Goldman Under Fire (Again): Ponzi Bonuses?


Goldman Under Fire (Again): Ponzi Bonuses?

Posted by Karl Denninger

Are we seeing once again the same game being played that WaMu played in the spring of 2007and which started me writing Tickers?

In his lawsuit (PDF), Brown states that Goldman Sachs gave out $4.82 billion in bonuses in 2008, despite earnings of only $2.32 billion that year. The lawsuit alleges that the company spent 259 percent of its income in the first quarter of 2009 on compensation.

Uh, that’s kinda interesting.  It is somewhat like WaMu, no? 

If you remember back in 2007 I wrote one of my seminal Tickers – one of the first – that spoke to Washington Mutual paying out funds they didn’t really have in cash in dividends.  That is, they were booking “capitalized interest” (negative amortization on Option ARM loans) as “earnings” and then paying part of that – plus all of their cash earnings – out to shareholders in the form of a dividend.

The problem with such a game is that non-cash “earnings” aren’t money and while they look good on the balance sheet if they don’t materialize later on you’re sunk!  My call at the time was that they wouldn’t materialize and WaMu would indeed be sunk, and it was.

This is a bit different, in that nobody is (yet) claiming that Goldman doesn’t have the money.  What’s being alleged here is that they have effectively pilfered the public Treasury and then paid that out as bonuses, rather than doing with it as Treasury intended and their shareholders were entitled to, which is to use the capital to rebuild the firm’s foundation and strengthen it against future potential losses.

This also ties in with the revelation yesterday that The NY Fed tried to cover up the pass-through via AIG of Treasury money to Goldman when Tim Geithner was it’s head, as I wrote about yesterday.

Goldman, for its part, claims the lawsuits are without merit.  We’ll see.

The better question from my point of view is not whether Goldman’s compensation practices are reasonable.  It is whether public companies (or private ones for that matter) should have access to public support under any set of circumstances.

It is my position that such support, if it is required to be offered at some point, come with the effective dissolution of the firm – and the wipe-out of shareholder equity.  Bondholders would get whatever is left as the firm is liquidated in bankruptcy.

Commentators call this “disorderly.”  I call it what Capitalism prescribes when you blow it.  Having had my “best laid plans” in business go boom on me before, I don’t see the issue. 

Those who argue for a “too big to fail” viewpoint are in fact arguing for a “too big to exist” firm.  If some company asserts such a position in the global financial marketplace then in my view it has declared of its own volition that it is a danger to the economic stability of the United States and as such it must be immediately broken up and dissolved. 

If the firm requires public support before that can occur then it must be liquidated immediately, with that public support being used to maintain order – not enrich employees and allow yet more skimming off of funds for a privileged few.