Saturday, July 25, 2009

What's another $100M among us taxpayers?

I'd be outraged, except I'm sure Mr. Hall is providing far more than $100M of value this year to US taxpayers by making sure that energy prices are set so as to optimize the functioning of the global economy. The reason I know this is the outcome of his herculean efforts is that (a) I was taught all about efficient markets by leading economists and (b) it strongly reinforces the objectivist priors I picked up from reading Atlas Shrugged ;-)

WSJ: A top Citigroup Inc. trader is pressing the financial giant to honor a 2009 pay package that could total $100 million, setting the stage for a potential showdown between Citi and the government's new pay czar.

The trader, Andrew J. Hall, heads Citigroup's energy-trading unit, Phibro LLC -- a secretive operation, run from the site of a former Connecticut dairy farm, that occasionally accounts for a disproportionate chunk of Citigroup income.

Mr. Hall's pay package puts Citigroup in a tight spot. Ripping up the contract could trigger Mr. Hall's departure and a potentially messy legal fight. But making any large payouts, even if they're based on previously agreed contracts, could subject Citigroup to political and investor fallout.

Earlier this year, American International Group Inc.'s bonus payments of $165 million to some executives caused an outcry, given the insurer's U.S.-government bailout. Citigroup has received some $45 billion in bailout money.

... It will be an early test for Kenneth Feinberg, the Treasury Department's pay czar, who was appointed last month to a new position with the power to help set pay for top executives and highly paid employees at seven firms receiving the most government financial aid. Banks and others have a mid-August deadline for submitting pay requests to Mr. Feinberg.

... Last year Mr. Hall received pay of more than $100 million, people familiar with the matter say. With this year barely half over, Mr. Hall's specific 2009 pay hasn't yet been set. Citigroup doesn't break out detailed financial reports for Phibro, but traders say the firm is having a good year.


anon said...

Bill Gates might be an Atlas, if there are such people. Henry Ford was an Atlas. This guy is better likened to a tape worm in Atlas's gut.

mock turtle said...

we are moving towards trials

hopefully imprisonment will follow

a letter today from 10 congressmen to ben bernanke and the federal reserve about goldman sachs gambling with taxpayer money

Dear Chairman Bernanke:

In the fall, Goldman Sachs secured access to government funding by converting from an investment bank into an ordinary bank. Despite this shift, the CFO of the company, David Viniar, said last week that the company is continuing to operate as if it were still a high-risk investment bank: "Our model really never changed," he noted in a quote to Bloomberg. "We've said very consistently that our business model remained the same."

This statement seems accurate. Earlier this year, the Federal Reserve granted a temporary exemption to Goldman Sachs from standard bank holding company Market Risk Rules, allowing the company to continue operating as if it were an investment bank. The company and its employees have taken full advantage of its new government subsidies, and the retained ability to bet big. In its most recent quarter, Goldman Sachs earned high profits of $2.7 billion on revenues of $13.76 billion, with 78 percent of this revenue derived from high-risk trading and principal investments. It paid out much of this revenue in compensation, setting aside a record $772,858 for each employee at an annualized rate. The company's own measurement of risk, its Value-at-Risk model, recently showed potential trading losses at $245 million a day, up from $184 million last May.

Despite its exemption from bank holding company regulations, Goldman Sachs has access to taxpayer subsidies, including FDIC-backed bonds, TARP money (since repaid), counterparty payments funneled through AIG, and an implicit backstop from the taxpayer that allowed a public equity offering in a queasy market. The only difference between Goldman Sachs today and Goldman Sachs last year is that today, the company is officially gambling with government money. This is the very definition of "heads we win, tails the taxpayers lose."

It is worth noting that there sometimes might be good reasons to grant temporary regulatory exemptions, considering that companies cannot instantly change their business model. Still, given Goldman Sachs's last quarter results and public statements that it is not changing its business model, we are worried that the company is using its regulatory freedom to evade capital requirements and take outsized risks with taxpayers on the hook for losses.

With this in mind, our questions are as follows:

1) In the letter granting a regulatory exemption to Goldman Sachs, you stated that the SEC-approved VaR models it is now using are sufficiently conservative for the transition period to bank holding company. Please justify this statement.

due to length see next post for the rest and links

mock turtle said...

part two of congress letter to fed

2) If Goldman Sachs were required to adhere to standard Market Risk Rules imposed by the Federal Reserve on ordinary bank holding companies, how would its capital requirements differ from the current regulatory regime?

3) What is the difference in exposure to the taxpayer between these two regulatory regimes?

4) What is the difference in total risk to the portfolio between these two regulatory regimes?

5) Goldman Sachs stated that "As of June 26, 2009, total capital was $254.05 billion, consisting of $62.81 billion in total shareholders' equity (common shareholders' equity of $55.86 billion and preferred stock of $6.96 billion) and $191.24 billion in unsecured long-term borrowings." As a percentage of capital, that's a lot of long-term unsecured debt. Is any of this coming from the Government? In this last quarter, how much capital has Goldman Sachs received from the Federal Reserve and other government facilities such as FDIC-guaranteed debt, either directly or indirectly?

6) Many risk-management experts, most notably best-selling author Nassim Taleb, note that VaR models can dramatically understate risk. What is your overall view of Taleb's argument, and of the utility of Value-at-Risk models as regulatory tools?

As we work through legislative conversations regarding systemic risk, these questions are taking on increased significance. We appreciate your time and the efforts you are making to explain the actions of the Federal Reserve to Congress, and to taxpayers.


Alan Grayson (D-Fla.)

Brad Miller (D-N.C.)

Dan Lipinski (D-Ill.)

Elijah Cummings (D-Md.)

Ron Paul (R-Texas)

Tom Perriello (D-Va.)

Maxine Waters (D-Calif.)

Jackie Speier (D-Calif.)

Maurice Hinchey (D-N.Y.)

Walter Jones (R-N.C.)

or here

mock turtle said...

ayn rand indeed

if the bankstas have their way

the country will devolve into pitchforks and torches

then we will see who truely espouses the philosophy of survival of the fittest

AMac said...

Mock Turtle,

10 Congressmen/women signed the letter. Why not more, I wonder.

2 Republicans--why not more? Trying even harder to earn that "Stupid Party" label?

Ron Paul and Maxine Waters--dogs and cats lying down together!

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