Goldman Sachs, Greek Debt and Greed

August 17, 2015


I’m currently reading Flash Boys by Michael Lewis, a detailed and at times, inconceivable, account of the way High Frequency Traders manipulate stock markets to make substantial gains, when I came across a throwaway line about the bank, Goldman Sachs, and the Greek Debt crisis.

Now, forgive me if you have already read about this, but I hadn’t come across the story until now and I’m sure I’m not the only one who was unaware of it.

The story begins in 2001 with Greece desperately trying to live up to its Maastricht Treaty euro-zone commitments to demonstrate an improvement in its public finances when in fact they were getting worse, not better.

They turned to US bank Goldman Sachs for help and found it in the shape of one Lloyd Blankfein, who has now risen to the lofty heights of CEO, who proposed a secret loan of €2.8 billion for Greece, disguised as an off-the-books “cross-currency swap”—a complicated transaction in which Greece’s foreign-currency debt was converted into a domestic-currency obligation using a fictitious market exchange rate.

This arrangement magically shaved 2% off Greece’s debt and Blankfein and his team collected a fee of €600 million which accounted for 12% of Goldman’s total earnings from trading and investments in 2001 in just one deal – no wonder he’s now the CEO.

Unfortunately the magic soon wore off and the deal turned sour – what had started out as a €2.8 billion ‘hidden loan’ had become, by 2005, a very visible, almost double the amount, debt of €5.1 billion when it was restructured by Goldman’s then international division managing director, Mario Draghi.

Does the name sound familiar? Yes, the very same Mario Draghi who is now head of the European Central Bank and a key figure in the current Greek bail-out.

Of course, Goldman’s aren’t the only ones to have benefited from Greece’s misfortune, a recent report from the private, non-profit Leibniz Institute of Economic Research says that over the last 5 years Germany has profited by €100 billion, equivalent to 3% of its GDP, as investors have fled from Greece into the welcoming arms of Germany.

“These savings exceed the costs of the crisis – even if Greece were to default on its entire debt,” the study said.

So, if Greece had refused Goldman’s helpful but over-complicated and ultimately very costly, interest rate swap deal in the first place and ‘fessed up to their public sector failings way back in 2001 perhaps they wouldn’t have been in the mess that they are in today with, what is by all accounts, an unsustainable bail out deal adding another €85 billion to their already crippling debts.

And the greed?

Well the dictionary definition of greed is: the inordinate desire to possess wealth, goods, or objects of abstract value with the intention to keep it for one’s self, far beyond the dictates of basic survival and comfort.

With Goldman Sachs and the German nation getting ever richer at the expense of the Greek people it is clear who, amongst others, are the perpetrators of greed and who is the victim


Fund managers attack bankers’ pay

December 6, 2011

Leading fund managers, including L&G and Jupiter, have stepped up their attack against huge pay rises at the UK’s biggest banks.

In recent weeks, several of the UK’s biggest investment groups have met bank boards to urge them to restrain pay and restructure the way they reward staff, especially within their investment banking arms.

Barclays, HSBC, Royal Bank of Scotland and UBS are among the banks to have been targeted, the Financial Times reports.

According to the paper, there is anger at the rapid rise in fixed salaries against a back-drop of declining investment bank revenues and falling share prices.

Legal & General and Jupiter Asset Management are among a number of influential investors engaged in discussions with the big banks.

Sacha Sadan, corporate governance director at Legal & General Investment Management, told the Financial Times: “We want the banks to make the highest returns. If banks choose to retain their earnings rather than pay them out in dividends, that is fine. But the leakage into bankers’ bonuses while returns are low is not fine. In a tough political and economic environment pay restraint seems to be the only solution.”

Emma Howard Boyd, head of corporate governance at Jupiter Asset Management, added: “We, along with a number of our peers, believe there is substantial value to be unlocked in UK bank shares if they can convince the market that shareholder returns take priority over employee compensation.”

Meanwhile, in its latest attempt to crack down on excessive pay, the Association of British Insurers (ABI) has written to all UK banks demanding they cut individual pay-outs and overhaul their remuneration structures.

What can be done about unjustifiably high executive pay?

December 5, 2011

Executives at the largest UK companies have seen their salaries rising at a rate that is hard to justify when compared with their company’s performance. When large numbers of employees and smaller company executives are facing pay freezes or cuts it is particularly galling to see senior executives in some sectors seemingly rewarded for their incompetence.

This is most markedly apparent in the banking sector where the architects of the biggest global recession in history not only seem to be unaffected by the economic constraints that they have created but still appear to be doing rather well.

It is clear that the problem of rapidly increasing executive pay is primarily an issue for the largest stock market-listed corporations. There is little evidence of similar pay inflation in small and medium-sized companies. In the current difficult economic environment, the company directors of most SMEs are struggling to keep their businesses afloat. Pay at such enterprises is inevitably tied to performance whether they like it on not.

So, whose fault is it that senior executives in large corporations are paid way beyond their level of competence and what can be done about it?

The executive pay process at larger companies is typically led by a sub-committee of the board of directors: the remuneration committee. According to the UK Corporate Governance Code, members of the remuneration committee should be independent non-executive directors. The intention of this code requirement is to ensure that executive pay is set by a group of individuals with an informed but objective (and unconflicted) perspective regarding the best interests of the company.

Despite their independent composition, remuneration committees have in recent years experienced significant challenges in ensuring a strong link between executive pay and company performance. Increased globalisation has given rise to a global market for executive talent with associated globally defined remuneration levels. An individual remuneration committee may be faced with the dilemma of losing the services of a key member of the management team if they do not respond to such market expectations. This could have major implications for the achievement of the company’s strategy.

Greater transparency and disclosure of executive remuneration has also – despite good intentions – exerted an upward ratcheting effect on top-manager pay. Senior executives understandably wish to be paid at levels equivalent to their peers in similar companies. With increased transparency, they are in a good position to know if this is the case and, if not, demand an increase in their remuneration levels.

Given these challenges, what is to be done? Three principles should be used to improve the legitimacy of executive pay: greater simplicity, greater accountability and greater diversity.

Greater simplicity is an essential prerequisite for the improved governance of executive pay. In an attempt to align the interests of executives with those of shareholders, executive remuneration packages have, over the last decade, become ever more complex and opaque. This trend has been encouraged by the growing role of remuneration consultants in advising remuneration committees. In the midst of such complexity, it has been increasingly difficult to keep track of the implications for total executive pay over time.

In response to this problem, remuneration committees and shareholders need to do a better job in demanding a simpler approach to executive remuneration. The variable component of executive pay should be clearly linked to a small number of longer-term performance indicators which are easy to justify and measure. Annual reports should demonstrate in a straightforward manner how the achievement of these performance criteria could feed into total remuneration levels.

Greater accountability should be introduced through the earlier involvement of shareholders in the approval of executive pay. At the current time, shareholders vote to approve executive pay – on an advisory basis – after it has been awarded. However, shareholders could offer their perspective on the structure of the remuneration policy – including the associated performance indicators – prior to its adoption. This would ensure that there were no nasty surprises after any pay award had been made.

Finally, a greater degree of diversity on boards would assist remuneration committees in making more socially grounded decisions on executive pay. This is not only about increasing gender diversity on boards. It is also about bringing exceptional individuals from different professional backgrounds on to the boards of large listed companies as independent non-executive directors.

Most non-executives tend to be serving or former senior executives from other companies. Although the business expertise of such individuals is invaluable, their perspectives may reflect their own personal expectations in respect of executive remuneration. Their contribution should therefore be balanced by the presence of a more diverse group of well-trained decision-makers.

Ed Milliband calls for “more responsible capitalism”

November 22, 2011

Ed Miliband

Last week Ed Milliband, speaking to a business audience, called for an overhaul of corporate governance in UK boardrooms to produce “more responsible capitalism”.

He suggested that  shareholdersvoting rights should vary depending on how long the shares had been held and also questioned whether companies’ long-term strategy was undermined by having to produce quarterly reports.

He also repeated his call for there to be an employee on the remuneration committee of every major company and criticised the government‘s plans to make it more difficult  for staff to take employers to employment tribunals, saying that the government was only offering “more of the same” in its backing for a “hire and fire” mentality.

As previously discussed in these pages, the idea of having an employee on remuneration committees is a bit of a non-starter given the difficulty of electing someone in an organisation of several thousand employees to be in any way representative and totally misses the point of having non-executives.

Similarly impractical is the idea of linking shareholder voting rights to the length of time the shares have been held – a nightmare for registrars and company secretaries with questionable benefits to corporate governance.

With regard to long term strategy perhaps he might like to consider whether long term political strategy is undermined by having to have elections every 5 years.


November 18, 2011

Family businesses in the United Kingdom are less likely to fail than their non-family counterparts, according to new research.

Entitled UK family businesses: industrial and geographical context, governance and performance, the report found that family firms – be it small, medium or large – have lower rates of insolvency than non-family owned businesses.

The survey, which analysed more than three million privately held firms in the UK between 2007 and 2009 and was conducted by the universities of Nottingham and Leeds for the Institute for Family Business Research Foundation, also suggests that family run companies are less likely to dissolve.

“Our analysis indicates that although family firms may be smaller than non-family firms and perhaps do not grow to the same extent, they are more able to withstand recession, and perhaps this is their most important feature,” said Dr Louise Scholes, co-author of the report, in a statement.

Corporate governance was also considered important by family businesses, with almost 20% of the companies involving more non-family directors than family at board level. Women were prominent, with 44% of family-owned businesses employing women as directors, as compared to only around 30% of non-family companies.

When it comes to the industry of operation, family-controlled groups tend to focus on certain sectors, found the report. While more worked in agriculture and fishing (44%), manufacturing, food and beverages, textile, retail, and motor vehicles, very few families opted to enter industries such as electricity, gas, transport and education.

Family businesses in the survey are those where the family owns more than 50% of the shares and at least one family member is a director of the company.

FRC announces changes to strengthen boardroom diversity from October 2012

November 16, 2011

Last month, the Financial Reporting Council (FRC) announced that it will make two changes to the UK Corporate Governance Code in order to strengthen diversity in the boardroom.

The revised UK Corporate Governance Code, which came into effect in June 2010, included a new Principle B.2 which stated that “the search for board candidates should be conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the board, including gender.” Later that year, Lord Davies was commissioned by the Government to review gender diversity on the boards of listed companies and recommend how the Government and businesses could increase the proportion of women on company boards.

Following the completion of his review in February 2011 – and the subsequent FRC consultation paper on his recommendations for revising the UK Corporate Governance Code to require listed companies to establish a policy on boardroom diversity in May 2011 – the following changes relating to listed companies were announced:

  1. They will have to report annually on their boardroom diversity policy, including gender, and on any measurable objectives that the board has set for implementing the policy and the progress it has made in achieving the objectives; and
  2. They will have to consider diversity of the board, including gender, when evaluating their board’s effectiveness.

These changes have been deferred and will apply to financial years beginning on or after 1 October 2012; however, the FRC has encouraged all companies to voluntarily apply and report on these changes with immediate effect.

10 million interested in joining the board of a charity, but confusion remains about the role of a trustee

November 8, 2011

NOVEMBER 7, 2011

  • 21% of British adults (10 million[1]) would like to sit on the board of a charity
  • Confusion about trusteeship remains: 51% of people don’t know what a charity trustee is
  • Young person’s game: 18-34’s are more interested in joining the board of a charity (28%) than retirees (15%)

Getting On Board, the charity that promotes board-level volunteering, reveals today that confusion remains about the role of the trustee, despite the high numbers interested in joining the board of a charity. Although 10.2 million people (21%)[1] confirmed they would like to sit on the board of a charity, significantly less (12%) stated interest in becoming a charity trustee – a role with very little fundamental difference. This figure suggests that British people remain unaware of the exact role of the trustee and is confirmed by 51% admitting that they don’t know what a charity trustee is.

The research also found that almost twice the number of 18-34 year olds are interested in joining the board of a charity (28%) as over 55 year olds (15%). This fact directly contradicts any outdated views of trustees as older retired professionals, and this high level of interest will encourage charities to actively recruit younger trustees to their boards.

London emerged from the research as the most charitably inclined location, with three in ten Londoners (29%) interested in joining the board of a charity. Although interest was reflected through the country, the South East and East Midlands saw the lowest level of interest in trusteeship at 16%.

This study was commissioned to mark Trustees Week (31st October – 6th November), the national campaign dedicated to raising awareness of trusteeship. Whilst there are around 800,000 trustees in England and Wales, Charity Commission estimates suggest that almost half of charities have a vacancy on their trustee board.

Sarah Hodgkinson, Chief Executive of Getting on Board, commented on the research: “It’s clear that there is a huge amount of interest in trusteeship – but confusion still remains. Our study shows that over half of the public don’t know what a trustee is – but two in ten would be interested in joining a board. Charities need to work together to ensure that the wider public have a better understanding of what a trustee is, to help take advantage of the broad range of valuable skills available in the private, public and voluntary sectors.”

Dame Suzi Leather, Chair of the Charity Commission, said: “Clearly the charity sector needs to do more to explain what a charity trustee is so that people realise what a fantastic opportunity it can be to make a real difference. Trustees are the driving force behind every great charity and are responsible for making decisions about a charity’s direction and activity. I have met so many trustees who tell me it’s the best thing that they have ever done and would recommend it to others.

“But as well as making a huge contribution to society, trusteeship can bring real benefits the individual. By being on a charity board trustees learn new skills, many of which can help them in other areas of their life. I would particularly encourage charities to consider recruiting as widely as possible for new trustees and to consider young adults in particular – they can add a new perspective to the charity’s work as the donors and volunteers of the future.”

What is a trustee? Trustees and their responsibilities (from the Charity Commission)
Charity trustees are the people who serve on the governing body of a charity. They may be known as trustees, directors, board members, governors or committee members. The principles and main duties are the same in all cases.

(1) Trustees have and must accept ultimate responsibility for directing the affairs of a charity, and ensuring that it is solvent, well-run, and delivering the charitable outcomes for the benefit of the public for which it has been set up.

*2,012 nationally weighted online Interviews were carried out by Opinium Research online from 28th to 31st October 2011. Respondents were asked: ‘Would you be interested in becoming a charity trustee?’ and ‘Would you be interested in joining the board of a charity close to your heart?’

1. 10,22,1960 million calculated as 21% of 48676000 (According to ONS 2009 UK population statistics, there are 48676000 adults in the United Kingdom)

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