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Goldman Forced To Sell Valeant Shares As CEO Stock-Pledged Loan Hit 100% LTV

Back in late 2008, Goldman was faced with a serious problem: as its stock was tumbling, numerous employees found themselves in a hot spot as they had taken out loans pledged by Goldman stock. As the stock cratered, suddenly the loans hit 100% LTV, or above, and as a result they got margin calls. Many scrambled to sell other assets to cover these calls. Of course, the biggest taxpayer-backed bailout followed, Goldman stocks surged, and the rest is history.

7 years later, the story is repeating itself, only this time instead of Goldman executives it was the CEO of Valeant, Michael Pearson, who was in the same tough position.

According to a just issued press release, Valeant's CEO had taken out a $100 million loan pledged with 1.3 million VRX shares to Goldman Sachs. Well, when the stock tumbled below $80 yesterday, the LTV on the loan hit 100% and as a result Goldman had no choice but to sell, showing how pro-cyclical and self-sustaining stock selloffs can be in the current environment in which many executives, assuming their stock would keep rising in perpetuity, took out loans pledged with stock, only to be shocked when said stock plunged.

From the release:

Valeant Pharmaceuticals International, Inc. (NYSE: VRX) (TSX: VRX) stated today that 1,297,399 shares pledged to Goldman Sachs to secure loans made to chairman and chief executive officer J. Michael Pearson were sold by Goldman Sachs on November 5, 2015.  Goldman Sachs held the shares as collateral for loans extended to Pearson.

 

As disclosed in the company's proxy statement filed on April 22, 2014, the company's board permitted Pearson to pledge approximately two million shares. As of the company's most recent proxy statement, filed April 9, 2015, those shares represent approximately 20.19% of his shares beneficially owned. Pearson pledged those shares to Goldman Sachs as collateral for loans of approximately $100 million that he used for, among other things, financing charitable contributions, including to Duke University, and helping to fund a community swimming pool, purchasing Valeant shares, and meeting certain tax obligations related to the vesting and payment of Valeant compensatory equity awards. Goldman Sachs required repayment of the loans, and has informed the company that it sold the shares it held as collateral in satisfaction of the loans.  

 

After repayment of the loans with the proceeds from the sale by Goldman Sachs, the loan agreements will terminate and there will be no amounts outstanding under those agreements.

 

"Since joining Valeant, I have not sold any shares provided to me as compensation, and it was not my desire that shares be sold now," Pearson said. "I have complete confidence in Valeant's ability to move forward and continue meeting our commitments to patients, doctors, and shareholders."

 

In January 2015, Pearson agreed to not receive a base salary and instead be compensated exclusively through cash and stock incentive awards tied to performance.