In defence of the Squid (sort of) | FT Alphaville

In defence of the Squid (sort of)

A rare – and unexpected – defence of the bank-that-everyone-loves-to-hate comes from James Kwak at BaselineScenario who (quite correctly) observes that not many people have commented on Goldman Sachs’s “stunning” compensation announcement on January 21.

Just to remind you, this from the FT’s report:

Goldman Sachs sought to counter the public furore over its pay practices by cutting the size of its bonus pool in the fourth quarter but it still rewarded its employees with a 48 per cent increase in compensation during 2009.

As the year progresses, Goldman sets aside revenues to cover compensation costs. In the final quarter of last year, Goldman withdrew money from the pool, while diverting bonus money intended for senior bankers to charity.

The drop in compensation costs booked in the final quarter helped lift Goldman’s profits above analysts’ expectations in spite of a slowdown in the final weeks of 2009. For the year, Goldman earned a record $13.4bn. “What we attempted to do was to be fair to our people . . . but to show restraint,” said David Viniar, chief financial officer.

Perhaps, ventures Kwak, the lack of attention was because Goldman’s announcement came out on the same day as the “Volcker Rule,” or perhaps because bloggers are not wired to say nice things about Goldman.

On Kwak’s first theory, we’re wondering if it was amazing prescience or just plain luck that prompted Goldman to delay its compensation announcement by a week to what turned out (conveniently) to be “Volcker day”.

Regardless of the reasons, Kwak adds bravely: “I’m going to make the sure-to-be-unpopular statement that Goldman did the right thing here.” He continues (emphasis and edits are ours):

In their press release, Goldman trumpeted the fact that compensation was down 20% from 2007 and the payout ratio was the lowest ever. They neglected to mention that total compensation was the same as in 2006 and over 30% higher than 2005, when per-employee compensation was $500,000… But still, $500,000 is better than $660,000 (2007) and a lot better than $700,000 (2009 through September).

I’m sure most people wrote this move off as a public relations stunt, and maybe it was. Maybe management leaked to employees that 2010 bonuses will be extra-good to make up for 2009. But there’s another possibility, as [Felix] Salmon pointed out, which is that Goldman realized it simply doesn’t have to pay its employees as much. Goldman is the premier investment bank in the world, and the gap between it and its rivals has gotten much bigger; if someone is unhappy with his bonus, where is he going to go? Citigroup? Bank of America Merrill Lynch?

If Goldman’s management team really wants to maximize shareholder value, then this is exactly what they should be doing…

But the big test, of course, will be next year, adds Kwak:

My prediction is that this is just a PR stunt and next year (assuming it is a good one for the banks), per-employee compensation at Goldman returns to at least $600,000 and maybe $700,000. But I would love to be wrong.

Finally, on another Goldman-related front, as Reuters noted this week, some are already speculating that the Squid is already considering going private this year.

Doug Kass, hedge fund manager and pundit, for one, has made Goldman going private among his “20 Surprises for 2010.”

Meanwhile, adds Reuters, Tom Sowanick, chief investment officer of the Omnivest Group in New Jersey said Goldman is “already in the process of figuring out how to go private”. “Goldman did not need, or want, the TARP money to start with and there is no reason for them to keep their bank charter and remain a public company.”

Related links:
Goldman overpay? Surely some mistake – FT Alphaville
Adding up levy’s costs for global banks – FT
Goldman Sachs, in cross-hairs, mulls options – Reuters
Ailing banks favour salaries over shareholders – NYT