Wall Street's private Santa

South China Morning Post  |  Dec 20, 2008

By Sin-ming Shaw

Goldman Sachs is the storied home of the "masters of the universe", with an alma mater list that includes former US Treasury secretary Robert Rubin, current Treasury chief Henry Paulson and many more stars. Yet one of its funds - Goldman Sachs Liquidity Partners, with US$1.8 billion in capital - reportedly lost over 55 per cent this year to the end of October.

This fund was supposed to be the "cavalry" that would rescue Goldman's reputation, battered by the ill fortunes of two other multibillion-dollar flagship funds: the Global Alpha Fund, down 40 per cent last year, and the Global Equity Opportunities Fund, down 32.7 per cent. Liquidity Partners was meant to take advantage of a devastated credit market on the assumption that the market was undervaluing corporate IOUs.

How could Goldman have been so wrong? If anyone should know about these things, shouldn't Goldman's highly paid geniuses be among the first in line?

Defenders of Wall Street often claim its meltdown originated in wrong-headed government policies that encouraged banks to provide housing loans to unqualified homebuyers. Let's pretend for a second that the packaging and then the selling of derivatives from such lousy loans had nothing to do with Wall Street's financial engineers. But surely the mismanaging of their own signature funds could not be blamed on someone else? As financial "masters", shouldn't they be doing a lot better than you and me? Especially given their out-of-this-world compensation? Surprise, surprise: they turned out to be just as clueless as you and I.

Investment bankers and spoiled children have one thing in common: both have wish lists for Christmas. Youngsters' non-negotiable demands for Santa go to their parents; the bankers' go to Mr Paulson.

Santa Paulson has injected US$125 billion of working people's savings into Wall Street, where his former colleagues and friends work, to save them from bankruptcy. Without that show of confidence by the US government, the market was expecting the imminent collapse of Morgan Stanley, followed by Goldman Sachs and Citicorp.

Thanks to Uncle Henry's bailout, the two firms are now doing OK. Mr Paulson did the right thing: their collapse would have been traumatic to the already panicky world markets.

That's not all. The US Federal Reserve has lent US$2 trillion to a number of financial institutions. Yes, you read me right: US$1 trillion is a thousand billion.

Bloomberg News is suing the Fed under the Freedom of Information Act to win disclosure of what, if any, collateral Wall Street banks have posted. The Fed is contesting the suit on the grounds of "trade secrets" and "fragility of confidence".

Many financial experts believe transparency is the key to stability. Keeping markets in the dark tends to increase the risk of panic due to miscalculation and unwelcome surprises.

But the truly astounding act by Mr Paulson to save his former habitat was to ignore Main Street's anxiety and anger by allowing Wall Street bankers to continue to pay themselves big bonuses - with one or two exceptions - for last year and this.

One Harvard Medical School professor told Bloomberg News: "If these guys were so talented, how did this problem happen, anyway?" A Baltimore lawyer commented: "Shouldn't they pay back a substantial portion of their 2007 bonus to the government for the financial devastation they oversaw, fostered and, in some cases, caused? Their sense of entitlement is appalling." One blogger on CNBC fumed: "Bonus! How about making them pay back the US$700 billion rescue money we loaned them!'

Only John Mack, chairman of Morgan Stanley, has done the decent thing: he gave up his 2007 and 2008 bonuses. He did get US$40 million for 2006. He is also the first on Wall Street to call for a "claw-back provision" in future that would tie compensation more closely to multi-year performance. (A disclosure: I have been a client of Morgan Stanley for many years.) Financial consultants estimate that between US$20 billion and US$23 billion in bonuses will be paid on Wall Street this year.

Main Street's revulsion is understandable. But the bankers themselves are not the only ones being blamed. They have "parents" who continue to spoil them rotten: Mr Paulson and US President George W. Bush, who signed off on the former's generosity - with other people's money, of course.

You can spank your own children, but not your private bankers. However, what you can do - when you come across yet another abrasive Wall Street smart-mouth - is to tell him to stop talking and finish his milk.

Sin-ming Shaw is a former financial professional in Los Angeles and Hong Kong

 Back to home page