Goldman Sachs, the world's most powerful investment bank, has begun distributing more than $16bn (£9.9bn) in pay and bonuses to its staff, in a move that it characterised yesterday as "restraint".
The cash is its employees' cut of $45bn (£27.7bn) in revenues that the company enjoyed in 2009, a year after the financial system was bailed out by governments around the world and pump-primed with cheap money from central banks.
Amid public fury about bonuses, Goldman said it was paying out a lower proportion of revenues than it had ever done before, and had also taken $500m (£308m) out of the bonus pool in the final months of last year to give to charity.
But its concessions came too late to stop a new assault on Wall Street by the White House, which yesterday proposed new rules to cap the size of US banks and to stop them gambling with borrowed money. The rules open up the possibility of profound changes in the way American lenders operate, and a rolling back of more than a decade of free-wheel trading by institutions deemed "too big to fail".
President Barack Obama, reeling from his Democratic Party's electoral defeat in Massachusetts earlier this week, said it was time to change the rules of the game in the finance industry. "My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform," he said, "and when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low, and cannot refund taxpayers for the bailout. It is exactly this kind of irresponsibility that makes clear reform is necessary."
The President's intervention came on the day Goldman Sachs reported its financial results for last year. The figures showed a doubling in revenues and profits that beat the previous record set on the eve of the crash in 2007. The White House press conference announcing the new clampdown began while investors and analysts were still listening in to a results presentation by Goldman managers. "We planned ours first," said the chief financial officer, David Viniar, when analysts grumbled about the clash.
Goldman's 32,500 employees were paid an average of $498,000 (£307,000) in 2009 – up from $317,000 (£195,500) during last year's financial panic but down from $661,490 (£408,100) in 2007. The company says that, while most bankers' pay takes the form of a year-end bonus paid in January, the total includes salary and benefits such as health insurance. The average is skewed by the huge bonuses paid to top earners, which can run into millions of dollars.
In the first nine years of the decade, Goldman distributed 47 per cent of net revenues to staff and looked on course to pay record bonuses this month. But it slashed the 2009 ratio to 36 per cent. Instead of paying more money into the bonus pool in the last three months of the year, it took out $500m (£308m) for Goldman Sachs Gives, an in-house charity that funds community development and education programmes.
On Wall Street, where the proportion of net revenues paid as compensation is closely watched, the change was being greeted as a daring experiment. Mr Viniar was peppered with questions about whether Goldman workers might flee to other firms where they may get a bigger cut.
"We have tried to strike a balance between the needs of the public with the needs of our people, and we think we have struck it well," he added. "We hope not to see high [staff] turnover."
Goldman staff, who are usually told about the size of their bonuses before the annual results, will start to hear their awards from today. "Goldman Sachs is not deaf to calls for restraint," Mr Viniar said, but declined to say if the compensation-to-revenue ratio would stay at current levels in future years.
A new opinion poll underscored the anger at Wall Street in the US. Nearly 60 per cent of respondents to an Ipsos survey put executive pay and bonuses among the top five economic concerns. Goldman, meanwhile, is under fire from its investors. One shareholder, the Southeastern Pennsylvania Transportation Authority, which runs buses and trains in Philadelphia, has launched a lawsuit claiming Goldman employees take too big a cut of the profits from bets taken using investors' money. According to the court filing, its bonuses substantially exceed what competitors pay, "even though, on a risk-adjusted basis, Goldman's officers and managers have performed over the past several years in a manner that is, at best, only average".
It adds: "Goldman's employees are unreasonably overpaid for the management functions they undertake, and shareholders are vastly underpaid for the risks taken with their equity."
A spokesman for Goldman said the lawsuit was "without merit".
The Republican by-election victory in Massachusetts fed in part on fury at the political establishment and the costly bailout of Wall Street in 2008. President Obama has already dialled up his rhetorical attacks on the industry and last week proposed a $117bn tax on banks to recoup likely bailout losses.
Yesterday, he moved to toughen reform proposals already going through Congress, saying he wanted explicit measures to limit the scale and the scope of banks in future. These will include a ban so-called "proprietary trading" at firms that have an implicit government guarantee. Proprietary trading involves bankers making bets on financial markets with the firm's own money, or owning private equity funds to invest in other companies.
About 10 per cent of Goldman's revenues come from proprietary trading, the bank disclosed yesterday. The other positions taken by Goldman come as a result of it being on the other end of a trade with a client.
Some of Wall Street's biggest trading profits come from proprietary trading, which is why so many giant financial institutions have engaged in the practice since the legal separation of investment and retail banking was scrapped by the Clinton administration.
The end of 'too big to fail'? Obama's banking reform plans
How is Barack Obama proposing to reform Wall Street?
When the financial system teetered on the brink of disaster in 2008, it became clear that many large banks and other institutions were simply too big to be allowed to fail. The economic consequences would be too dire. The President's reform efforts all aim at solving the problem of "too big to fail", and the new proposals announced unexpectedly yesterday will put limits on the size and on the activities of banks.
What are the new rules?
The first will set a cap on the size of banks, similar to the rule that no one institution can hold more than 10 per cent of customer deposits in the US. There will be a similar limit on other types of funding that banks use to finance their activities, which will limit their ability to grow. The second rule will force banks to choose between running a commercial bank and "proprietary trading", which is the practice of making bets for the bank's own profit.
What is the logic behind the clampdown?
Commercial banks are special beasts. Deposits are insured by the government, so to protect consumers they get special privileges, such as access to emergency borrowing from the Federal Reserve. What has so infuriated the public is the perception that these special privileges have been used to fund reckless trading and speculation.
Does this mark a return of the Glass-Steagall Act?
No. The 1933 Act that broke up the banks in the Great Depression kept high street banking entirely separate from Wall Street, whose firms could trade risky securities, until its repeal in 1999. Paul Volcker, the former Federal Reserve chairman and Obama adviser, had been urging for its reinstatement, but this is only a compromise.
Who will be affected?
Institutions like Citigroup, Bank of America and JPMorgan Chase, which run the biggest networks of high street banks in the US, will be forced to make tough choices about the future of their businesses. They have expanded their activities to include proprietary trading. Goldman Sachs switched to being a formal commercial bank to get access to the Fed's special privileges during the 2008 panic. Even it may have to shed its proprietary trading business, depending on how the law is worded.
Will it change the culture of Wall Street?
It is hard to draw a line between proprietary trading and trading with clients, which can also involve a bank taking on big risks. Even trading with clients can make for oversize profits and bonuses for staff.Reuse content