Should Goldman Sachs pay for creating havoc? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
PRINTER FRIENDLY | ARCHIVES

Should Goldman Sachs pay for creating havoc? 

A  A  A
In this issue:
» Populism forces railways to take a govt. loan of Rs 30 bn
» Govt. projects record food output
» Are the banks hiding their NPAs?
» Is US becoming a global threat?
» ...and more!


----------------------------- Now get free daily updates on Global Economy! -----------------------------

Will Italy be able to get back on its feet again?

Will Euro die faster than the Dollar?

Will China now replace US as the new superpower?


Know all that's going on in the global markets through the free daily financial e-column The Daily Reckoning.

Authored by Bill Bonner, a three-time New York Times best-selling author, the Daily Reckoning is published in 3 languages and is read by millions of people across the globe.

Sign up now for free updates on global markets!

---------------------------------------------------------------------------------------


00:00
 
Every parent knows that rewarding bad behavior simply encourages more misbehavior down the road. But the US investment banks do not think so. They are under the impression that a cut down in rewards is good enough to deal with bad behavior. We are referring to the case of Goldman Sachs and its Chief Executive Mr Lloyd Blankfein.

The bank that has been widely held responsible for causing the financial crisis in 2008, has decided to slash down its pay to Mr Blankfein. His aggregate pay in 2011 is so far estimated to be US$ 9 m of which US$ 7 m is in the form of stock options. This when compared to his pay of US$ 68.5 m in 2007 and US$ 12.6 m in 2010, does appear to be a pretty steep cut. In fact the news has been hitting headlines since the pay package was announced. But the point is not the quantum of cut. The question is does the lower pay package resolve the issue? Should he not be held liable for the damage that he and his bank have created in the world?

The repercussions of the financial crisis that was triggered by the stupendously risky products introduced by the likes of Goldman, are still being felt worldwide. But the penalties that these banks have doled out for their actions have been ridiculously low in comparison. The loss of investor money and confidence is so much more than the compensations that these banks have given. But despite the damage caused, they still continue to reward the same top executives who had taken these bad decisions years ago. Executives like Mr Blankfein are just being penalized through lower pays. When instead they should be made to pay for the damage that they have inflicted on the financial world. But well as a leading Russian businessman says "investors have very short memories". And by the looks of it bankers have even shorter memories than the investors.

Do you think mere pay cuts are adequate punishments for the top executives of the investment banks that have caused the global financial crisis? Share your comments with us or post your views on Facebook page / Google+ page.

01:30  Chart of the day
 
That India's GDP (Gross Domestic Product) growth has slowed down is not really news. In fact after dishing out a stellar performance during FY10 and FY 11, the GDP growth is expected to be in the region of 7% in FY12. Though the estimates are not yet released by the Central Statistics Office, with the slowdown in manufacturing, the 7% levels are also looking tough to acheieve. The economy grew by just 7.3% in the first half of FY12. But since then the country has seen its industrial production slowing down. This would have a negative impact on the overall economic growth

Data source: The Mint
* Data for the period April to September 2011


02:00
 
There was a time in the 1950s when the railways had extended a loan to the government at the centre. But at present, the scenario has reversed and it is the Indian Railways now which has gone knocking on government doors for a loan. This is the first time in nearly 2 decades that the railways ministry has had to ask for a loan; an amount of Rs 30 bn has been approved by the government. As per the terms of the loan, the railways ministry will have to dole out dividend of around 8.5% and that the loan will have to be repaid in 2-3 years. Besides this, there is a stipulation that the money would be spent prudently for zones with earning potential and be used strictly for activities enhancing throughput of the railway. The railways ministry is not entirely happy with this and is seeking a waiver on the dividend to be paid to the government. Their contention is that passenger services for railways the world over are suffering operational losses and various governments have been subsidizing them. India is the only country which has to pay the dividend to the government. Now with the government's finances already stretched to the limit, we doubt whether the demands of the Indian Railways will be met. Especially when one of the culprits for the rise in the fiscal deficit has been the government's inability to bring subsidy dole outs lower.

03:00
 
Asset quality of Indian banks has been one of RBI's biggest concerns even since the cost of funds went up. Besides agriculture, sectors like telecom, power and construction have also exposed banks loan portfolios to undue risks. However, while the deterioration in asset quality has been evident in some counters, others especially few PSU banks have managed to camouflage them by restructuring the accounts. Most of these banks already had some legacy restructured agri loans. Other exposures like loans to beleaguered airline companies are yet to be classified as NPAs. Hence what is evident in Indian banking sector's health may not be the true picture. Slippage in asset quality has a direct impact on the bank's networth as well as shareholder returns. They are thus detrimental to both depositors and shareholders. It is time that the RBI tightens the noose on banks that are deferring NPA recognition. Else the sector may once again lose investor confidence.

03:40
 
The ambitious Food Security bill of the Indian government just got a major boost. The country is likely to see record food grain production in the current year. This was mainly on account of good rains, according to the second advance estimate of the agriculture ministry. Bolstered by the record production of wheat and rice this year, the government has pegged the food grain output in 2011-12 to touch an all-time high of over 250 m tonnes. However the production of oilseeds and pulses which has a major impact on food inflation declined, which could potentially revive pressures on food inflation. Despite record production of food grains, the major concern of storage, procurement and the distribution still looms large on the food security law. For India to truly achieve inclusive growth and speed up the process of development, we have to keep agriculture in the forefront of our nation's developmental effort and reduce the bottlenecks affecting agricultural growth.

04:15
 
Though the US economy has shown some signs of recovery in recent times, several long term issues like a high fiscal deficit, excessive debt burden, a slowing economy, etc. continue to threaten the future of the US. It goes without saying that such economic problems have severe political repercussions. With elections due later this year, the US government has resorted to desperate measures to save its face. For instance, the latest buzzword in the financial world is 'extraterritoriality' (ET) which means that a government can exercise its authority beyond its borders. What is happening now is that the US is acting unilaterally with aggressive new market rules and tough financial reforms. All of this, in a bid to be seen as the safest capital market. But an unfortunate outcome of this will be that the US will end up haphazardly imposing its own rules on other nations. This is yet another example of the kind of double standards that the US follows. All talk about creating a global level playing field is pure lip service. By nature, the US continues to remain a bully. But its new set of rules will not only hurt foreign banks and international markets, but even US firms.

04:45
 
In the meanwhile, the Indian stock markets have been trading in the positive territory since the time of opening. At the time of writing, the BSE Sensex was up by 126 points (0.7%). Nearly all the sectoral indices were in the green with the stocks in the realty and metal sectors leading the pack of gainers. Other stock markets in Asia closed the day on a mixed note with Japan and Singapore closing in the green while Taiwan and Indonesia closed the day in the red. European markets have opened in the red as well.

04:55  Today's Investing Mantra
"Understanding how to be a good investor makes you a better business manager and vice versa." - Charlie Munger

Click here to read our series on 'Lessons from Warren Buffett'
The 5 Minute WrapUp Premium is now Live!
A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

Latest EditionGet Access
Recent Articles:
Were You Lured By Mr Market's Bait?
August 23, 2017
Mr Market lured investors into believing they'd bitten into a crash. Did you take the bait?
Why Hasn't Warren Buffett Rung the Bell Yet?
August 22, 2017
It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.
How Unique Are the Companies You Invest In?
August 21, 2017
One of the hallmarks of successful investing is to look out for companies that have a unique and enduring moat.
You've Heard of Timeless Books... Ever Heard of Timeless Stocks?
August 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

Equitymaster requests your view! Post a comment on "Should Goldman Sachs pay for creating havoc?". Click here!

8 Responses to "Should Goldman Sachs pay for creating havoc?"

V.Jagannathan

Feb 8, 2012

They should have been made accountable and sacked for their actions. Atlower levels penalty for accountability for bad decisions and consequent losses are heavy. But at the top level they hardly suffer!

Like 

sarat palat

Feb 7, 2012

if it is proved that the problems are caused by their negligence, the Govt. should confisticate all their assets and to be kicked out to the street.

Like 

ANURAG KUMAR

Feb 7, 2012

top bankers are to blame. harvard mba culture is suspect. very surprising and difficult to digest that these smart bankers ,well read could not predict the double ip recession, the soveriegn debt crisis, the decreased manufacturin, the growth of economy. so many people all over the world lost thier hrd earned money in these in thse investment banks. somany ecame poor. these investment bankers --JIM CORZINE , MADDOF--ETC SHOULD be made to realize that it is not correct to play with other people money.
they should serve as servants to al the poor people in this world--who lost all thier life savings in the 2008 crash tc .

smarter pople than bankers are there in this world.

Like 

Albert

Feb 6, 2012

They should ALL be sent to the Gulag in Siberia.

Like 

Sam

Feb 6, 2012

Only way to make them feel the impact of what they did, is to offer them one of their non-saleable complex financial instruments in lieu of salary for 2,3 years and freeze all their other assets/finances for this period.

Like 

saby chacko

Feb 6, 2012

It is typical example of double standard played by US govt, unable to tackle its own bankers but bully the others around the world. Probably Obama must have got good amount funds from Golman sachs for his election campaign which prevents any action against such people.

Like 

Sowmya

Feb 6, 2012

You are right in pointing out that the investment banks, primarily Goldman Sachs, that is believed to be behind the crisis need to be penalised. The sub-prime mortgage mountain was not built in a couple of years. Hence indicting just the current CEO would'nt be fair. Other top management executives during whose tenure the decision to create innovative financial products as CDOs were taken should also be asked to forego/surrender their earnings during the period.

Like 

Hussam

Feb 6, 2012

For lesser crimes people have been shot. In this case "livelihood shot down", lives have been lost.

The signals are clear, for Bankers, life goes on.

Rgd.

Hussam

Like 
  
Equitymaster requests your view! Post a comment on "Should Goldman Sachs pay for creating havoc?". Click here!

MOST POPULAR | ARCHIVES | TELL YOUR FRIENDS ABOUT THE 5 MINUTE WRAPUP | WRITE TO US

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407