Goldman is set to pay huge bonuses, but don’t worry be happy!

Escrito el 16 Julio 2009 por Antonio Rivela Rodríguez en Uncategorized

Brendan Quirk has just contributed to our financial blog…. Thanks Brendan!

Goldman is set to pay huge bonuses, but don’t worry be happy.

How ever you may feel about yesterday’s news that, in the second quarter, Goldman Sachs posted record earnings, we should all agree that this is a positive sign for the financial sector and maybe even the economy as a whole. Huge bonus condemnations aside, his is good news.
The company is demonstrating that it can make money in areas other than its historic income makers, like the M&A, by being profitable in areas such as fixed income, commodities, foreign currencies (FICC), and under writing. This shows that the industry can be versatile and flexible. Goldman is not filing for bankruptcy it actually made a profit. Let’s not get too upset about bonuses. The company is required to set up a provision for bonuses based on the rules of accounting and industry standards. We should also bear in mind, that Goldman has fewer employees so there are less people getting a cut of the pie and it makes the bonuses look larger, but this is only an incentive the employees.
Finance executives have performance incentives built into their contracts and thus get paid when they perform well, just like a professional athlete gets paid a bonus when he or she achieves goals. However, this issue also has political dimensions to consider as many believe that these incentives fueled the financial crisis by making executives more concerned about short-term gains than long-term sustainability. This news will certainly give critics something to argue about.
So rather than argue, whether or not you agree with executive compensation, we should not lose sight of the fact that a healthy financial sector is a precondition to a healthy economy, and this is good news for everyone.


Lauritz Aass 16 Julio 2009 - 21:30

Popping the champagne already?

No matter how hard I try to share your enthusiasm about the Goldman bonuses, I can not help from expressing my rather conservative and old fashioned views on the issue. As I learned about the article decorating the front of the pink financial news paper next to a photo of 9 fighter planes making a colorful fly-by over l’Arc de Triumph, I was not sure if the flyby was a gesture to the French national day or the bonus payouts at Goldman’s.

Indeed is it positive reading that trading and financial activities again is picking up, but there is still a long way to go for the economy as a whole. Companies are still laying off people, unemployment levels are on their peaks and economics analysts are still trying to figure out if we have reached the bottom of the recession.
Furthermore, the pay-out announced by Goldman was not just a little symbolic compensation indicating that potential prosperity is becoming realistic, it was a record-pay out! Bonuses of this scale had not even been issued before the crisis.

Whether the pay-out is a gift to Goldman’s employees for bringing the company through a difficult time, a catch up of previously unallocated bonuses, or a quick maneuver made by management before remuneration ceilings are enforced by the government, I do not know. However I had expected more modesty and prudence from a financial institution, as this industry officially has been recognized as the guilty for the financial crisis.

The vital role of financial institutions to stimulate monetary activity, combined with the rigid and complex financial structures which most regular mortal people find hard to grasp, and short memory of the rest of us, will make yesterday’s article quickly forgotten.

I find it hard to understand how the size of such a pay-out can be justified? Are there no moral emotions triggered by the receivers? What possible consequences can follow this action?

Mario Padilla Velasquez 19 Julio 2009 - 18:41

Brendan, I have to agree with you on the fact that there is nothing wrong with executive compensation, especially when management has had positive results and outperformed its competition. At the same time I believe we need to learn how to look past indicators like EPS, Net Income or EBITDA since sometimes they can be misleading and not necessarily be a reflection of reality. In my opinion we need to focus on a more in depth and meticulous analysis, which would include all relevant factors concerning and affecting the wellbeing of the company and maybe move away from the traditional P&L and Balance Sheet as the base for determining compensation. For example, I’m not familiar with GS at all, but from the little I have red I have a few concearns about its 2Q results. The fact that their revenues came mostly from bond, currency and commodity trading (93% higher compared with 2Q 2008) is showing that they have the ability to attack and profit from emerging business opportunities, but at the same time we need to question if this is an extraordinary quarter due to uncommon market factors and also question and analyze if GS deviating from its core business, the second thing is that as there are less players in the bank sector, so is GS just making revenues as a consequence of the closing down of other banks or are their operations really improving, and finally I would expect that the 2009 vs. 2008 comparison could be somehow misleading since 2008, which is the base of the comparison, was over all a bad year. So as a conclusion, I believe that we have to change the base in which compensation is measured, and develop a new and more accurate calculation, where we could include market factors, future growth and firmness of the company, and deviate a little from the usual P&L and Balance Sheet measurement.

Let’s hope that over the next few months we continue to see this kind of headlines and get back on the path towards a healthy economy.

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Goldman would have gone bankrupt if taxpayers didn’t bail out AIG, which then used billions of the money to cover trades with Goldman. Goldman made trades that were far too risky, the government provided the cash to cover goldman’s bets – and now you want us to be glad they are paying out huge bonuses? Did you miss the massive banking crisis that happened last year?

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Goldman’s bonuses are open to scrutiny because the federal government bailed them out in 3 ways:

1) $100 billion in bailout money to AIG enabled them to pay Goldman $20 billion in insurance claims. The lack of these payments could easily have led to Goldman’s insolvency.

2) The government allowed Goldman’s chief competitor Lehman Brothers fail so they have had less competition.

3) At the height of the crisis, Goldman was quickly converted to a bank holding company which allowed it access to currency from the Treasury and Comptroller of the Currency.

Based on these facts, it is no more valid to lionize Goldman’s recent success than it is to demonize them for leading us into the current recession.

Goldman was able to pay back the $10 billion in emergency money so quickly because you and I, the taxpayer bailed them out in their hour of need. Paying exorbitant bonuses now is not in Goldman’s or the country’s best interest.

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