12.10.09

Goldman's Bogus Bonus Ploy

Former Goldman managing director Nomi Prins says the Wall Street giant wants the public to believe it slashed executive bonuses—but behind the spin, compensation is higher, taxes are deferred, and risk is way up.

It’s so damn tough to be Goldman Sachs nowadays. Before its 1999 IPO, the firm didn’t have to navigate the murky waters of public opinion. Of course, it got no public backing for its risk, either. Everything has a price.

But now that price has, as they say on Wall Street, been “factored in.” And predictably, as its total compensation payouts are set to hit yet another all-time record, Goldman has again demonstrated its aptitude for well-timed, hollow spin.

The notion that this cosmetic pay alteration will somehow reduce the firm’s overall risk is as far-fetched as the possibility that it will give back the $12.9 billion it got from the government through AIG.

In another pre-emptive strike at any possible external monetary restrictions, the firm announced Thursday that it would change the compensation structure for its 30-person management committee, made up of 26 men and four women. They would have to forgo the cash part of their bonus and instead receive something Goldman is calling “Shares at Risk” (read: shares with a tiny, meaningless string reducing “excessive risk” attached) five years from now. Bonus sizes, of course, remain intact. No specific risk-containment strategies were mentioned.

After patting himself and the firm on the back again—God’s work is never done!—Chairman and CEO Lloyd Blankfein reminded the public “that compensation accurately reflects the firm’s performance and incentivizes behavior that is in the public’s and our shareholders’ best interests.”

To placate shareholders further, after some fairly large ones started demanding reduced bonuses a couple of weeks ago, Blankfein promised that they would get an advisory vote on compensation at the annual shareholders’ meeting in 2010.

Ostensibly, this is to “reinforce the importance of risk controls to the firm and to make clear that… compensation practices do not reward taking excessive risk.” To drive the whole risk-mitigation point home further, Goldman also introduced a claw-back provision on the bonus shares in case the execs receiving them engage in “materially improper risk analysis” in the future.

That’s all very sweet, but considering Goldman operates on the basis of taking risk, and a large portion of discretionary pay comes in the form of restricted shares that also can’t be used right away, we’re not talking about a consequential risk-reduction strategy here.

Charlie Gasparino: Goldman’s PR Chief in the Hot SeatIndeed, Goldman gets a higher portion of its revenue from trading than any other big bank. So far, for annualized 2009, the percentage of revenue from its trading and principal investment (long-term speculative position taking) division is 79 percent, or $38 billion out of $47 billion, compared to 41 percent, or $9 billion in 2008, and 68 percent in 2007 and 2006. (Not that one can compare these numbers precisely, as Goldman Sachs changed fiscal year-end dates twice within a four-month period.)

The firm posted a record profit for the second quarter of 2009 and did almost as well during the third quarter. This was while floating on $43.4 billion in government subsidies, not including the $10 billion TARP repayment.

But Goldman also takes more risk than the other big banks. Its measure of average daily risk fluctuation, or VaR (Value at Risk), reached a record $245 million per day during the second quarter, an increase of 24 percent over last year’s crisis quarter. The figure declined to $208 million in the third quarter, but the first nine months’ average was $231 million vs. $174 million per day in 2008, a 32.8 percent increase in risk.

Aside from the risk-reduction angle in Thursday’s announcement, these compensation restraints are only valid for 2009. If the tides of public opinion and possible government scrutiny change, the management committee could technically receive double or more in cash next year. As it is, the top five committee members made $322 million in 2007, the year before Armageddon befell Wall Street. As for related cash bonuses percentages, cash comprised 37 percent of total discretionary pay in 2007, and 0 percent last year. Given that Goldman’s overall 2009 compensation expectation is about 10 percent higher than 2007, the top five are looking at a ballpark compensation of $354 million.

The side benefit of deferred shares is that any income tax is deferred, as well. The entire maneuver also gets around the fear of the U.S. doing anything near what the U.K. and France are doing—invoking a one-time 50 percent tax on discretionary bonuses. You can’t tax what isn’t there.

Not that there’s any chance such a tax hike would happen here. Back in March, the House of Representatives voted 328-93 for a 90 percent tax on the cash portion of bonuses over a $250,000 limit for firms floating on $5 billion or more of TARP money. The legislation went nowhere fast. The Senate barely bothered to consider. Meanwhile, pay czar Kenneth Feinberg just bowed to pressure from five AIG executives who threatened to walk if they’d didn’t get paid commensurate with their brilliance. His reaction to their petulance was to say, sure, I’ll think about it.

Once again, Goldman is attempting to spin nothing of consequence into something of meaning. Lost in all of this public largesse and faux concern is how these bonuses were made to begin with—by taking risk.

Thus, the mirage of this compensation modification being a risk-mitigation move should be viewed as just that. The firm’s profits, indeed its existence, are predicated on two things: federally subsidized capital and taking risks with it. This year, that risk paid off. Next year, it might not. The notion that this cosmetic pay alteration will somehow reduce the firm’s overall risk is as far-fetched as the possibility that it will give back any of the $12.9 billion it got from the federal government through AIG.

Of course that’s not going to happen. Besides, it was perfectly legalized pillaging. Goldman Sachs may be guilty of excessive risk-taking and the compensation that follows, but the legislation that allows the combination is guilty of immense enabling.

So we are left with another masterfully orchestrated, self-interested Goldman PR move designed to get the government off its back, coded in nicely manicured public good and risk-reduction terms. And once again, it is outsmarting the comatose lawmakers and regulators.

Nomi Prins is author of It Takes a Pillage: Behind the Bonuses, Bailouts, and Backroom Deals from Washington to Wall Street (Wiley, September, 2009). Before becoming a journalist, she worked on Wall Street as a managing director at Goldman Sachs, and running the international analytics group at Bear Stearns in London.