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Show Me the Money

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O n the afternoon of November 17, Benmosche met with Feinberg in Washington to continue negotiations over a deal. A source familiar with the meeting described it as “constructive.”

The challenge for Geithner and the Obama White House in this fight is to extract maximum negotiating leverage and know what you can afford to lose. The stakes are higher, of course, because of what was surrendered earlier. On November 16, the TARP inspector general, Neil Barofsky, ruled that the Fed probably could have extracted concessions from Goldman Sachs and others but didn’t. It’s now clear that was one of the truly major blunders of the bailout. “If they had let us fail, it would have been game over for Goldman, Morgan Stanley, Merrill Lynch, Wachovia,” says a senior FP executive. “Not because they had exposure to AIG but because the market had no liquidity. You can’t survive in a world without leverage.”

It’s the moral-hazard problem writ on a truly gigantic scale: Goldman, Morgan, Merrill, et al., took risks—for what was dealing with AIG but a risk—and didn’t ultimately have to pay any of the costs. AIG should not be a place to get rich, after all that’s happened. But the AIG FP traders are right that, in some sense, they’re stand-ins for the sins of an entire class.

On Wall Street, there is a debate about just how fundamental Feinberg’s rulings will be in changing the culture of greed. At the non-TARP firms—Goldman Sachs, Morgan Stanley, JPMorgan Chase—there’s serious money to be made. “Bonuses will be up 35 percent this year over last year,” says Michael Karp, founder of the Options Group, a compensation consultancy. At the TARP firms, there is one view that an inability to pay will drive the big rainmakers away. “Any superstar like Andrew Hall is going be crushed,” one compensation consultant says. Adds Gary Burnison, CEO of the executive search firm Korn/Ferry International: “It’s a fair-market society; at some point, you’ll say enough is enough.”

Feinberg told me he doesn’t see binary choices. His job is to weigh competing interests and “come up with a fair number.” The problem is that fairness from a Wall Street point of view is very different from how most Americans think of the word. Part of Feinberg’s job is to bring them into harmony. “The companies will stay in business, they’ll thrive, and the taxpayer will get all, or some, of their loan back,” he says.

And for AIG, that question is a $180 billion gamble. The FP traders are well aware of their leverage in letting everyone know the stakes. “As a trader,” one senior FP executive says, “you’re only as good as the hand you have.”


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