Fortunately my credit card banks are constantly sending me “important information” in envelopes that don’t have printing all over them. Thus I have a steady supply when I want to do “back of the envelope” figuring.
But Hank Paulson needed a much larger envelope than a simple #10 when he was figuring what a collapse at AIG would do to the net worth of his former firm. Not that he had to worry, because he got a “get out of jail free” card, and a special tax exemption, that let him sell his Goldman stock without paying $200 million in capital gains taxes back in 2006 when he took the job in the Bush Administration.
Like Goldman CEO’s before him, Paulson took the shuttle down to Washington and “served” the nation in a high political appointment beginning in 2006. His large position in Goldman stock was put into a blind trust no doubt, and he was prohibited from trading it, given the policymaking role he had, and the highly sensitive non-public information he would see as Secretary of the Treasury.
Throughout September and October of 2008, Paulson spent every weekend putting together shotgun marriages among financial giants, setting new records for uncontrolled spending (together with Bernanke), and getting no sleep at all.
He even presented a three-page plan to take over the financial world with no legal liability. I loved the section on judicial or administrative review:
Sec. 8. Review.
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
Goldman’s role in financial disasters and government intervention afterward is a long-established tradition. Even JK Galbraith’s classic study of the panic that set off the Depression has a chapter with the title “In Goldman Sachs, We Trust” (The Great Crash 1929).
When the Paulson-sponsored AIG bailout took down its first major pile of money, the fed wire was still warm when the transfers back out of AIG started those electrons going the other direction. $12.9 billion ended up at Goldman, as a payment against a margin call on CDS that Goldman had bought from AIG.
It seems likely that at least some of those CDS were insurance against Goldman-arranged CDO deals like the Abacus series. At the time, most of us in the business were horrified that the taxpayer was effectively paying off at 100 cents on the dollar on a gambling debt that the market probably thought was worth around a dime.
Today that value got confirmed when Ambac disclosed the terms of their settlement of CDS contracts tied to ABS CDOs. Even though Ambac was arguably a company that was not as badly insolvent as AIG was last year, Ambac was able to convince their counterparties on over $5 billion in contracts to settle for just $520 million.
Applying similar ratios to the AIG CDS obligations would have resulted in nearly $100 billion less taken out of taxpayers’ hides by now, and, of course, far less lucre for the likes of Goldman, Deutsche and Calyon, three of the biggest recipients of the first round of CDS payouts.
Back to that envelope:
Goldman’s market cap at the end of today’s trading was $93.461 billion. It sported a 1.6 price-to-book ratio using Q3 2009 book values, implying a $58.4 billion book value after the rally we’ve seen stocks and bonds this year. $12.9 billion is still 22% of that capital base. So, on my envelope, I see a rough estimate that 20% of Goldman’s capital was a pure gift from the taxpayers, arranged by Hank Paulson. At least that’s how much my estimate is for the overpayments above what a normal market would have accepted.
Last year’s envelope (the one I imagine Paulson really looking at) had smaller numbers, with book value hovering around $98 a share, and 456 million shares outstanding, even after that $12.9 billion transfer. Capital as of last November was $44.7 billion. No doubt that $12.9 billion extra saved the day, and the year, at 85 Broad.
If the credit default swaps weren’t paid in full, Goldman would have a major hole in its balance sheet. They might even have to cut paychecks. Imagine not being able to pay out the full $16.7 billion they’ve set aside for compensation in the first three quarters this year.
Since I don’t believe they pay their administrative assistants and back office clerks anything remotely resembling the $700,000 per employee that they have budgeted, my guess is that “normal” pennies-on-the-dollar payout on those ill-fated AIG CDS might have knocked down the senior people’s pay from $2 million for 2009 down to $1 million (or $20 down to $10 for the superstars).
Even at that they would doing far better than the ordinary employees of AIG’s regular insurance businesses or Lehman and Bear’s brokerages that are now looking for jobs.
Hey, let’s look at the bright side: without those nasty competitors in the business, Goldman can really make some serious money in the CDS business. The Zero Hedge trader’s blog that looked at the recent Goldman report was quite upbeat about the profit potential.