By Rich Miller and Christine Harper
Dec. 5 (Bloomberg) -- Treasury Secretary Timothy Geithner disputed claims by Goldman Sachs Group Inc. executives that the bank could have survived the financial crisis without government help and said it and other Wall Street firms should show some restraint in handing out bonuses this year.
"It is very important that we change the way these executives are paid, the form of compensation, this year," Geithner said in an interview yesterday for Bloomberg Television's "Political Capital with Al Hunt," which is being aired throughout the weekend. "We have to end that era of irresponsibly high bonuses."
President Barack Obama has blamed compensation tied to excessive risk-taking for fueling the deepest financial crisis since the Great Depression. The administration has named a special master to approve compensation packages at firms that have received the biggest government bailouts.
Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co.'s investment bank are set to pay record combined bonuses this year, according to analysts' estimates. Goldman set a Wall Street pay record in 2007 when its compensation totaled $20.2 billion, including $68.5 million for chairman and chief executive officer Lloyd Blankfein.
Blankfein told Vanity Fair magazine in an article published online this week that he thought the company could have survived the financial turmoil on its own without government help. Goldman's president, Gary Cohn, was more definitive. "I think we would not have failed," he told the magazine. "We had cash."
Geithner, 48, took issue with that, saying that the entire financial system was at risk at the height of the crisis, including Wall Street's big institutions.
‘Classic Bank Run'
"None of them would have survived" had the government stood aside and let the crisis run its course, he said. "The entire U.S. financial system and all the major firms in the country, and even small banks across the country, were at that moment at the middle of a classic run, a classic bank run."
New York-based Goldman Sachs, the fifth-largest U.S. bank by assets, accepted $10 billion from the Treasury and other forms of government support last year. It has since returned the funds with interest, as have firms including Bank of America Corp., JPMorgan Chase and Morgan Stanley.
Geithner said that most of the money the federal government injected into banks through the Troubled Asset Relief Program will likely be paid back. "We now estimate that we're probably going to have $175 billion in repayments from the banking system by the end of next year," he said.
Goldman spokesman Lucas van Praag said the firm recognized that it would have failed had the financial system broken down.
"If the financial system collapsed, we would have collapsed too," he said. "We believe that government action averted a major systemic problem."
He added that Goldman acted on its own to raise capital amid the turmoil. "We had cash and funding that would have allowed us to survive for quite a long time," he said.
Geithner said that even institutions that have repaid the government should show restraint in paying out bonuses, arguing that Wall Street's compensation practices had encouraged excessive risk-taking.
"We want to see fundamental constraints in how senior executives are paid," the Treasury secretary said.
He said he wants compensation at financial institutions to be tied more to their long-term performance, rather than to short-term gains. Should those gains prove ephemeral, the bonuses would be clawed back, he added.
"The basic problem we face across the system is that executives were paid for taking imprudent risks," Geithner said.
The Federal Reserve has said it will review the 28 largest banks to ensure that compensation doesn't create incentives for excessively risky investments. It also offered guidelines on making pay more tied to risk management.
To contact the reporters on this story: Rich Miller in Washington firstname.lastname@example.org; Christine Harper in New York at email@example.com.
Last Updated: December 5, 2009 00:00 EST
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