Survival of the greediest: The 2009 bonus scandal

Inside the London headquarters of Goldman Sachs, the chatter last week focused on one thing. As ordinary mortals feared rising taxes and unemployment, the concern for staff of the “giant vampire squid” — as the bank has been labelled — was what to do with the vast bonuses heading their way.

A mere year after the financial system was bailed out with hundreds of billions of pounds from governments around the world, Goldman’s bankers are set to reap more loot than ever. Bonuses of £5m to £20m per person are likely in its senior ranks after the bank announced profits of £2 billion for the third quarter of this year.

The pool of money being set aside to pay bonuses at the end of the year is on course to hit £14 billion — double last year’s total and close to a record. As the rest of the world struggles to get back on its feet, Goldman’s 31,700 employees are in line for what one commentator called “eye-stabbingly, brain-searingly blood-boiling” bonuses of £428,000 each.

To assuage public shock and anger at the scale of its bonuses, Goldman likes to ascribe its fortunes to its own brilliance; at the same time it points to the large sums it contributes in taxes and highlights its charitable donations.

Welcome though these are, they cut little ice with many experts. President Barack Obama’s top financial aide made clear what the man in the street thought: the huge payouts would not be possible without the billions of pounds from taxpayers that have propped up the financial system.

“There is no financial institution that exists today that is not the direct or indirect beneficiary of massive taxpayer support for the financial system,” said Lawrence Summers, director of Obama’s National Economic Council, at a conference sponsored by the Economist magazine last Friday.

Others were more blunt. Lord Oakeshott, Liberal Democrat Treasury spokesman, has described it as “survival of the fattest”.

Vince Cable, the Lib Dem Treasury spokesman, said: “People will be rightly furious to see Goldman Sachs paying out bumper bonuses just 12 months after it was bailed out by the American government. It is farcical that so soon after the greed of bankers brought the world economy to its knees, we are seeing a return to business as usual.”

Even inside the City many battle-hardened investment bankers consider the payouts distasteful.

“The Goldman bonus pot should just be handed back to governments around the world,” said one senior banker in London. “It just doesn’t feel right. If things had been left to their natural course last year, then even Goldman would have fallen. It would have been the last to fall, but it would have fallen.”

GOLDMAN’s latest results, and news of its brimming bonus pool, came as America’s federal budget deficit hit $1.4 trillion — the highest since the second world war. Unemployment is still rising both there and in Britain, where the government’s budget deficit is threatening to force savage spending cuts and tax increases.

Stock markets have rebounded, but the wider economies are still weak and vulnerable. In Britain, the Bank of England has resorted to record low interest rates and quantitative easing — effectively printing money — to inject £175 billion of liquidity into the financial system.

Outside the charmed circle of the giant banks, business is still tough. Almost 100 regional banks have failed in America this year and so far 48,929 jobs have been lost on top of the 260,110 that were lost last year. John Challenger, chief executive of Challenger, Gray & Christmas, an outplacement consultancy, said he doesn’t see any signs of recovery much before 2010.

Against such a grim economic backdrop, how has Goldman racked up such huge profits and bonuses? A number of factors precipitated by the great financial crisis underlie its present position.

At the height of the credit crunch Goldman morphed from an investment bank into a traditional bank holding company. By doing so it got access to cheap funding from the US Federal Reserve. To prop up the bank, the American government also made a direct injection of capital — which Goldman has since repaid. However, it also received billions indirectly from the taxpayer in another rescue.

Goldman held contracts with the giant insurance company AIG, which had to be bailed out with at least $85 billion of taxpayers’ money. Some of those billions went to pay AIG’s obligations to Goldman. At the same time, the disappearance of some rivals has diminished competition, allowing survivors such as Goldman to raise their fees.

Bolstered by such government largesse, Goldman weathered the storm and when it emerged into calmer waters found itself in a position of opportunity. Markets had tanked, but taxpayers around the world were now underpinning the system.

The masters of the universe at Goldman seized the chance to bet on recovery — and bet big. While it can claim to have avoided some of the disasters other banks steered themselves into, Goldman has profited from the “socialising of losses”. As Professor Stefano Harney from Queen Mary School of Business and Management, said: “There is a question of whether these results ... are enhanced by the taxpayer. The taxpayer ultimately is the investor who ought to be reaping the results and getting the bonuses this year.”

Even if Goldman’s top executives — including Michael Sherwood, the bank’s London-based vice-chairman — forgo some pay as insiders hint they may do, dozens of senior bankers will take home bonuses running to millions of pounds.

London-based executives such as Matthew Westerman, who has been involved in some of the biggest company fund-raisings in Europe this year, are thought to be in line for such payouts. Top dealmakers Karen Cook and Julian Metherell are also expected to qualify for big windfalls, along with senior equities trader John Ashdown.

Goldman is not alone in reaping outsized rewards. Thanks to the death of their competitors, JP Morgan, Barclays and a handful of others have also emerged stronger and more profitable than ever and are set to pay out huge bonuses.

Last week JP Morgan Chase, another of the post-meltdown winners, delivered a $3.6 billion quarterly profit and set aside $7.3 billion for staff compensation. It is now on track to hand out as much as $29 billion in pay and bonuses this year.

In Britain, Barclays is forecast to make record profits of more than £10 billion this year — £3 billion above its previous record. Analysts reckon Royal Bank of Scotland’s investment-banking division will generate income of about £12 billion.

THE emerging league of super bankers is triggering a backlash. In New York an acerbic blog run by Gawker, an internet media company, has promised to track the windfalls of Goldman staff, who are notoriously tight-lipped and secretive.

Gawker’s project will be “an ongoing attempt to track the multi-million second homes, $50,000 cars, $500 bottles of wine, and ostentatious living that we are subsidising”.

The site is issuing a call to arms (or iPhones) for readers to send in tips and pictures of Goldman’s fat cats at play. Gawker’s Goldman Project kicked off with an aerial snap of chief financial officer David Viniar’s $24m hotel-sized second home in California.

Last week Viniar said Goldman had a duty to its employees and to retain staff. By paying big bonuses, he said, the bank was trying to make a difficult trade-off between “being fair to our people who have done a remarkable job” and “what’s going on in the world”.

People in the outside world don’t see it that way, judging by the coverage the bank is now generating. A bank that used to get little interest outside the business press is now front page news, the butt of late-night comedy. A short while ago it was the subject of a largely unfavourable review in Rolling Stone magazine, which described it as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”.

Though Goldman pointed out that vampire squids are small animals, the image of a blood-sucking monster has stuck. More importantly, legislators are taking a close interest.

“The big issues are the amount of cheap government money that these banks are still benefiting from, and the lack of competition,” said John McFall, the chairman of the Commons’ Treasury committee. “The trend is towards the big getting even bigger, to less competition rather than more. It’s an oligopoly, and that’s something that has to be looked at right at the top, at a G20 level.”

Last month the Group of 20 world leaders announced guidelines for banks and other financial companies designed to rein in risks by aligning rewards with long-term success. The guidelines are probably the most concrete attempt to impose restrictions on pay so far. But experts are already warning that they may backfire and put more distance between the new haves and have-nots of banking as the limits hamper the less successful banks in their attempts to hire top talent.

Moreover, the Goldman plan for mega bonuses meets every criterion put forward by regulators to curb bonuses — including the new guidelines drafted last week by the Treasury. Deferring bonuses does not make them any smaller, it seems.

If so, it may provoke further government action. Oakeshott called the G20 proposals “mushy and meaningless”. He said: “It’s starting to look like a nationalised industry with virtually no controls. They have a licence to print money. All this raises serious issues about competition and monopolies. The government must get a grip and look at this now.”

Bailed out and buoyant

LAST WEEK Goldman Sachs reported a $3.2 billion (£2 billion) quarterly profit. So far the firm has put away $16.7 billion for its compensation pool, enough to pay the average Goldmanite $526,814.

With three months to go, the company is on track to match the record bonus payments of 2007 — before the world’s taxpayers were forced to bail out the banks.

Goldman received $10 billion from the Troubled Asset Relief Program (Tarp). It repaid that with interest this spring. Like its rivals, Goldman also benefited from the September 2008 rescue of insurer AIG and the government bailouts in Britain and America.

JP Morgan Chase has also repaid its $25 billion Tarp money and this week reported third-quarter profits of $3.6 billion. It has set aside $21 billion for compensation, 23% more than at this time last year.

Citigroup, once the world’s largest financial firm, is still paying back the $45 billion it received in state aid. Last week the bank reported a slim profit of $101m. Credit problems, particularly in its consumer-related businesses, weighed down its results.

Bank of America posted a $1 billion loss last Friday. America’s largest bank owes $45 billion to the government. Its results were dragged down by losses on consumer loans.