For Bailed-Out Goldman Sachs Employees, a $22 Billion Payday

Many people are fit to be tied over the $22 billion that Goldman Sachs plans to pay its employees this year. Are these bankers really making more than $84 million, collectively, each day the bank is open for trading?

According to Goldman Sachs, the answer is yes. It expects to pay each of its nearly 30,000 employees $743,000, on average, this year.

Wow!

Goldman has certainly come a long way since it received $10 billion from the U.S. government last fall. Not only has it made billions, but unlike firms such as Bank of America, Citigroup and AIG, Goldman does not have to submit its compensation package to the scrutiny of the Obama administration's pay czar, Kenneth Feinberg, because it paid back its $10 billion debt last summer. Those firms, and others that receive federal aid via the Troubled Asset Relief Program (TARP), are subject to pay restrictions.

Yet something seems wrong about the statement that Goldman no longer receives government assistance.

It's true that by paying back the $10 billion, Goldman technically no longer receives direct assistance. However, exiting TARP does not mean that it has given up all government help. Goldman still benefits from the government backing of billions in debt it issued through the FDIC's Temporary Liquidity Guarantee Program, or TLGP. The TLGP helps companies borrow funds more cheaply than otherwise and was launched last October to help prevent the credit crunch from spreading. Nine financial institutions that the government deemed systemically important -- too big to fail -- were allowed to borrow funds at favorable rates. Goldman Sachs has issued about $29 billion under this program, saving it about $600 million in annual interest costs.

Since the federal government will cover Goldman's debt if it defaults, this guarantee is equivalent to giving Goldman's bonds a AAA credit rating and the favorable interest rates that the high rating commands. On its own, Goldman Sachs would have at best a A/A-1rating on its short-term debt.

Moreover, Goldman receives other indirect government assistance. For example, AIG transferred some $12.9 billion of the $185 billion it received from the government to Goldman Sachs in the form of collateral payments on its credit default swaps and other securities lending contracts.

In light of all this ongoing aid, perhaps Goldman might reconsider paying its employees so much money. It could give some of the $22 billion to charity. Goldman Sachs claims a proud history of philanthropic giving. As Bloomberg reports, Goldman has donated a total of $114 million --- or about $11 million each year --- in the past 10 years. While it's hard to fault any charitable giving, the firm's $11 million annual gift at a time when a single Goldman executive, Lloyd C. Blankfein, made more than $50 million in one year, seems remarkably stingy.

Moreover, increasing charitable contributions would not change the fundamental problem with this compensation scheme. Real change would require Goldman executives to take affirmative actions.

One step would be for those executives to decline their compensation and transfer it to shareholders. But few executives ever return excess pay. In fact, one who took this step received very little credit for it -- AIG's former CEO, Robert B. Wilumstad, who led the insurance giant for three months until being removed when the government took over the company in September 2008. Wilumstad turned down his $22 million severance package largely because AIG had gone into the tank.

Of course, Goldman is not in the tank. Its shareholders are doing quite well, as its share price has more than tripled since reaching a low of less than $50 last fall.

Still, that $22 billion seems too much pay for a company in an industry that so recently brought the economy to the precipice of another Great Depression. Perhaps the way to go is for shareholders to have a say in the pay of corporate executives. This avenue has already been proposed. Back when he was a senator, President Obama sponsored legislation that would have given shareholders the ability to approve or veto the compensation packages presented by company boards. At the time, Obama was outraged over the pay packages given to executives such as Countrywide Financial's Angelo Mozilo, who received more than $100 million in severance when Bank of America purchased his firm -- whose lax lending standards to subprime borrowers laid the foundation of the subprime crisis.

Obama continues to pursue this avenue. Last July, the Treasury Department sent Congress a draft of "say-on-pay" legislation. This proposal would go further than TARP by requiring all publicly traded corporations to give shareholders a non-binding vote on executive compensation packages.

The president could take another tack in limiting executive compensation. He could require that any institution that received government assistance at any time and in any form seek shareholder approval of their executive compensation schemes. This option would make these companies bear some of the burden of the financial crisis that they helped create. Such a move might not stop Goldman from doling out $22 billion in pay, but it sure would make shareholders feel better if they had the ability to say that "enough is enough."