Was cost of saving Goldman too much?

A man protests in front of the Goldman Sachs headquarters in New York. The perception that the firm has profited at the expense of taxpayers has fueled public anger. Bloomberg News

NEW YORK: In the first six months of 2010, about 6,000 employees of Goldman Sachs Group Inc will take a break from their spreadsheets and move across the southern tip of Manhattan to a new 43-story, steel-and-glass skyscraper.

The building was a bargain - and not just because the final cost is expected to be $200 million less than the $2.3 billion price the company had estimated when construction began in November 2005. Goldman Sachs also benefited from the government's determination to avoid losing jobs in lower Manhattan after the Sept 11, 2001, terrorist attacks.

Building a new headquarters cater-cornered to where the World Trade Center once stood qualified the firm to sell $1 billion of tax-free Liberty Bonds and get about $49 million of job-grant funds, tax exemptions and energy discounts. Henry Paulson, then Goldman Sachs' chief executive officer, threatened to abandon the project after delays in addressing his concerns about safety.

To keep the plan on track, state and city officials raised the bond ceiling to $1.65 billion and added $66 million in benefits. The interest expense on the financing is about $175 million less over 30 years than if the company had issued corporate debt at the time, according to data compiled by Bloomberg.

"It was absolutely imperative that Goldman Sachs keep its world headquarters downtown," says John Cahill, who took part in the negotiations as chief of staff to then-Governor George Pataki and now works at New York law firm Chadbourne & Parke LLP. "They had the financial resources to move anywhere."

Goldman Sachs, which set a Wall Street profit record of $11.6 billion in 2007 and may have earned $11.4 billion this year, according to the average estimate of 15 analysts surveyed by Bloomberg, won new and larger concessions from taxpayers in 2008.

This time it was the threat of a financial meltdown that prompted the US government, with Paulson as Treasury secretary, and the Federal Reserve to supply an unprecedented amount of aid to firms deemed critical to the financial system, including Goldman Sachs.

The 140-year-old company received $10 billion in capital, guarantees on about $30 billion of debt and the ability to borrow cheaply from the Fed.

The Fed's bailout of American International Group Inc, and its decision to pay the insurer's counterparties in full, funneled an additional $12.9 billion to Goldman Sachs.

"What was done was appropriate because the potential costs of not doing that were probably exceedingly high," says Gary Stern, who stepped down in August as president of the Federal Reserve Bank of Minneapolis. "It certainly looked very threatening."

That's not how the Goldman Sachs rescue looks to William Black, a professor of economics and law at the University of Missouri-Kansas City and a former bank regulator. He says the government has been far too generous in allowing the firm to get federal backing without either seizing equity or curbing risks.

"It's just an unbelievably bad deal," Black says. "We could hire any middle-tier guy or gal at Goldman, and they would tell us within 15 seconds that the deal we have made as a nation with Goldman is underpriced by many, many orders of magnitude and that we are insane."

During the past year, Goldman Sachs' profits and compensation outstripped those of its rivals.

The firm, now the nation's fifth-largest bank by assets, reported a record $8.44 billion in earnings for the first nine months of 2009 after setting aside $16.7 billion to pay employees. That comes to $527,192 for each person on the payroll, almost eight times the median US household income.

Public anger

The company's stock was up 93 percent in 2009, above its price before Lehman Brothers Holdings Inc collapsed.

Meanwhile, the US unemployment rate hit a 26-year high of 10.2 percent in October before dropping to 10 percent in November.

The perception that Goldman Sachs has profited at the expense of taxpayers has fueled public anger - it even received jabs from the television comedy show Saturday Night Live.

Rolling Stone writer Matt Taibbi described the firm this year as "a great vampire squid wrapped around the face of humanity".

Conservative television commentator Glenn Beck devoted a 10-minute segment in July to Goldman Sachs' connections with the government and arguing that taxpayers were being spun in "a web of lies".

Bonus plan

"People are just really angry; you can see it on the left and the right," says Andy Stern, president of the 2.1 million-member Service Employees International Union, who led about 200 protesters outside Goldman Sachs's Washington office on Nov 16 to demand that the firm cancel its year-end bonuses and repay taxpayers instead. Some carried "Wanted" posters with pictures of Chairman and CEO Lloyd Blankfein.

Bloomberg News

(China Daily 12/28/2009 page11)