BANK CHIEFS OWE A PERSONAL DEBT TO TAXPAYERS / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( RECOMMENDED READING )

Bank chiefs owe a personal debt to taxpayers

By William Cohan

Published: September 21 2009 21:02

Few could argue with Barack Obama last week when the US president said Wall Street owed a debt of gratitude to taxpayers. Some of America’s largest banks would not have survived without the trillions of dollars the government used to shore up the financial sector. Less remarked upon, however, is the personal windfall executives of the bailed-out institutions received as a result of Washington’s largesse.

This is no doubt a controversial conclusion, since most of the chief executives whose banks were forced to take funds from the troubled asset relief programme, or Tarp, nearly a year ago will point immediately – and correctly – to the fact that many of them eschewed a bonus for 2008.

For instance, Lloyd Blankfein of Goldman Sachs was paid about $70m in 2007 but only his $600,000 salary for 2008 (plus $111,000 for the cost of a car and driver). John Mack, who has just announced his resignation as chief executive of Morgan Stanley effective from January 2010, received an annual salary of $800,000 (plus $438,000 of imputed income from perks such as use of the corporate jet, which Morgan Stanley requires for “security” purposes) in 2008. He never received a cash bonus during his four and a half years at the helm at Morgan Stanley, although he did receive 500,000 shares of restricted stock, then worth $26m, when he rejoined the bank from Credit Suisse in June 2005. Jamie Dimon, chief executive of JPMorgan Chase, had to make do with his $1m salary in 2008 (plus car and driver and aircraft income) but received no cash bonus. Ken Lewis, the chief executive of the beleaguered Bank of America, somehow came out the winner on a relative cash basis in 2008, with a salary of $1.5m and, like the others, perk allowances and no cash bonus.

But whether these men received a cash bonus or not in 2008 almost certainly obscures the important larger point: the bail-outs of their banks through the Tarp, through the Federal Deposit Insurance Corporation guarantees of their debt financings and through government-backed securitisation programmes such as the term asset-backed loan facility, or Talf, provided an essential boost to long-term investor confidence – and their stock prices – at a crucial juncture. This is how each of these men benefited personally from the government bail-outs.

To be sure, the government’s initiatives were not solely responsible for keeping these institutions alive. Their own efforts were crucial too, whether it was Goldman’s decision to raise $10bn from both the public markets and from investor Warren Buffett on September 29 or Morgan Stanley’s ability to raise – in a cliffhanger – $9bn from UFJ Mitsubishi on October 10. But the $10bn both Goldman and Morgan Stanley received from the Tarp on October 13 did not hurt either, and nor did the swift approval by the Federal Reserve – on September 22 – that allowed the two to become bank holding companies and thus receive virtually free financing on a regular basis from the central bank. As for Bank of America, it would be hard to argue that without the US taxpayers’ $45bn the bank would still be around. (For what it is worth, JPMorgan does not believe it was bailed out but rather that it helped save other banks.)

What is not hard to argue is that the smorgasbord of government programmes and initiatives have helped ensure the survival of these institutions by restoring investor confidence, in turn boosting their stock prices and the value of the chief executives’ stock holdings.

For instance, Mr Blankfein’s 3.4m shares of Goldman, worth about $168m at one point last year, were worth closer to $623m (€425m, £385m) at Friday’s closing prices. Mr Mack’s 4m Morgan Stanley shares, which were worth as little as $27m, have rebounded to $125m. Mr Dimon’s 11.2m shares of JPMorgan are valued at about $503m these days, up considerably from their recent low of $168m. And Mr Lewis’s 4.7m Bank of America shares, at one point valued at around $15m, are now worth about $83m. These calculations do not reflect the additional increased value of the executives’ stock options and unvested stock awards, which have moved up smartly – at least on paper (they are not tradeable) – as a result of the rise in the banks’ stock prices.

This is not a trivial matter, although it is barely mentioned. Those who find the observation petty or unfair would do well to ask Dick Fuld, Lehman Brothers’ one-time chief executive, if he would be willing to trade places with any of his former Wall Street brethren. Unlike Mr Blankfein and Mr Mack, he could not win Fed approval to convert Lehman into a bank holding company. We all know there was no government bailout for Lehman.

After Lehman filed for bankruptcy a year ago, Mr Fuld’s 10m shares of Lehman plus options – once worth as much as $1bn – were rendered worthless, which seems like the correct price for the stock of a bank that was way overleveraged and took too many foolish risks. “I don’t expect you to feel sorry for me,” Mr Fuld testified in front of Congress last October. And we don’t.

But a year later, we still have no good answer as to why the other chief executives were permitted to benefit from the government’s largesse while Mr Fuld could not.

The writer is a contributing editor at Fortune and is the author of House of Cards: a Tale of Hubris and Wretched Excess on Wall Street

Copyright The Financial Times Limited 2009.