Goldman Sachs having record year, will pay record bonuses
Banking is back, baby! It cost investors $30 trillion in losses and took a $12.8 trillion taxpayer funded bailout, but who cares? We know bankers are running the world and the ones who survived are taking advantage of the losers -- and that includes taxpayers who helped them. Goldman Sachs Group (GS) is rumored to be having a record year which will yield record bonuses, and banker base salaries -- which are a small proportion of total compensation when times are good -- are rising 60 percent.
How did Goldman do it? Not much detail -- but that is true even when Goldman files financial reports with the SEC. Rumor has it that "a lack of competition and a surge in revenues from trading foreign currency, bonds and fixed-income products" has sent Goldman profits soaring. Bankers will get "bumper bonuses" if, as predicted, 2009 is Goldman's most profitable year.
Meanwhile, banks are boosting banker base salaries. Market salary rates for managing directors have jumped 60 percent from about $250,000 a few months ago to $400,000. And banks are once more offering guaranteed bonuses to staff approached with lucrative offers by rivals. The salary increase is not that big of a deal for bankers, what really matters for them is the bonus. And it's too early to tell how many other banks will pay Goldman's record ones in 2009.
Thanks to a financial regulatory plan that, as I posted, puts a fresh coat of paint on the shaky foundation that got us into this $43 trillion catastrophe, we will soon be able to resume pretending that everything is fine again.
One little problem: since we have done nothing to change the financial system that got us into this mess and since no other industry can provide the campaign cash that Wall Street pays, there is not going to be a fundamental fix to the system.
Will taxpayers get back the $43 trillion that has been lost? Not if Wall Street has a say. And given the huge amount of extra government borrowing that likely helped Goldman earn its profits, the next bubble could be even bigger than the last one.
What might keep this from happening again? Here are four things that would help:
- Change who does accounting. As I've posted, it is a mistake to let executives write their own report cards. An independent government agency should produce public company financial reports.
- Make accounting real. Current financial accounting mixes real historical cash flows and forecasts so that executives can get more pay -- a byproduct of this is confused investors. Financial accounting must change to make clear distinctions between the two so investors know what is really going on.
- Limit leverage. During the last few years, Wall Street borrowed $50 for each dollar of capital, this needs to drop to no higher than 8:1 and regulators must keep that from rising when the economy improves.
- Put top banker's pay in capital account. As I've posted, bankers take risks that give them short-term bonus boosts while letting them shift later losses onto taxpayers and shareholders. This pay scheme needs to change -- instead top bankers' bonuses should fund a bank's capital reserves to protect against a downturn. This will provide a strong incentive for bankers to be more careful with shareholder's money since it will be their own.
These changes would tilt the playing field in favor of shareholders and taxpayers. I doubt any of them will happen.
Peter Cohan is president ofPeter S. Cohan & Associates. He alsoteaches management at Babson College. His eighth book isYou Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.