The Vilification of Goldman Sachs’ Pay Practices

Mike Santoli has an interesting perspective on the furious reactions to Goldie’s bonuses in this week’s Barron’s:

“Absent in the rage against people earning impressive pay after their firms got public help is the key question: Do we want the firms that received aid to continue operating as autonomous, profit-seeking businesses, or as quasi-utilities operating under tight government restrictions?”

That is the key disagreement I have had with those folks furious about the bonuses: The firms that paid back the TARP — do we never allow them to resume control of their businesses? Are they now “non profits?” Who is appropriate to determine their pay packages — their owners, board members and senior management — or the Government?

Santoli further suggests we consider the means and implications of explicitly limiting pay:

“Goldman, operating at less than half the leverage of a couple years ago, last quarter produced a return on equity well below what it logged in peak years. It set aside a much smaller portion of its revenue to employees last quarter than it typically has, 43%.

What if Goldman set aside half as much as it did for bonuses, say 20% of revenue. Where does the other half go? To the bottom line, where it builds up book value, which could allow Goldman to leverage a greater capital base and trade more and become even bigger in the markets it plays in, likely with fewer of the better people to oversee the risk as they could go find a new employer willing to pay. Or do we want to legislate away the chance for a Goldman to earn even what it did last quarter? Or require that the government get some percentage of the take? On what legal or practical basis, at this stage?

If Goldman weren’t exploiting the market opportunities it is, those opportunities would still be there, and others would get to them — whether other banks or hedge funds — and would pay their people (maybe some hired from Goldman) the big money.

Let’s get to the true heart of the matter” It is that these folks — many of whom are assholes — make oodles and oodles of money, much more than they would be permitted to if a munificent and just deity were paying closer attention to this little ball of earth and water:

“It has long been true that the “average” employee on Wall Street is overpaid, his or her bonuses dragged higher by those who make huge scores for their firm. The solutions — bonuses based on multi-year, risk-adjusted performance; “clawbacks” if trades go bad after bonuses based on them were paid; more pay in the form of long-vesting company stock — are being implemented by the remaining firms.This isn’t the same as saying “the market will sort it out,” but that any new rules or structural changes need to be considered from all the angles. And remember that the most important consequences of such measures are often the unintended ones.”

Interesting stuff, worth thinking about.

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Previously:
Much Ado About Nothing $23B: Goldman Sachs Bonus (Oct 14, 2009)
http://www.ritholtz.com/blog/2009/10/much-ado-about-nothing-23b-goldman-sachs-bonus/

Goldman Sachs: “A Bunch of Clever Thugs” (Oct 15, 2009)
http://www.ritholtz.com/blog/2009/10/goldman-sachs-%E2%80%9Ca-bunch-of-clever-thugs%E2%80%9D/

Source:
Will This Week’s GDP Validate the Rally?
MICHAEL SANTOLI
Barron’s October 26, 2009
http://online.barrons.com/article/SB125633731314404773.html