A Bit of Goldman Schadenfreude

Wellie, we get a bit of cheery news of sorts to take the edge off the sting that Goldman, presumably alive today thanks to the many ministrations of the government, ultimately borne by chumps like you and me, is off again looting making money hand over fist.

It appears that quite a lot of Goldman employees sold stock when it was pretty depressed, between November and March. This is similar to what happened when the firm was still private, and had a very bad year in 1994. Many partners went limited. That did not mean they got to take their money and run; Goldman staged the withdrawals over many years. But it did mean the value of their partnership interest was set at that point in time. Why did that matter? If you expect equity to go down (the firm to lose money), you want your percentage interest applied to the level of equity pre the reduction, not post.

It was a massive vote of no confidence in the future of the firm (that was also the first time Goldman had ever had layoffs). A mini version of the same took place around the turn of the year. What a difference a few months makes.

That is a warning as well as an observation.

On the one hand, the MDs sold $700 million at comparatively low prices. On the other hand, cash was coming in from the TARP and in part going directly to these MDs. Insiders were also selling as the company was peddling shares to the public, Not a pretty fact set. So we will have a few days of fulminating and this too, like all misdeeds by Goldman, will soon pass. In particular, no one will care, since the stock has traded up and it looks like, for once, the chumps did well.

From the Financial Times:

Executives at Goldman Sachs sold almost $700m worth of stock following the collapse of Lehman Brothers last September….

Most of the sales occurred during the period in which the investment bank enjoyed the support of $10bn from the troubled asset relief programme…

The surge in selling among Goldman partners, at a time when the US government had thrown a lifeline to Wall Street, is likely to draw criticism from lawmakers on Capitol Hill. Having survived the crisis, the bank is expected to report strong second-quarter earnings on Tuesday on rebounding trading profits.

For the eight-month period for which figures are available, Goldman partners sold more than $691m in company stock, even as the firm expanded its public float from 395m to 503m shares in several capital raises.

For the comparable period between September 2007 and April 2008, when the average share price was substantially higher, Goldman partners sold about $438m in stock….

Some of the sales could have been motivated by margin calls, which are said to have afflicted a number of Goldman executives who used company stock as collateral for loans….

Goldman agreed to the unusual buy-backs last September to obviate the need for the two officers to sell stock on the open market, the company said in March. “Stock sales would easily have covered their requirements but, given the turbulent market conditions, we and they were concerned that such sales would be misconstrued by the market as indicating a lack of confidence in Goldman Sachs.”

Employee ownership has been an important component of Goldman’s “partnership” culture, a vestige of the investment bank’s history as a privately held firm. It went public in 1999.

But Goldman’s culture was severely tested last year. For the period during which executive sales were allowed, from September 17 to October 24, Goldman partners sold some $250m worth of stock.

A bigger wave of selling occurred during the window between December 2008, after Goldman reported its first quarterly loss as a public company, and mid-February. In that two-month period, when Goldman’s share price sunk to near-historic lows, partners sold more than $280m worth of company stock.

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  1. Anonymous

    As Reggie Middleton points out in his blog, Goldman's Value at Risk is trending upward while their Risk adjusted return on capital is trending downward. Our tax money is backstopping Goldman's increasingly risky gambling habit.

  2. RTD


    First paragraph:

    "Goldman Sachs Group Inc., which provided a $3 billion credit facility to CIT Group Inc. more than a year ago, said today that it has offset any exposure to the company with collateral and hedges."

    Last paragraph:

    "Goldman Sachs’s comments on its vulnerability to CIT Group echo comments made last year about exposure to American International Group Inc., the New York-based insurer that was bailed out by the Federal Reserve. Goldman Sachs, which also said it had no material exposure to AIG because of collateral and hedges, got $12.9 billion from the firm between the government rescue of the insurer in September and the end of 2008."

    Spot on!

    We are ultimately going to bail out CIT. Not because of concern (legitimate) over the impact a failed CIT will have on small businesses, but because Goldman will always be protected regardless of the political regime in power or the cost to the taxpayer.

  3. Anonymous

    I would not be so quick to state that the sale of GS stock by certain partners was related to a lack of confidence in the future of the firm. Like many others at that time the partners may have been facing margin call on their other holdings and were required to raise cash. There was at least one story in the WSJ relating to this although I can not remember which executive it was.

  4. quantacide

    The dillution argument makes sense, but I know if I had any non-locked shares in my at-the-time solvent, currently non-existing bank post-LEH, I would've dumped and diversified too.

  5. Peripheral Visionary

    I'm not sure how much of a story this is. They sold $700 million in stock, but compensation for this quarter alone will be several multiples of that.

    If anything, it simply reinforces the point that management and ownership are more separate than ever, and that management incentives are no longer in line with those of the stockholders. They have more incentive than ever to take risks with the firm in the interest of short-term gains.

  6. Carlosjii

    The inflation retarded the crisis for some time, but this broke out later, throwing millions out of employment [emphasis added]. At first inflation stimulated production because of the divergence between the internal and external values of the mark [devaluation — ed. note], but later it exercised an increasingly disadvantageous influence, disorganizing and limiting production…
    It annihilated thrift; it made reform of the national budget impossible for years; it obstructed the solution of the Reparations question; it destroyed incalculable moral and intellectual values. It provoked a serious revolution in social classes, a few people accumulating wealth and forming a class of usurpers of national property, whilst millions of individuals were thrown into poverty. It was a distressing preoccupation and constant torment of innumerable families; it poisoned the German people by spreading among all classes the spirit of speculation [emphasis added] and by diverting them from proper and regular work, and it was the cause of incessant political and moral disturbance.

    About the German hyperinflation of 1919-1923. Professor Bresciani- Turroni in The Economics of Inflation (first published in 1931 and reprinted by Augustus M. Kelley, London, in 1968). As referenced in the article ‘The Financial Implications of Reflation’, THE GLOOM, BOOM & DOOM REPORT, ISSN 1017-1371 , A PUBLICATION OF MARC FABER LIMITED JUNE 23, 2003

    note by Carlosjii – the speculation that occurred here was in the stock market up to March 2000 and then the housing market. It is THIS product of the Federal Reserve – a moral decline into a spirit of speculation – and particularly Alan Greenspan that has been so destructive to America. The outlandish GS ‘profits’ ARE the usurping of the wealth of America which was the product of the industry and creativity of ‘The Greatest Generation’, those one and two generations before us – and we act largely as ineffectual observers and commentators on the decline and fall of the American Empire.

  7. Anonymous

    I used to work at Goldman and still have many friends there.
    the driving force behind many of the sales was simply a need for cash in a year when cash bonuses at the firm almost disappeared. You may not approve of people earning the amounts of money Goldman pays nwhen times are good, but if the cash stops it leaves a hole which needs to be filled.
    It's also true that by any rational standard people who work at Goldman have too much of their nfuture income nand wealth invested in the firm, most totally by the possibility their jobs would disappear if the firm went under. It's also true that a process of intertia means that most people at Goldman leave far too much of their capital locked up in tthe firm and the events of last Autumn were a wake up call.
    it is absurd for Peripheral Vision to talk about the gap between management and ownership. The investment banks more than any other institutions have enormous ownership by their employees.

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