Goldman Sachs Group CEO Lloyd BlankfeinWOLFGANG RATTAY
A rare loss potentially looms for Goldman Sachs. A growing number of analysts reckon the Wall Street titan will slip into the red when it soon announces third-quarter results. Given the recent state of the markets, it's not hard to imagine. But most assessments also expect Goldman will sock away nearly half its revenue to cover compensation. Top brass may need to grin and bear draining the pool.
The numbers don't look promising. Figure Goldman reports a $180-million (U.S.) quarterly loss, as Barclays Capital predicts while assuming chief executive Lloyd Blankfein sets aside $1.8-billion for pay and benefits. Halving that would swing net income to about $500-million.
That's no windfall either. It equates to return on equity of just below 3 per cent. Even if Goldman took the unusual step of leaving the comp line empty for the quarter, it would fail to reap enough to meet its cost of capital.
Such restraint would nevertheless show a willingness to put shareholders first. And it wouldn't necessarily be just a short-term solution. After all, Goldman's first half wasn't great either. Excluding the one-off cost of redeeming Warren Buffett's preferred stock, it posted a return on equity of 10.2 per cent. That's around half Goldman's recent historical average through the cycle.
Achieving a more respectable 15 per cent would have required slashing the comp ratio to 33 per cent, a tad lower than the 2009 distribution rate. Lower pay might have encouraged some to leave, though rivals weren't exactly swimming in money and overall Goldman would still have squirrelled away an average of $179,000 per staffer.
The other option, of course, is to cut staff. That costs, too, though, especially with more stock payouts that take several years to vest. Keeping average pay higher in the first six months with a shallower compensation pool would have meant showing a quarter of employees the door, undermining morale and the ability to satisfy clients.
Goldman may yet hold out longer before trimming pay. But with no obvious signs of business picking up, bankers and traders may need to get used to the idea of sacrificing more of their waning spoils to keep shareholders on board.