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

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.