New Standard for Goldman Sachs Bonuses: Don't Embarrass the Firm

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Pedestrians walk by Goldman Sachs headquarters in New York, NY, Monday, April 15, 2013.
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Goldman Sachs (GS) bonuses: the envy of Wall Street. For 2012, the firm doled out an average of $399,506 in compensation to its employees, up nine percent from the previous year. By contrast, the schmoes at JPMorgan Chase (JPM), the nation's largest bank by assets, only got an average of $216,928, slightly less than in 2011. (Those figures via The Wall Street Journal.)

But Goldman bankers have a new criterion to consider when striving for a big reward at bonus time -- a standard that even its CEO and chairman Lloyd Blankfein has memorably struggled with in recent years: Citing a company report, Bloomberg reports that "the firm is reviewing employees' efforts to protect its reputation and win clients' trust."

This directive is coming from the management of a bank whose leader once told the Senate "I don't believe there is any obligation" to inform investors when the firm has taken a position against a product it's selling. Only in finance.

According to Bloomberg, Blankfein himself "led 23 three-hour sessions in 2011 and 2012 with partners and managing directors that stressed personal accountability and included a case study about communications within the firm and with clients." In a statement, Blankfein said the company's business standards committee -- created in May 2010 after a cluster of particularly disastrous transactions led to a lawsuit by the Securities and Exchange Commission, and the Senate hearing referenced above -- "is part of a much larger, ongoing commitment to learn the right lessons from recent experiences."

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How investment bankers are evaluated come bonus season may seem a rarefied concern, but more than one study has found that Wall Street's biggest firms -- JPMorgan, Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), Goldman and Morgan Stanley (MS) -- receive huge subsidies from the government, whose perceived commitment to rescuing them if they get into trouble decreases their borrowing costs. Bloomberg Markets magazine will report in its June issue that this implicit taxpayer guarantee was worth $82 billion in lower returns on big bank bonds from 2009 to 2011. Add in tax breaks and money from the Federal Reserve, and it turns out Wall Street has benefited from Uncle Sam to the tune of $102 billion since the start of 2009, according to a World Bank financial economist.

A previous study cited by Bloomberg View reported a higher subsidy figure, $83 billion a year, and noted that the top five banks (all of the above except Morgan Stanley) account for $64 billion of that total, "an amount roughly equal to their typical annual profits." While the number is in dispute, even Fed chairman Ben Bernanke has conceded that a subsidy exists. If that's so, big banks like Goldman have taxpayers to thank at least in part for the cash they're able to lavish on employees.

Just last week, Goldman released a report denying the existence of such a subsidy, arguing instead that the too-big-to-fail effect is a funding disadvantage of 10 basis points -- i.e., that the leviathans of Wall Street currently pay an average 0.10 percent more than financial small fry do. Size provided a slight borrowing benefit from 1999 to 2007, which "widened sharply" during the crisis but then reversed, Goldman contends. Now, other factors besides taxpayer guarantee are at work, like the added liquidity of big bank bonds, which "itself could account for the observed funding advantage for the largest banks." The Independent Community Bankers of America isn't having it: According to Bloomberg, "of 15 studies it reviewed all except one by JPMorgan found a 'significant' too-big-to-fail subsidy. The resulting cost savings enjoyed by the 10 largest banks has more or less equaled or exceeded their net income, the community bank trade group said." The ICBA is in favor of a bill to increase capital requirements for banks with more than $500 billion in assets, a bipartisan attempt to end the assumption of corporate welfare for Wall Street.

So since we're probably backstopping Goldman bonuses to a significant extent, let's review some of the reputation-damaging incidents of the last few years that Blankfein & Co. are trying to learn from -- and which the firm's employees will have to avoid repeating if they hope to take home some of that subsidy. The following list is not exhaustive: It was already Goldman policy to claw back compensation in the event of illegal behavior, so insider trading by a board member, say, has been omitted.

Goldman Bonuses Now Dependent on Not Embarrassing the Firm
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New Standard for Goldman Sachs Bonuses: Don't Embarrass the Firm

We should start with the transaction mentioned above, which involved a mortgage-related security called Abacus 2007-AC1. This was one of many collateralized debt obligations that Goldman created, sold to investors, and bet against in the years before the crash, making lots of money when the underlying assets lost value. Other banks did basically the same thing, spreading the rot throughout the financial system as institutional investors such as pension funds and insurance companies bought CDOs based on bad debt.

This seems like pretty objectionable behavior, but as we've seen, Blankfein himself professed to find it OK in principle. What's not OK, one imagines, is for a pink-slipped Goldmanite who worked on the Abacus 2007-AC1 deal to write a roman à clef called "How I Caused the Credit Crunch: An Insider's Story of the Financial Meltdown."  But that's what Tetsuya Ishikawa did in 2009. I'm not sure, though, how the company can protect against this contingency, since a laid-off employee has no bonus to lose. On the other hand ...


... Fabrice Tourre was still at the firm when he brought Goldman into disrepute. Here again, we are concerned with Abacus CDOs, which M. Tourre worked to present as more attractive investments than objectivity would suggest. He tried to get Moody's Investors Service to rate component assets more highly, and did not disclose to clients that a hedge fund collaborated with Goldman in selecting the bonds that made up the products, before betting against them as well.

Rough stuff, but financial transactions can usually be spun to lawmakers and the public as complicated processes with utilities unclear to the uninitiated. Tourre made the mistake, however, of composing eminently-excerptible emails in which he explained what was going on, albeit with a weird sense of humor. The securities in question were "like a little Frankenstein turning against his own inventor", he wrote, "a 'thing', which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price." Nevertheless, he "managed to sell a few abacus bonds to widow (sic) and orphans that I ran into at the airport". Most revealing of all, Tourre offered the following ironic explanation of why Goldman's double-dealing wasn't so bad:

"Anyway, not feeling too guilty about this, the real purpose of my job is to make capital markets more efficient and ultimately provide the U.S. consumer with more efficient ways to leverage and finance himself, so there is a humble, noble and ethical reason for my job ;) amazing how good I am in convincing myself !!!"

Which literally makes a mockery of the standard defense of investment banking's social value.
Moving backward in time a bit, we come to one of the all-time corporate PR blunders, which happened when Goldman opened its headquarters to journalists in the fall of 2009, offering access to Blankfein in an apparent attempt to improve its public image. Talking with a Times of London reporter about capping compensation -- which Blankfein argued against, using "ambition" and "success" as surrogates for "money" -- the CEO grinned impishly and said he was 'just a banker "doing God's work.'" (The impish grin is in the original.) Defenders of Blankfein argued that he was just kidding, not realizing that this cynical jocularity was precisely what made the remark so distasteful. Blankfein's bonus for 2009 was $9 million in stock -- no cash -- "a modest payday by Wall Street standards," according to the Associated Press. "It's almost as if he's taking a bullet for everyone else," observed an awed "compensation consultant."
After the "God's work" debacle, Goldman sought a different means of acquiring good will: buying it, with a $500 million investment in small businesses struggling through the recession. But as The New York Times observed, that sum, announced in mid-November 2009, represented approximately 3 percent of the $16.7 billion earmarked for compensation up to that point. Accompanying this gesture was a vague expression of contrition by Blankfein, who said of his firm, "We participated in things that were clearly wrong and we have reasons to regret and apologize for." What those wrong things were he did not specify, thereby omitting a crucial part of any apology.

When Greg Smith quit Goldman in March 2012 after almost 12 years there, he went out with a bang, calling the place "toxic and destructive" in the pages of The New York Times. But the best revelation in his insider account was the assertion that he had "seen five different managing directors refer to their own clients as 'muppets,' sometimes over internal e-mail." There was also something about "ripping eyeballs out," which seems like a grotesque intensification of "rip-off." So not identifying your clients with absurdist puppets, or fantasizing about blinding them when they make you money, is probably now a prerequisite for a good payday at Goldman. Assuming all this stuff about business standards is real and not a PR ploy.



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