Goldman Earns $3.19 Billion, Beating Estimates/A credibility problem for Goldman/onuses Put Goldman in Public Relations Bind

Goldman Earns $3.19 Billion, Beating Estimates
By GRAHAM BOWLEY and MATTHEW SALTMARSH
Copyright by the New York Times
Published: October 15, 2009
http://www.nytimes.com/2009/10/16/business/16goldman.html?hpw


Just a year after surviving the financial crisis with billions in federal aid, the banking giant Goldman Sachs reported strong results Thursday that beat expectations and promptly went on the defensive about its bonuses.

In part to allay criticism of its profits and bonuses, Goldman announced a $200 million contribution to its foundation, which promotes education.

The bank said that it earned $3.19 billion in the third quarter, powered by strong trading and gains on its own corporate investments. Revenue was $12.37 billion.

The earnings of $5.25 a share easily exceeded analysts’ estimates of $4.18 a share or $2.34 billion. Earnings in the corresponding quarter a year ago were $845 million on revenue of $6 billion.

“Although the world continues to face serious economic challenges, we are seeing improving conditions and evidence of stabilization, even growth, across a number of sectors,” the chief executive, Lloyd C. Blankfein, said in a statement.

Goldman also disclosed how much it had set aside for its annual bonus pool. It said that it had earmarked $5.35 billion in compensation and benefits, an increase of 84 percent from the year earlier period, putting it on course for a record payout to its executives by the end of 2009.

During a conference call, the chief financial officer, David A. Viniar, rejected criticism that the bank’s high bonus levels ignored the tougher times experienced by other people elsewhere in the economy.

By paying the bonuses, Mr. Viniar said, the bank was trying to make a difficult “trade-off” between “being fair to our people who have done a remarkable job” and “also what’s going on in the world.”

“We are very focused on what is going on in the world,” he said. “We are focused on the economic climate. We are focused on what is going on with other people.”

Mr. Viniar also rejected criticism that Goldman was paying out bonuses while receiving an implicit guarantee of its survival from the government, after the federal aid and guarantees on its debt it received in the last year.“We don’t think we have a guarantee,” he said. “We certainly don’t operate the company that way. We operate the company as an independent financial institution that stands on its own two feet.”

On Wednesday, another big bank that accepted federal assistance, JPMorgan Chase reported $3.6 billion in profit for the third quarter.

The latest profit for Goldman continues a turnaround for the bank, which has emerged as one of the stronger of the big Wall Street institutions. In the second quarter, Goldman posted the richest quarterly profit — $3.44 billion — in its 140-year history.

The latest three months are slightly down on the record second quarter because of the seasonally slower summer period. But they continue the string of blowout periods for Goldman since it recorded a single loss in the final quarter of last year, triggered by the financial crisis.

As it has recovered, Goldman’s share price has soared 128 percent this year, closing at $192.28 on Wednesday. The stock is still off its record high of $250.70, reached in 2007.

Goldman said its bonuses reflected performance and were necessary to retain top staff.

But the return to big profits and hefty bonuses will raise questions for Washington policy makers. They come even as memories are still fresh that just a year ago taxpayers had to step in to save Goldman and other banks on Wall Street.

Earlier this year, Goldman paid back $10 billion in federal aid that it received last fall under the government’s Troubled Asset Relief Program.

But in addition, Goldman, along with other banks, benefited from a government program that allowed it to issue debt cheaply with the backing of the Federal Deposit Insurance Corporation. And it received money from the government’s bailout of the American International Group, the insurance giant, receiving 100 cents on the dollar for its $13 billion counterparty exposure to the insurer.

Amid the crisis, it converted from an investment bank to a more regulated bank holding company.

Bonuses have become a hot topic again recently. The special federal paymaster is trying to persuade the American International Group to reduce a coming bonus payment of $198 million.

And there is also anger over Bank of America’s failure to adequately disclose to its shareholders the bonuses that were paid by Merrill Lynch before its merger with Bank of America.

Wall Street’s culture of excessive bonuses in the last decade is widely perceived as having encouraged some of the risk-taking that triggered the financial crisis.

In its statement, Goldman said fixed income, currency and commodity units generated quarterly revenue of $5.99 billion, a significant increase from the third quarter of 2008, reflecting “strong performances in credit products and mortgages.”

Equities generated $2.78 billion, 78 percent higher from a year earlier, helped by gains in global indexes. And the tier-1 capital ratio, a common measure of financial strength, was 14.5 percent as of Sept. 25, up from 13.8 percent in late June.

Still, there was some evidence of weaker performance in the report.

Overall net revenue from investment banking was $899 million, down 31 percent on the same quarter a year earlier, while revenue from asset management was $1.45 billion, a decline of 29 percent from a year earlier, “primarily reflecting the impact of changes in the composition of assets managed.”

The bank said it would pay a dividend of 35 cents a common share at the end of the calendar year.




A credibility problem for Goldman
By John Gapper
Copyright The Financial Times Limited 2009.
Published: October 14 2009 22:34 | Last updated: October 14 2009 22:34
http://www.ft.com/cms/s/0/bb9b743e-b8f3-11de-98ee-00144feab49a.html


It will be business as usual for Goldman Sachs on Thursday morning. The bank will annoy a lot of people.

Goldman, the institution that came through last year’s financial crisis best – arguably the only pure investment bank left standing – will say how much money it made in the third quarter (a lot) and how many billions it has stored for bonuses (about $5.5bn towards a likely 2009 bonus pool of $23bn).

For believers in Goldman’s ethical standards and way of doing business, these are difficult times. Although it avoided the mistakes that brought down Bear Stearns and Lehman Brothers, forced Merrill Lynch into Bank of America’s arms, and prodded Morgan Stanley further into lower-risk retail broking, Goldman has become a whipping boy.

There is outrage that, having taken government money to survive the crash, Goldman is in such rude health that it will hand out billions in bonuses. Matt Taibbi, a Rolling Stone writer, caught the mood memorably by describing Goldman as “a giant vampire squid wrapped around the face of humanity”.

Such is Goldman’s importance to Wall Street and regulation that I am devoting a pair of columns to it. Today, I will discuss the Goldman problem (different and less egregious to what Mr Taibbi believes, but still a problem). Next week, I will suggest what should be done about it by regulators and the bank itself.

Goldman executives were wounded by how seriously Mr Taibbi’s piece was taken despite their riposte that vampire squids are small creatures that present no danger to humanity. He accused it of profiting from bubbles such as the US internet and housing booms, and of repeatedly “selling investments they know are crap” to retail investors.

But, amusing though his article was, Mr Taibbi mischaracterised Goldman. Its run of success since its 1999 initial public offering has not been based on “pump and dump” broking but on sticking obstinately to the institutional, less-regulated elite end of the market.

While others such as Morgan Stanley and Merrill have wavered, Goldman has steadily built a widely envied list of clients among blue-chip companies, hedge funds and private equity firms. It has used its superior network and information to invest, and trade with, its capital.

One rival Wall Street executive describes Goldman (with rueful admiration) as “a bunch of clever thugs”. He means that Goldman has been tough about seizing profitable opportunities even if that involves, for example, bidding for an asset against a former client.

Whatever Goldman is doing to make money, it works. Between 2000 and 2008, its average ratio of pre-tax profits to revenues was 29 per cent – one of the highest in the Fortune 500, even after allocating nearly half its revenues to bonuses.

That was a cause for concern before the crisis, but Goldman was playing in the big leagues and its clients, from large corporations to wealthy individuals, could – at least in theory – take care of themselves. Equally, its shareholders knew it was betting with their capital.

What changed things was the financial crisis. Hank Paulson, the former Goldman chief executive who was then Treasury secretary, first let Lehman Brothers founder and then rescued American International Group by settling at par its credit default swaps with banks including Goldman.

Goldman received $10bn in government capital (which it has paid back) and issued $21bn in bonds backed by the Federal Deposit Insurance Corporation. It turned into a bank holding company, and then a financial holding company to allow it to keep, among other things, its private equity arm.

From being a small Wall Street firm in which its employees risked all their own wealth by placing it in a partnership, it has become a large, Federal Reserve supervised bank with public shareholders and employees that expect to be richly rewarded each year.

Lloyd Blankfein, Goldman’s amiable and funny chief executive, has made thoughtful speeches about reform (including on this page this week), but said nothing I can detect about changing how it operates. Yet Goldman, much as it wishes to be, is is no longer the same firm.

It has not yet been declared a “tier one financial holding company” – a systemically important institution that the Fed is supposed to watch over carefully – but that is a foregone conclusion.

The US government wants to create a resolution regime that would permit even such banks to fail in an orderly fashion, but it suffers from a credibility problem in Goldman’s case. Few people believe that it would actually go through with dismantling the most powerful financial institution of all.

Not only is it reasonable to suspect that Goldman, which has entwined itself with governments around the world by sending partners out into “public service” when they leave, would not be allowed to fail by its alumnae network, but the bail-out was prima facie evidence.

Thus, at the heart of the financial system, now sits a professionals-only, high-risk Wall Street firm with its own private equity and hedge funds arrayed on top of a nonpareil corporate and government client list, which taxpayers reasonably assume is gambling with their money.

You do not have to be a vampire squid-style conspiracy theorist to see the difficulty. Goldman wants to carry on as its old self (but bigger) in a world that has changed.

Next week: how do you solve a problem like Goldman Sachs?

john.gapper@ft.com
More columns at www.ft.com/gapper





Bonuses Put Goldman in Public Relations Bind
By GRAHAM BOWLEY
Copyright by Bloomberg News
Published: October 15, 2009
http://www.nytimes.com/2009/10/16/business/16bonus.html?_r=1&ref=global-home


A celebrated Goldman Sachs partner, Gus Levy, coined the maxim that long defined the bank, the savviest and most influential firm on Wall Street: “Greedy, but long-term greedy.”

But these days that old dictum is being truncated to just “greedy” by some Goldman critics. While many ordinary Americans are still waiting for an economic recovery, Goldman and its employees are enjoying one of the richest periods in the bank’s 140-year history.

Goldman executives are perplexed by the resentment directed at their bank and contend the criticism is unjustified. But they find themselves in the uncomfortable position of defending Goldman’s blowout profits and the outsize paydays that are the hallmark of its success.

For Goldman employees, it is almost as if the financial crisis never happened. Only months after paying back billions of taxpayer dollars, Goldman Sachs is on pace to pay annual bonuses that will rival the record payouts that it made in 2007, at the height of the bubble. In the last nine months, the bank set aside about $16.7 billion for compensation — on track to pay each of its 31,700 employees close to $700,000 this year. Top producers are expecting multimillion-dollar paydays.

The latest tally came Thursday, when Goldman reported another set of robust results. But its strong financial showing — a profit of $3.19 billion in the third quarter — was overshadowed by Goldman’s swelling bonus pool. Goldman set aside nearly half of its revenue to reward its employees, a common practice on Wall Street, even in this post-bailout era.

But despite Goldman’s success or, perhaps, because of it, the bank has come to symbolize for many a return to wanton Wall Street excess. Even in 2008, the most tumultuous year in modern Wall Street history, Goldman employees reaped rewards that most people can only dream about. Goldman paid out $4.82 billion in bonuses last year, awarding 953 employees at least $1 million each and 78 executives $5 million or more. The rewards for 2009 will be far greater.

Goldman executives know they have a public opinion problem, and they are trying to figure out what to do about it — as long as it does not involve actually cutting pay.

Lloyd C. Blankfein, Goldman’s chairman and chief executive, finds himself in the unusual position of defending a successful company in a nation that normally celebrates success.

Goldman said Thursday that it would donate $200 million to its charitable foundation (that figure represents 6 percent of its third-quarter profit, or about six days of earnings).

Rumors are swirling on Wall Street that Goldman might donate even more money to charity, perhaps as much as $1 billion, in an effort to defuse public resentment directed at the bank. Mr. Blankfein has even urged his free-spending bankers to be mindful of conspicuous consumption.

Goldman is also weighing changes to some of its compensation practices. Its executives receive a significant portion of their total compensation in stock. But like other banks, it is considering increasing that portion for all employees, giving deferred payments and introducing provisions that would enable the bank to claw back bonuses if trades go wrong.

Mr. Blankfein laid out such ideas in a speech in Germany last month that drew wide attention on Wall Street.

Despite the news of Goldman’s strong quarter, David A. Viniar, the chief financial officer, was on the defensive Thursday. Talk of bonuses, and whether they were justified, dominated what in another era might have been a celebratory call with the media.

“We are very focused on what is going on in the world,” Mr. Viniar replied to a barrage of questions about whether the bank should pay outsize bonuses in these hard economic times. “We are focused on the economic climate. We are focused on what is going on with other people.”

But he said Goldman had a duty to its employees and to retain staff. By paying big bonuses, he said, the bank was trying to make a difficult trade-off between “being fair to our people who have done a remarkable job” and “what’s going on in the world.”

Goldman, Mr. Viniar said, was being unfairly singled out over its bonus culture. “Yes, I think that is too big a focus,” he said. “I would prefer people to be focused on the success of our business, how well we’re doing, and how well our people are performing.”

Still, some outsiders wonder if Goldman, which is so adept at reading the markets, is misreading public opinion, and whether the gilded Goldman name will be tarnished by this episode.

Goldman is no different from most Wall Street firms: it rewards bankers and traders who make lots of money.

“They do it because they can,” Michael Useem, professor of management at the Wharton School at the University of Pennsylvania, said of the bonuses. “But strategic thinking requires that you think not only about trading but also about reputation and where the bank stands in the court of public opinion.”

This much is indisputable: Goldman Sachs is minting money. Its third-quarter profits were powered in large part by aggressive trading in the fixed income and equity markets.

Its earnings were also bolstered by mark-ups in its own private equity stakes and other corporate investments, which have risen as markets have rallied this year. Its earnings from investment banking were down from the second quarter, it said, because of the seasonally weak summer months and because the second quarter had been enhanced by underwriting business as other banks had rushed to raise capital.

While Goldman has been a vocal proponent of reforming pay practices, the bank has not yet shown its hand and will only describe any major changes in its compensation structure when it announces final bonuses at the end of this year. Meanwhile, other banks, like Morgan Stanley, have moved ahead in reform, by introducing three-year clawback provisions, for example.

Brian Foley, a compensation consultant in White Plains, said of the possible reforms like delayed payments and clawback provisions: “I definitely think they ought to be doing it, and I assume they will be doing it. They have got to arrange the chairs on the deck so things look different.”