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October 20, 2009

Shareowners Rush to Challenge Goldman Sachs on Huge Payouts of Bonuses
    by Robert Kropp

As the TARP bailout recipient prepares to award executives with billions of dollars in bonuses, shareowners call for a review of its compensation practices. -- Goldman Sachs, the investment bank that received a $10 billion bailout from taxpayers via the Troubled Asset Relief Program (TARP), recently released its income statement for the third quarter of 2009, and at least on the face of it the firm's recovery from a November 2008 loss in net income of over $2 billion seems a success. For the third quarter in a row, net earnings increased dramatically, reaching $3.2 billion for the quarter ending September 25.

Of course, Bank of America and Citigroup, also TARP recipients, reported big earnings for the first two quarters of 2009 as well, only to revert to losses in the third quarter. But the two banks, unlike Goldman Sachs, actually engage in such traditional banking practices as consumer lending, and their poor financial performances reflect ongoing severe problems across the economy in credit and consumer lending.

Goldman Sachs, which includes among its former CEOs Henry Paulson, Treasury Secretary in the Bush administration and architect of the TARP bailout, continues to benefit from the financialization of the US economy; while Wall Street celebrates the recent return to a Dow Jones industrial average of 10,000, housing foreclosures hit a record high in the third quarter, and unemployment continues to rise.

Furthermore, Goldman Sachs recorded an average daily value at risk—or the amount of money the firm could potentially lose in a single day—of $208 million, up 15% from the amount recorded in the third quarter of 2008.

Having, through the largesse of American taxpayers, dug itself out of a deep financial hole brought on by the Wall Street practice of trading in excessively risky mortgage-backed securities, how does the Wall Street firm intend to spend its newfound billions? For the first half of 2009, Goldman Sachs set aside $11.4 billion for its pool of bonuses to be paid to its executives. The bonus pool is expected by analysts to swell to over $23 billion in the aftermath of the firm's third quarter earnings announcement.

Responsible institutional investors have wasted no time in responding to Goldman Sachs' plans to perpetuate the practice of excessive executive compensation, by introducing a shareowner resolution for the 2010 proxy season in advance of final decisions by the Board of Goldman Sachs on awarding bonuses.

As Laura Berry, Executive Director of the Interfaith Center on Corporate Responsibility (ICCR) said, "We have a responsibility here to act as the conscience of Wall Street, especially when it fails to do so on its own."

The shareowner resolution, which is expected to gather more co-sponsors, was filed by the Nathan Cummings Foundation and the Benedictine Sisters of Mt. Angel. Observing that "Concerns about the structure of executive compensation packages have also intensified, with some suggesting that the compensation system incentivized excessive risk-taking," the resolution requests that the Compensation Committee of Goldman Sachs "initiate a review of our company's executive compensation policies and make available, upon request, a summary report of that review by October 1, 2010."

The resolution requests that the Compensation Committee's report include a comparison of the total compensation package of senior executives and median wage of employees, as well an analysis of and rationale for executive compensation that in 2007 was 364 times the pay of the average US worker. In 2007, an S&P 500 CEO had to work only three hours to earn what a full-time minimum-wage worker earned for the entire year, according to a 2008 report from BusinessWeek cited by the shareowners.

The resolution further requests that the Compensation Committee evaluate whether executive compensation packages at Goldman Sachs are excessive, and "whether sizable layoffs or the level of pay of our lowest paid workers should result in an adjustment of senior executive pay." In November, 2008, Goldman Sachs laid off more than 3,000 employees, or 10% of its workforce.

In filing the resolution, Laura Shaffer, director of shareholder activities of the Nathan Cummings Foundation, said, "Executive compensation accounts for a considerable portion of aggregate earnings and as firms like Goldman hand over ever larger sums to their executives, these spiraling pay packages will have increasingly significant impacts on investors' returns."

In 2008, a shareowner resolution calling for an advisory vote on executive compensation received 46% vote in favor; but, according to the filers of the new resolution, "the Board has resisted implementing even that modest reform."

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