Goldman Sachs' Blankfein: 'We apologize'

Goldman Sachs Group’s charm offensive continues.

From Bloomberg News:

Lloyd Blankfein, chairman and chief executive officer of Goldman Sachs Group Inc., apologized for the firm’s role in some of the activities leading to the financial crisis.

"We participated in things that were clearly wrong and have reason to regret," Blankfein, 55, said at a conference in New York hosted by the Directorship magazine. "We apologize."

That could be a dangerous admission if plaintiffs' lawyers are listening, but . . . there it is.

Separately today, Goldman announced that it would team with billionaire (and major Goldman shareholder) Warren E. Buffett to launch a $500-million program of loans and other assistance for U.S. small businesses.

Goldman, the most powerful (and profitable) Wall Street titan, has been pushing back at its critics in recent weeks after months of mostly just turning a deaf ear to them.

Last week, Blankfein asserted in a lengthy interview with the Times of London that Goldman served a "social purpose. . . . We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle."

-- Tom Petruno

AIG chief says he's 'committed' to staying despite battle with U.S. over pay

American International Group Inc. Chief Exeuctive Robert Benmosche today sought to play down published reports that’s he’s ready to jump ship because of frustration with his federal masters over executive pay issues.

After a Wall Street Journal story said that Benmosche was threatening to leave AIG -- just three months after taking the helm -- the CEO sent a letter to employees insisting that he was "totally committed to leading AIG through its challenges."

AIG shares, which fell as low as $36.02 today, rebounded to $37.99 after the letter was reported but have since drifted lower again.

Benmosche, who was named to the CEO job in August, hasn’t been afraid to take on the government despite its 80% ownership of the company since last year’s federal bailout.

From Benmosche’s letter, which the Journal posted on its website:

I’m sure many of you were concerned to see this morning’s news accounts speculating about my frustration with the time and effort it is taking to ensure that our top 100 executives are compensated fairly. To be certain, I and the Board are indeed frustrated and we are in ongoing discussions with Treasury and the Special Master to resolve the uncertainty surrounding this issue. However, as I have said before, the vast majority of AIG employees are unaffected by this issue.

Let me be clear: I and the Board remain totally committed to leading AIG through its challenges and to continuing to fight on your behalf. We are all working aggressively to overcome this compensation barrier that stands in the way of restoring AIG’s value and allowing us to live up to our obligations to all stakeholders: our customers, who have remained loyal; our nearly 100,000 employees, including 46,000 here in the U.S.; our shareholders and creditors.

The U.S. took a majority stake in AIG in return for keeping the company afloat amid the financial system meltdown. The government’s stake means the administration’s pay czar, Kenneth Feinberg, has the right to reject executive-compensation arrangements that he believes are unwarranted.

The Journal story said Benmosche believed he was in an "impossible situation" trying to balance government pay restrictions against the need to retain top AIG staff.

-- Tom Petruno

Fed review of bank pay will go well beyond top execs

The Federal Reserve’s new push to regulate pay levels of bankers probably won’t include a review of your friendly neighborhood branch manager’s salary.

But the Fed made clear Thursday that it will be looking at compensation arrangements beyond the executive suites of the 6,000-some banks it regulates.

In a question-and-answer post on its website, the Fed said its review would cover "personnel who have the ability to expose a banking organization to material amounts of risk." That would include, according to the Fed:

--- "Senior executives and others who are responsible for oversight of the organization’s firm-wide activities or material business lines;

--- "Individual employees, including non-executive employees, whose activities may expose the firm to material amounts of risk (for example, traders with large position limits relative to the firm’s overall risk tolerance); and

--- "Groups of employees who are subject to the same or similar incentive compensation arrangements and who, in the aggregate, may expose the firm to material amounts of risk, even if no individual employee is likely to expose the firm to material risk (for example, loan officers who, as a group, originate loans that account for a material amount of the organization’s credit risk)."

The Fed says its overriding goal is to ensure that bank pay plans -- specifically, bonus plans -- don’t reward employees for taking excessive risk that might boost profit in the short-term but also could threaten the safety of the institution.

And how, exactly, to determine that? There’s the challenge.

Importantly, the Fed says it isn’t looking for a one-size-fits-all pay formula. Instead, it issued some very general guidance Thursday on how pay arrangements should be structured, and asked for public comment on the proposals for the next 30 days. (Go here for the guidance.)

Once the Fed settles on the final language for the guidance, its examiners "will review whether the arrangements and processes of banking organizations are consistent with the guidance and safety and soundness."

But the Fed said banks shouldn’t wait for final guidance on compensation. Rather, it expects them to "immediately" launch reviews of their specific pay arrangements and alter the plans if management finds that the structure could threaten bank safety.

Bottom line: The obsession with financial companies’ pay levels, far from reaching a peak, is just ramping up.

-- Tom Petruno

Photo: The Fed's headquarters in Washington. Credit: Brendan Smialowski / Bloomberg News

 

Bank of America posts net loss of $1 billion

Bank of America Corp. reminded investors this morning how ugly conditions remain in some parts of the U.S. banking industry.

The nation’s largest bank reported a third-quarter net loss of $1 billion, mainly because of the continuing travails of U.S. consumers. In a measure of its plight, BofA became the only major financial institution to miss analysts’ third-quarter estimates.

BofA lost 26 cents a share after paying out $1.2 billion in dividends, including $893 million to the U.S. government. Analysts had expected a 12-cent loss. BofA earned $1.2 billion, or 15 cents a share, a year earlier.

On a slightly positive note, losses in its consumer businesses rose at a slower rate than earlier this year, the company said.

"Obviously, credit costs remain high, and that is our major financial challenge going forward,” BofA Chief Executive Kenneth Lewis said in a statement.

After rising sixfold from their March low, BofA’s shares sank more than 4% this morning and are off almost 7% in the last two days.

BofA’s woes contributed to a sell-off in the stock market that dragged the Dow Jones industrial average below 10,000. As of 8 a.m. PDT, the Dow was off about 100 points. General Electric Co. shares sagged 5.5% after its third-quarter profit fell 45% and revenue was less than analyst expected.

BofA’s poor results extend what already is a turbulent time for the company.

Lewis agreed to forgo his salary and bonus this year at the behest of the Treasury Department’s pay czar. In an unusual move, he’s returning about $1 million that he had been paid this year.

-- Walter Hamilton

House Democrats to push for tax hike on private-equity chiefs

As the fortunes of private-equity firms improve with rebounding financial markets, House Democrats are renewing a push for a long-sought tax increase on the industry.

From Bloomberg News:

Matthew Beck, a spokesman for the House Ways and Means Committee, said the panel will revive an effort to raise the 15% tax rate on “carried interest,” a term for the share of [an investment] fund’s profit that is paid as compensation to its executives.

That portion of an executive’s pay, now taxed at lower capital gains rates, would be subject to income tax rates of as much as 35%.

“There is strong support for taxing carried interest as ordinary income and I expect this issue to move forward in the coming months,” Beck said.

Managers of private-equity firms, hedge funds, venture capital firms and other investment partnerships typically use the "2-and-20" compensation structure: They earn an annual fee of 2% of assets under management and then take 20% of any profit above preset levels. The rest goes to the investor-clients who put up the capital the managers invest.

The 20% profit is known as carried interest, and is treated as a capital gain for tax purposes if the underlying return was generated on investments held more than a year.

Many Democrats say that such compensation should be classified as regular income and taxed accordingly. The House in June 2008 passed a bill mandating that change but Republican opposition scuttled it in the Senate.

Now, with Democrats in control of the House, Senate and the White House, carried interest is a ripe target as Washington looks for ways to boost revenue.

From Bloomberg:

Ways and Means Committee Chairman Charles Rangel, a New York Democrat, and other Democrats including Michigan Representative Sander Levin say [carried-interest] fees are more like wages than capital gains because executives usually haven’t risked their own capital.

Revenue from the tax proposal may be earmarked by House Democrats to help pay for renewal of tax subsidies designed to help economic recovery. For example, Rangel said lawmakers should extend an $8,000 tax credit for first-time homebuyers, and the White House is pushing renewal of an incentive that lets companies use current losses to get refunds for past taxes.

Arguing against the tax change, the private-equity industry in the past has countered that fund managers should qualify for the lower capital gains tax rate on carried interest because they "act as owners, not employees" and "bear significant economic risks."

This time around the industry also will try to play the economy card, asserting that after private-equity firms buy companies they make them better (a debatable point, to say the least).

Douglas Lowenstein, president of the Private Equity Council, told Bloomberg that as the economy begins to recover a “tax increase on growth investors with a demonstrated record of building stronger companies and creating new jobs would be exactly the wrong policy at the wrong time.”

-- Tom Petruno

BofA owes Ken Lewis $68.8 million on his way out the door

Ken Lewis, who is quitting as Bank of America Corp.’s chief executive at year's end, is headed for an extremely comfortable retirement even though he won’t enjoy one of the special golden parachutes that some corporate bosses collect on the way out the door.

After 40 years working for BofA and predecessor companies, the 62-year-old executive has accumulated quite an array of personal assets. Topping the list is a lump-sum pension benefit that was valued at $53.2 million in the bank’s last public report on his holdings.

That report, in a proxy filing this year, also said Lewis had $10.6 million in deferred compensation coming his way. And he will keep 305,000 shares of restricted stock that will vest over the next few years, which, at Friday's stock price of $16.34 are worth about $5 million.

Total take: $68.8 million.

And that’s just the latest bag of booty for Lewis, who has been under fire since his agreement last year to acquire Merrill Lynch & Co. resulted in BofA's receiving a $20-billion, second infusion of federal bailout funds.

Over the years, Lewis has accumulated 3.4 million shares of BofA stock -- now worth about $55 million -- via restricted stock grants, the exercising of stock options and purchases in the open market.

Lewis, like all longtime BofA shareholders, has reason to regret hanging on to many of the shares: A year ago, the stock was cruising along at above $50 a share. It plunged to as low as $3.14 back in March, when it looked as though the bank and other financial giants might melt down, before rebounding to nearly $18 by the end of August.

The most disappointing of Lewis’ holdings have to be his remaining 2-million-odd stock options, which were granted in the $40-to-$50 range, said David M. Schmidt, a senior consultant at executive compensation firm James F. Reda & Associates.

They currently are “way underwater,” Schmidt said. “The stock price would have to triple for them to be worth anything.”

Is Lewis’ compensation likely to come under attack by Kenneth Feinberg, the "pay czar" tapped by President Obama to evaluate and approve compensation at bailed-out corporate mammoths including  Citigroup Inc., American International Group Inc. and, yes, BofA?

Feinberg couldn't be reached for comment Friday. But it seems unlikely he would go after Lewis, because the various awards to the BofA boss were made before the meltdown and the bank's total $45-billion U.S. bailout.

And although the public may object to the rich compensation packages that bank executives have been granted over the years, Schmidt said there was nothing unusual about any of the pieces of Lewis’ exit package -- except perhaps the restricted stock grant. Restricted stock, which can’t be sold immediately, usually lapses if an executive quits a company before the shares vest or become salable. But BofA lets its executives hold on to the restricted stock if they leave the company at age 60 or older.

What’s more, Lewis has voluntarily worked without a contract since 2003, and so had no special exit package -- just the enormous benefits his board deemed business as usual for someone leading a goliath on the banking scene.

-- E. Scott Reckard

Photo: Ken Lewis. Credit: Bebeto Matthews / Associated Press

U.S. review of executives' pay at bailed-out firms won't name names

The Obama administration’s "pay czar" said today that he won’t put ceilings on executive compensation at bailed-out companies including General Motors Co. and Bank of America Corp., and that the public won’t get to see who makes what.

From Reuters:

"We don't want specific names next to dollars," said Kenneth Feinberg, who was appointed in June to decide compensation packages for the highest-paid personnel at companies that received U.S. government bailouts.

The rules do not call for capping pay, Feinberg told a conference in New York, adding he is faced with setting compensation that discourages excessive risk-taking and that relates pay to performance.

"Avoiding excessive risk means different things to different people in different situations," he said.

Feinberg was picked by President Obama to review top executives’ pay at companies that got huge injections of federal money. His initial review is focusing on seven names: GM, BofA, American International Group, Chrysler Financial, Chrysler Group LLC, Citigroup Inc. and GMAC Inc.

His report on those seven is due next month.

From Reuters:

After Feinberg makes his initial determination about whether to approve or disapprove pay contracts, the companies have 30 days to ask him to reconsider, after which Feinberg has 30 days to make a final determination.

The final determinations are binding, Treasury has said.

After Feinberg finishes his review of pay packages for the companies' top 25 employees, he will have to approve broader compensation structures for the 75 next-highest-paid employees.

-- Tom Petruno

American Express to restore compensation cuts, citing economy

American Express Co., which in June repaid the $3.4 billion in government capital it got under the Troubled Asset Relief Program last year, is planning to restore some of the employee compensation cuts it made seven months ago.

From Bloomberg News:

Annual merit increases and contributions to retirement plans will resume in January, and a 10% salary cut for managers in the senior vice president ranks and above will be rescinded, according to a memo today from Chief Executive Officer Kenneth Chenault to employees.

The memo cited "a somewhat more positive outlook about economic conditions in the coming months." American Express will maintain cuts on expenses, including employee travel and entertainment, meetings, consulting and training.

"The challenges we face are far from over," Chenault said, pointing to "stubbornly high" unemployment, lower consumer spending and decreases in home prices. "Even after the recession ends, we are likely to see a prolonged period of slow economic growth."

Note that this is not about bonuses, which is the main battle over banker pay now raging worldwide. Still, one of the reasons why many financial companies have sought to repay TARP money is to get out from under restrictions that TARP rules placed on executive compensation in general.

Restoration of rank-and-file pay raises at AmEx and other companies would be a good thing for the economy, of course, giving workers more spending power.

A survey of 175 big companies by consulting firm Watson Wyatt last month found that 44% of firms that had reduced salaries in the recession planned to restore those cuts in the next six months.

Twenty-four percent of companies that reduced 401(k) match contributions expected to reinstate the matches in the next six months.

Obama tries a 'do-the-right-thing' approach with bankers

President Obama went to the den of the money changers today to make his case for financial-system reform.

His speech on Wall Street was largely a lecture, but I thought the tone was much less confrontational than it might have been. Anyone hoping for more overt banker-bashing will probably be disappointed.

Yes, Obama took the requisite swing at excessive risk-taking and fat compensation packages, telling his audience of financial company executives and consumer advocates that "we will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses."

Also requisite when you’re in the beating heart of capitalism: Profess one’s faith in "the power of the free market."

Jobs, Obama said, "are best created not by government, but by businesses and entrepreneurs willing to take a risk on a good idea. I believe that the role of government is not to disparage wealth, but to expand its reach; not to stifle markets, but to provide the ground rules and level playing field that helps to make them more vibrant -- and that will allow us to better tap the creative and innovative potential of our people."

As for the administration’s multipronged effort at reforming the financial industry and how it’s regulated, here’s how Obama argued against keeping the status quo:

"I certainly did not run for president to bail out banks or intervene in the capital markets. But it is important to note that the very absence of common-sense regulations able to keep up with a fast-paced financial sector is what created the need for that extraordinary intervention. The lack of sensible rules of the road, so often opposed by those who claim to speak for the free market, led to a rescue far more intrusive than anything any of us, Democrat or Republican, progressive or conservative, would have proposed or predicted."

Then he tried a bit of guilt-mongering in an attempt to get financiers to do the right thing without having the government force them down that road:

"The fact is, many of the firms that are now returning to prosperity owe a debt to the American people. Though they were not the cause of the crisis, American taxpayers through their government took extraordinary action to stabilize the financial industry. They shouldered the burden of the bailout and they are still bearing the burden of the fallout -- in lost jobs, lost homes and lost opportunities. It is neither right nor responsible after you’ve recovered with the help of your government to shirk your obligation to the goal of wider recovery, a more stable system, and a more broadly shared prosperity.

"So I want to urge you to demonstrate that you take this obligation to heart. To put greater effort into helping families who need their mortgages modified under my administration’s homeownership plan. To help small business owners who desperately need loans and who are bearing the brunt of the decline in available credit. To help communities that would benefit from the financing you could provide, or the community development institutions you could support. To come up with creative approaches to improve financial education and to bring banking to those who live and work entirely outside the banking system. And, of course, to embrace serious financial reform, not fight it."

Among those in the audience at Federal Hall on Wall Street today: Citigroup Chairman Dick Parsons; Robert S. Nichols, president of the Financial Services Forum; Jim Chanos, president of well-known "short seller" Kynikos Associates; Wes Edens, chief executive of private-equity firm Fortress Investments; and Robert S. Kapito, president of money management giant BlackRock Inc.

-- Tom Petruno

Photo: President Obama at Federal Hall in New York today. Credit: Peter Foley / European Pressphoto Agency

Executive pay: All the numbers you need, and then some

Numbers junkies, this report’s for you: The Institute for Policy Studies has published its 16th annual executive compensation survey, this one entitled, "America’s Bailout Barons: Taxpayers, High Finance and the CEO Pay Bubble."

As you can guess, it is not a celebration of executive remuneration.

The central theme is that pay for American corporate leaders remains grossly inflated, despite government and investor efforts to rein it in.

Not surprisingly after what the nation has been through over the last year, the report focuses on compensation packages for top executives of the biggest financial companies. All the usual suspects are here -- Goldman Sachs, Bank of America, Citigroup, etc.

The watchdog role of groups like the institute is important, of course. But the 36-page report is numbers-heavy to a fault. Did you know, for example, that 100 workers making the 2008 average annual wage would have to labor over 1,000 years to make as much as the top 100 executives at the top 20 bailed-out financial firms made in three years?

No, you didn't know.

The institute’s report is meant to infuriate, and it will accomplish that. But it may quickly cause eye-glazing in all but the most avid data hounds.

Still, if you’re ever looking for a pay-related figure -- say, the ratio of average CEO compensation to average worker pay -- it’s all here. (That number was 319 last year, according to the study.)

Also useful is a section of the report tracking the various recent federal proposals to reform (i.e., curb) compensation.

-- Tom Petruno