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Whitman's Wall Street ties raise recession questions

With the San Francisco Chronicle, California Watch investigated Meg Whitman’s relationship with Goldman Sachs, the Wall Street investment bank that is also a major player in state public finance.

Flickr photo by Cali1234

Our story, published Sunday, focused on conflicts that could arise if the wealthy Republican business executive is elected governor. Whitman has been on Goldman’s board, she keeps part of her $1.2 billion fortune in Goldman investment funds, and, in her days at eBay, steered underwriting business to Goldman and received insider stock deals from the firm.

Meanwhile, Goldman has underwritten billions in state bonds, manages a billion dollars of state pensioners’ money, and has pitched the state on many other projects, from privatizing the California Lotto to building toll roads, published reports show.

Whitman wouldn’t talk to us, but her lawyer, Tom Hiltachk, said concerns were overblown and she would be scrupulous in following state conflict laws. Still, some experts said problems could arise, even if Whitman puts her fortune in a blind trust, as promised.

But when it comes to Whitman and Goldman, other questions may arise as the campaign heats up: How much responsibility does the Wall Street firm bear for bringing on a crippling recession that still besets our country more than a year since onset?

And if blame is to be apportioned, how much should be laid to Whitman, who left Goldman in 2002 after 15 months on the board?

For anti-Goldman partisans, the answer to the first part of the question is obvious.

“You can connect Goldman Sachs to everything bad that has happened in the financial crisis,” says Tom Mattzie, president of Washington, D.C.-based Accountable America, a nonprofit that advocates tougher banking regulations.

“For a politician, a connection to Goldman Sachs is the scarlet letter.”

Rolling Stones’ Matt Taibbi has laid out the indictment of Goldman in over-the-top language; Michael Lewis is nearly as tough on the firm when he talks about his new book.

At any rate, three issues that resonate in recession-battered America arose while Whitman served on Goldman’s board, according to records and news accounts.

One is executive bonuses.

As we reported, Whitman served on Goldman’s compensation committee, which approved $79 million in bonuses for then-CEO Henry Paulson and four top aides in two pay cycles. Paulson’s 2001 bonus was $11.5 million, 19 times his salary.

Most objections to mega-bonuses of this sort, including those raised in shareholders’ lawsuits against Goldman, rest on notions of simple fairness: It’s grotesque to pay some Americans this kind of money at a time when millions of others have been out of work for a year, the argument goes.

Some corporate reformers also contend that paying mega-bonuses damages the nation’s economy, by inciting corporate managers to make risky and short-term decisions. That’s part of the dynamic that brought on the financial crisis. Goldman, under pressure from shareholders, recently geared back on bonuses.

During Whitman’s time on the board, should Goldman’s compensation committee have resisted paying the big bonuses?

“When you’re an outside director, it’s difficult to be the one who speaks up,” says Michael Lapham, director of the Boston-based Responsible Wealth Project, a nonprofit that campaigns for limits on executive pay. “But that’s what you would look to a leader to do.”

A second issue that resonates involves mortgage-backed securities, the financial instruments that, when the housing bubble burst years later, were blamed for plunging the nation into economic crisis.

While Whitman was on the board, Goldman invested $140 billion in mortgage-backed securities. Long after she left, the firm unloaded $135 billion of bonds tied to risky home loans, according to published accounts, essentially dumping the assets before the market plunged.

As a result, “Goldman itself didn’t suffer the consequences in the meltdown,” says Michael Garland of Change to Win, a corporate reform project backed by a coalition of labor unions. “But they may share significant responsibility for spreading risk throughout the economy.”

Finally, starting in 2000 but continuing in 2001, while Whitman was a director, Goldman bankers helped the nation of Greece to borrow billions at a time when its large budget deficits threatened to exceed what was allowed for admission into the European Union.

Goldman created a portfolio of complex derivatives called currency swaps. They allegedly helped the nation mask the size of its national debt, according to disclosures initially reported in the German magazine Der Speigel.

The transactions came to light after the economic downturn plunged Greece into crisis, and for a time, threatened the European Union as well.

In February, Federal Reserve Chairman Ben Bernanke told Congress that U.S. regulators were investigating “Goldman Sachs and other companies and their derivative arrangements with Greece,” saying he was particularly concerned about using financial instruments “in a way that intentionally destabilizes a company or a country.”

Goldman has said the accusations are “just plain wrong.”

Corporate directors are legally responsible for signing off on major strategic decisions, experts say.

Should Goldman’s board have intervened?

Paul Lapides, director of the corporate governance center at Kennesaw State University in Georgia, calls the recession “a worldwide meltdown caused by American investment bankers and some of the brightest people in the world.”

Corporate directors are supposed to make responsible decisions, but they’re not expected to see into the future, he says, and you can only take notions of fiduciary accountability so far.

“There’s a difference between being reckless and not seeing it coming,” he says. In the recession, “a lot of really smart people didn’t see it coming.”

At times since the onset of the recession, Goldman has expressed contrition, stating on its Web site that it is working “to address the underlying abuses of the global financial crisis.” But CEO Lloyd Blankfein has also defended his company, saying Goldman is doing “the Lord’s work” on Wall Street. In a recent Bloomberg Business Week, company executives expressed frustration at the criticism of the firm.

“When it comes to it role in the financial crisis, Goldman Sachs has a message for the world,” the headline reads. “Not Guilty, not one little bit.”

Hiltachk, Whitman’s lawyer, said it was “plainly ridiculous” and “a stretch too far” to hold the candidate responsible for the problems of Wall Street because of her service on Goldman’s board. He didn’t respond to questions about Whitman’s decisions on the board.

Meanwhile, the Democratic strategists at Level the Playing Field, the independent expenditure committee that has been teeing off on Whitman for weeks, went after her on the Goldman issue Monday.

“Whitman’s record at Goldman places her directly at the scene of the crime where the middle class got turned upside down, and where a handful of individuals, including Meg Whitman herself, made millions at public and shareholder expense,” said Ace Smith, the committee’s senior strategist and a former Hillary Clinton adviser.

“Whitman needs to explain whether she sold California short and bet against the interests of America’s middle class.”
 

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