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Macro Economics
All Roads Lead to Goldman Sachs?

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By Knighted
April 15, 2009

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Or so it seems. While I'm not much of a believer in conspiracy theories, the recent turn of events does cause me to stop and consider where one should draw the line between coincidence and not.

To begin, as most know, former Treasury Secretary Paulson was the previous CEO Goldman Sachs as recently as 2006, when he was tapped by the president to be the new Treasury Secretary. I mention this first only because I think it may add an important piece to the puzzle.

But I guess the real story begins back in September 2008 when the stuff was really starting to hit the fan. The financial sector was in a panic, and as a solution to the problem, the government introduced us to TARP - the massive bailout program largely engineered by Henry Paulson. Meanwhile, AIG was in dire straits, and we only recently revealed that AIG had sent a number of reports to the Treasury predicting impending doom if they were allowed to fail. The government with Paulson heading operations responded by granting AIG a $85B bailout under the required condition that AIG's current CEO be ousted and replaced with Mr. Edward Liddy at Mr. Paulson's request. Note that this CEO exchange was a requirement for AIG to receive the bailout money. They were eager to oblige.

Now, Mr. Liddy was an interesting choice for the position, considering he had been on the Board of Directors of - guess who? - Goldman Sachs from 2003 up until 2008 when he was tapped by Paulson to head AIG. Mr Liddy even offered to work for a $1 salary as the new CEO of AIG out of the goodness of his heart and in order to help AIG turn things around. What a benevolent man (who still retains a $3 million stake in Goldman Sachs stock, but surely that doesn't matter.)

Fast forward to about a month ago, when it was revealed that AIG (presumably under CEO Liddy's directive) had used a large portion of the bailout money it had received from the government in order to pay off debt it owed to its counter-parties. We then learned that the recipient of the largest payment (payoff) was - surprise? - Goldman Sachs, who received a whopping $12 Billion, 100 cents on the dollar. Interesting. But there was a lot of confusion and talk in the press as to why AIG would fully repay its counter-parties, mainly Goldman Sachs, 100 cents on the dollar instead of attempting to negotiate a discount with them. After all, AIG was hardly on sound financial footing, even after the enormous bailout it had received.

Certainly Goldman Sachs has had some remarkable luck throughout this crisis, but where exactly has it left them? Well, Goldman Sachs just posted a surprising earnings release, blowing away expectations with a $1.8 Billion first quarter profit. Perhaps more importantly though, Goldman Sachs is now able to repay the government its bailout money and by doing so, once again release itself from the influence of the new "compensation regulatory committee" that seems to have arisen from the public outrage over excessive executive pay. That same outrage that resulted in the current CEO of Goldman Sachs "voluntarily" deciding to take a pay cut from $70 million to $1 million in 2008. But of course, with this newly found money to pay off the government bailout with, the government will no longer have the slightest say in Goldman's executive compensation either. What a fortunate turn of events for Goldman Sachs. I guess some companies just have all the luck?