MANHATTAN (CN) – Goldman Sachs is using taxpayer money and wasting corporate assets to pay billions more dollars in pay and bonuses than it does to shareholders, according to a derivative complaint in New York County Court. The company earned $2.32 billion and paid $4.82 billion in bonuses in 2008; it paid more than 259 percent of its net income as compensation in the first quarter of 2009 and more than 193 percent of its net income in the second quarter, according to the complaint.
Named plaintiff Ken Brown says Goldman Sachs routinely spends about 50 percent of its net revenue in pay and bonuses, regardless of the bank’s performance or “shareholder outrage.”
Over the past few years, Goldman contributed to “a worldwide economic crisis,” took $13 billion from the AIG bailout and a $10 billion loan from the Troubled Asset Relief Program, according to the complaint.
Treasury Secretary Tim Geithner said that without government intervention, the big banks would not have survived, according to the complaint. Delaware-based Goldman Sachs would have lost billions of dollars without the bailout money, the shareholder claims.
New York Attorney General Andrew Cuomo called the banks’ compensation structure a “major impetus for the subprime fiasco,” according to the complaint.
Goldman Sachs claimed in a statement that its senior executives “are negatively impacted when times are difficult.” But shareholders countered that, “buttressed and inflated by the government,” Goldman Sachs approved nearly $17 billion for employee compensation and bonuses – a $6 billion increase from the bank’s original estimate.
Goldman Sachs is on track to pay out more than $22 billion this year, “the most compensation ever paid to employees of the company,” according to the complaint.
Shareholders sued the bank’s 12 board members, including CEO Gary Cohn and COO Lloyd Blankfein, who would be direct recipients of the inflated compensation. The other 10 directors are on the company’s compensation and audit committee.
Blankfein issued a public apology after its salary plans were announced, saying that the company participated in “clearly wrong” activities, according to the complaint.
Company standards require performance-based compensation, but Goldman Sachs has made only cosmetic adjustments, such as paying the 30-member management committee with restricted shares instead of cash, according to the complaint. An additional 14,000 executives’ and employees’ pay schedule remains unchanged.
Many former Goldman Sachs executives worked at the Federal Reserve Bank, which indirectly bailed out the bank through the AIG bailout in addition to TARP money, according to the complaint.
After the Fed loaned AIG $85 billion to keep it from going under in September 2008 and another $40 billion over the next 5 months, the shareholder says, AIG repaid Goldman $13 billion on its contracts for credit default swaps.
During the housing boom, Goldman created and sold underperforming collateral deposit obligations, such as subprime residential mortgages. When the bank saw the risks of those securities, it bet against the CDOs but continued to sell and underwrite them, according to the complaint.
Goldman transferred the risk to AIG by buying credit default swaps from it, which reportedly created a $20 billion exposure for the bank.
The shareholders seek damages and an accounting, alleging waste of corporate assets, bad faith and breach of fiduciary duty.
They are represented by lead attorney Lynda Grant.