Goldman Sachs Still Generating Huge Profits, Still Paying Out Old-School Bonuses

It seems like only yesterday that Goldman Sachs was announcing its first quarter profits to an aghast world, and since then they’ve been issuing shares to pay off their government bailout cash, and probably closing the doors and curtains in their offices before having a Krug fight. We wondered whether the fabulous profits borne off a less competitive banking market, inherited assets, and fees from capital raising, would manage to carry on for very long. Well, they managed to do so over the last quarter at least – Goldman just announced earnings of $3.44bn for the last three months. That’s 65% more than the same quarter last year. That’s $38m a day. Gah!

Goldman staff are therefore set to get some whopping bonuses – estimates for staff pay packages vary from $770,000 to $900,000 for this year. It goes to show how little compensation reform is managing to keep up with the pace of change – these are short-term bonuses, not tied to the ongoing financial health and profitability of the company. Which according to even their own people, isn’t likely to stay as healthy as it is now.

“We’re in a volatile business”, admitted their chief financial officer, David Viniar, yesterday. Take their exposure in the real estate market, running to $8bn. Goldman lost half a billion dollars in that area over the last quarter, but had the losses neutered by its other trading. But as investment bank Cazenove warned today: “the majority of GS’ revenues are generated in areas that are inherently difficult to predict”. Citigroup suggested that “while 2Q results were strong, they also raise the question where will future growth come from, since it seems clear that core FICC results [from securities trades] ($7.8 billion) and equity trading ($2.2 billion) are not sustainable”. Meanwhile, Peter Eavis at the WSJ notes that Goldman’s value-at-risk level, the estimate of potential one-day losses during adverse trading conditions, is at its highest level since 1999.

That said, they’re not particularly exposed at the macro level – they still have a lot of capital tied up, which, while they might ditch some of it over the next few months, is going to keep them insulated against any further bumps on the road to recovery. That’s no reason though to keep plugging away with a compensation structure that belongs to a previous, reckless age. If Goldman’s staff are being rewarded for the banks’ systemic successes rather than those in real terms, then it distorts their worth to the company; we need a Hester-style approach, with payouts delayed until ongoing profitability is met, to trickle down to the non-executive workers.

Tomorrow we get to see how well JP Morgan are doing – their health will impact upon Goldman, as despite their retail banking assets dragging them down somewhat, JP can start to take market share from Goldman on the new, lean Wall Street. But for now, Goldman has darted into the chaos left by the financial crisis, and mopped up everything it can lay its hands on while the legislature lumbers around getting its plans together. They may never see another bubble like it, but if you’re a Goldman employee, 2009 was the year when you stopped having to worry about your future.

Posted by Ben Beaumont-Thomas in Hot Money | July 15, 2009 12:08PM |