi’s blog: If America is circling the drain, Goldman Sachs has found a way to be that drain, an extremely unfortunate loophole in the system of Western democratic capitalism, which never foresaw that in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy.

The drain that has the capacity to defeat democracy is according to Taibbi relative simple: Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again, riding in to rescue us all by lending us back our own money at interest, selling themselves as men above greed, just a bunch of really smart guys keeping the wheels greased.

Matt sees the same pattern of a basic scam going as far back as the Great Depression, and most recently identifying Goldman’s role during the internet bubble, the housing bust and even the huge spike in oil prices.

from Matt Taibbi’s blog: Goldman did it by persuading pension funds and other large institutional investors to invest in oil futures agreeing to buy oil at a certain price on a fixed date. ….. Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion, an increase of 2,300 percent. By 2008, a barrel of oil was traded 27 times, on average, before it was actually delivered and consumed.

The nice thing about Taibbi is that he also does not refrain from name-calling, namely those who graduated from GS only to end up later in some important government position. Former GS CEO Henry Paulson and Bush’s secretary of Treasury, the architect of Wall street’s bailout funneled trillions of dollars to his friends in the industry. Robert Rubin, Bill Clinton’s Treasury secretary, joined GS in 1966 where he stayed as Co-Chairman till 1992 only to end up later as chairman of Citigroup. John Thain, Robert Steel, Joshua Bolton, Mark Patterson, Ed Liddy, the head of the World Bank, the head of the New York Stock Exchange and two heads of the Federal Reserve Bank of New York were all on Goldman’s pay list at some point or another.

Not surprisingly Taibbi focuses on Robert Rubin, the former Goldman banker turn Treasury secretary under Bill Clinton, whose persona was hyped as the smartest person ever to walk the face of the Earth. The repeal of the Glass-Steagall Act, which allowed investment banks, commercial banks and insurance companies to engage in merger, was one of the political hall marks achieved by Clinton’s then Treasury secretary Rubin.

In 1998 Travelers Insurance group, the owner of brokerage firm Smith Barney, announced a $76 billion merger with US bank Citigroup. The deal closed after the repeal of the Glass-Steagall Act in November 1999. A few months later after Clinton’s term in the White House had expired, Jeff Rubin became chairman of Citycorp, which after the merger with Salomom Smith Barney created the largest financial services company in the World. During his tenure at Citicorp Rubin earned several hundreds of millions of dollars in compensation. Today Citicorp is at the center of the storm on Wall Street and subsequently the global economy.

Taibbi modifies a misconception of mostly blaming Republicans for Wall street’s deregulation. The repeal of the Glass-Steagall-Act which is according to many at the core of the current financial crisis, is clearly the result of politics made by Democrats. In fact Goldman has very long standing and deep ties with the Democratic party. GS was the number one campaign tributer to president Obama. 

Regardless of which political party is to blame most, it seems obvious that Goldman graduates by occupying important government positions could deliver to their parent firm whatever they wanted and needed. Paulson’s bailout of insurance giant AIG serves as good example. Thanks to the bailout GS got paid in full for their bad bets. Homeowners or retirees who lost their live savings in the current crash are not that lucky. Taibbi concludes: The collective message of all of this – the AIG bailout, the swift approval for its bank-holding conversion, the TARP funds – is that when it comes to Goldman Sachs, there isn’t a free market at all. 

Nobel laureate Stieglitz calls Goldman the great American revolving door, through which the firm’s executives first leave only to end up in some high level government position. Once this has expired they enter the firm again through its revolving door and continue their ill gotten endeavors. In doing so they effectively block much needed financial reform of the financial services industry.

read also: Goldman Sachs – Weltmacht mit Drehtür, DIE ZEIT, 02.07.2009 Nr. 28

from Wikipedia this list of former GS alumni certainly reads like a who-is-who among American power brokers:

GSalumni

CEO needed for some – historic bonuses for others

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Ramifications from the credit crisis have reverberated around the World. Millions have already lost their jobs and many more will do so in the months and years to come. Even the Federal Reserve admits that unemployment will increase further from already painful levels.

While certainly nobody sheds a tear about high paid CEO’s the WSJ takes it up and reports on the difficulties of firms in the financial-services industry to find replacement for their vacant CEO positions. About 18 percent of the 2500 biggest firms in the US have lost their CEO in 2008, the highest rate of forced succession in any industry.

This is a unique situation which goes counter to anything the industry has experienced in the last couple of years where high paying jobs were in strong demand. After Lehman the strain of the credit crisis, curbs on executive compensation and the specter of government scrutiny have cut short this once rosy scenario. Some of the most venerable applicants for open CEO positions are also tarnished with a reputation of being responsible for the problems that have emerged since September of last year.

"Let’s face it: There is no one" . Obviously people inside the struggle for CEO succession at BofA and Citigroup face a dilemma. These mighty institutions are left with lack of interest in their highest job openings, something that is either very sad or very dumb.

According to the WSJ, Jerry Grundhofer, the former chief executive of regional bank U.S. Bancorp, hesitates to take the lead at Citi. He expressed concern about the relatively low pay that likely would come with the job. By the way he seemed also worried about the government’s involvement in the firm, most likely because of limited compensation measures. Robert Steel (former Treasury Department undersecretary), John Thain (former Merrill Lynch CEO) and David Moffett (exCEO of Freddie Mac) are among the most lucrative CVs being handed down to the boards of American International Group, Hartford Financial Services Group, mortgage company Freddie Mac, BofA and Citi.

But there are also those who can only smile and shake their head in disbelieve at this problem. Employees and executives at investment firm Goldman Sachs are faced with the specter of the largest bonus program in the firm’s 140 year history. Last week, after Goldman paid back all TARP money it received in the wake of the bail-out, it has paved the way for this stunning development. The firm’s second quarter results will not be known until next month but a jump in earnings is expected and that despite the company’s pay back of $10 billion to the US government. This has led some to speculate that GS never needed government funds in the first place but was forced to participate in the TARP program (Was TARP just a ruse?; see video-center).

The fact that some of the biggest financial institutions are being able to pay their highest bonuses in history and reap the profits of a crisis they helped to create is deplorable. It certainly is the wrong signal at the wrong time.

Written by Alfred

24. June 2009 at 1:39 pm