7 Things Goldman Can Do with Its Money Instead of Fat Bonuses

Lloyd Blankfein has been receiving lots of unsolicited advice on what to do with all the money Goldman Sachs (GS) is believed to have minted in the third quarter -- instead of simply dedicating the loot to fat year-end bonuses.

Some say Goldman should show that it's a good citizen by making a big charitable donation. Others think the firm should simply sit on the cash and build up its reserves and wait out the populist rage over banker pay.

Personally, I think the best way to deal with excessive Wall Street pay is for the federal government to impose a transaction tax on some of the more risky and lucrative trading strategies employed by investment banks. There's been some talk on Capitol Hill about such a tax. But for now, it appears a long way off.

So, with that said, it appears there is little to stop Goldman from generating the kind of windfall revenues that will enable it to set aside $23 billion for bonuses. Here then are seven suggestions on what Blankfein should really do with all the money:

1) Raise the dividend. Goldman currently pays a quarterly dividend of 35 cents a share to its shareholders. That's not too shabby given that many banks have either eliminated or slashed their dividends. But a dividend increase would reward shareholders who have stuck with the firm through the financial crisis. There also should be nothing sacrosanct about the prevailing practice that Wall Street firms set aside about 50 percent of their revenue for compensation. Reward shareholders before employees.

2) Buy back shares. If Goldman doesn't want to commit itself to a dividend increase, then it can bolster shareholder value with a stock buyback. Sure, Goldman's stock has been a stronger performer -- more than doubling in price this year. But at $186, the stock is still trading some $64 below its high-water mark set in the fall of 2007.

3) Create a cleantech fund. The idea of Goldman making a big charitable donation is intriguing. But it's a bit unfocused. Goldman could make a bigger impact by setting up an investment fund that would provide seed capital to clean energy start-ups in the U.S. This cleantech fund would operate like a venture capital fund, except Goldman wouldn't profit from it. The only benefit Goldman would get is from having its name listed as an official corporate sponsor.

4) Pay back the AIG money. Yeah, yeah, we've all heard Goldman say that the $13 billion in payments it got from the federal government's bailout of the giant insurer wasn't a charitable gift -- it was money owed to the firm. But Goldman was never forced to take a haircut on the value of the ailing collateralized debt obligations it sold to the Federal Reserve as part of the deal. So we'll give Blankfein a break and suggest he just pay back half of the $13 billion.

5) Bail out the FDIC. The Federal Deposit Insurance Corp.'s deposit insurance fund for taking over failed banks is running out of money. Goldman could make a one-time multi-billion dollar grant to the FDIC fund to help put the fund on a sounder footing. Maybe a generous gift to the FDIC would guilt Jamie Dimon at JPMorgan Chase to do the same.

6) Fund a high-frequency trading study. Goldman is a big proponent of high-frequency trading. But there's so much we don't know about the potential systemic risk posed by superfast, machine-driven trading. Goldman can take some of the billions it makes from HF trading and subsidize research grants to study the impact of this fast-growing trading strategy.

7) Hire Vikram Pandit. Sadly, it appears the Citigroup (C) chief executive isn't going away anytime soon -- even though he should. Pandit got his job at Citi when the bank overpaid for Pandit's failing Old Lane hedge fund. Citi thought it was getting a diamond in the rough, but in Pandit it simply got another overhyped Wall Street banker. Blankfein could do Citi and the nation's taxpayers who now support the bank a favor by luring Pandit away with an offer he can't refuse.

Lloyd, any of these ideas is fine in my book.

Comments

[CFB:]

Fortunately, I reached the end of this article and realized the author was being tongue-in-cheek. Because clearly Goldman Sachs is not in a position to do any of these things except #2.

1) Raising the dividend on 500 million shares from 1.40 to like 2.50 would be a deminimus use of cash. But raising it to $10/share would never be allowed by regulators. A 'special dividend' is more possible, but with unknown new capital constraints on the horizon, no financial institution can dividend away its cash until the new 'rules of the game' are set.

2) Buying back stock is highly likely. Goldman has issued a lot of equity in the past twelve months. This year's bonus payout will be largely in stock (politics). That is tantamount to an additional $15B in equity issuance, give or take. Current investors will HATE the dilution. With a current market cap of $95B, employees will soon be 20%+ owners. Talk about skin in the game. If employees are forced to hold their shares, stock buybacks will cause that percentage of employee ownership to climb very high over the next few years. Won't have to worry much about a say-on-pay vote going against management....

3) Goldman has no retail presence, and does not need marketingto help attract clients. Dumping money down a hole with no hope of profit isn't exactly aligned with executives fiduciary duty to owners.

4) If Goldman was hedged with collateral and counterparty insurance vs AIG, they clearly were in no position to take a loss. Would the various counterparties have paid Goldman in full? Maybe yes maybe no. But speculating about that outcome and saying Goldman should pay money to the government based on what may have, could have happened is just wishful thinking. And an unjust reward for Goldman, a company that actually exercised sound risk management to protect itself when others did not.

5) Generous gifts to anybody violate fiduciary duty to shareholders.

6) Goldman 'makes billions' from HF trading and is a big proponent of it? Says who? Assertion without proof if you ask me. And why would Goldman fund a study of a market that is about to get shut down by the SEC?

7) Hire Pandit from Citigroup? Laughable. It would be undeniably fun to see one of the most complex financial institutions on earth (Citigroup) run by one of these yahoos off the street who bleat that 'they would run Citigroup for $100,000 or $1 million' or whatever. A new reality TV show, perhaps?

Oct 13 06:34 PM

[Angry Banker:]

As a GS shareholder, I want GS to continue to perform, which means I want its employees to continue to be happy, which means I want GS to pay its employees the big bonuses.

People forget that the primary responsibility of a corporation is to "maximise shareholder wealth". Shareholders of GS will continue to benefit by the company treating its employees right. Besides, most of GS's employees are also huge shareholders.

Lastly, people should quit excoriating GS (and all the other current and former TARP banks) for their duty to "repay the taxpayers." Remember, before the crisis when these banks were hugely profitable, they were paying billions in taxes every year. Further, when they pay huge bonuses, the government again collects taxes from the employees.

For example, try this on for size - suppose a company makes $100 after tax. That means pre-tax they made about $150. So the government has already made $50 from that $150 in earnings. Then if the company pays out $50 in bonuses, the government collects another $15~$20 from the employees who received the bonuses. So the government has now received $65~$70 from the company's original $150 in pre-tax earnings, meaning the government has taken almost 50% of the company's earnings in taxes. Now extrapolate these figures to the earnings that companies like GS have put up over the years and the government (meaning you and me) has benefited HUGELY. So I don't think it's totally unfair that the taxpayer helps to prop up some of these institutions every couple of decades, especially considering most of the taxpayers' investment will be repaid handsomely anyway.

Oct 14 09:36 AM

[a. palmer jr.:]

I have an idea...how about the government stepping in as they did with Bell Telephone and busting the company up. Since it's " too big to fail" it must be some kind of monopoly.

Oct 14 11:26 AM

[helplessobs...:]

If GS is truly the "master of the Universe" they should take the loss on their AIG investment. If they don't they are just like all the other wimps who duck their mistakes and come crying to momma. I also think there is blood on their hands in the demise of Lehman and Bear Sterns. The final chapter in all this is still to be written.

Oct 14 01:50 PM

[HBWOW:]

Who says logic and fairness must be applied? Simply consider the company's hoarding for "treasury stock", government connections, and prior stingy bonus practices, and we know what will happen to any
extra cash.

Oct 14 06:30 PM

[User 481361:]

You are joking, Right?


On Oct 14 09:36 AM Angry Banker wrote:

> As a GS shareholder, I want GS to continue to perform, which means
> I want its employees to continue to be happy, which means I want
> GS to pay its employees the big bonuses.
>
> People forget that the primary responsibility of a corporation is
> to "maximise shareholder wealth". Shareholders of GS will continue
> to benefit by the company treating its employees right. Besides,
> most of GS's employees are also huge shareholders.
>
> Lastly, people should quit excoriating GS (and all the other current
> and former TARP banks) for their duty to "repay the taxpayers." Remember,
> before the crisis when these banks were hugely profitable, they were
> paying billions in taxes every year. Further, when they pay huge
> bonuses, the government again collects taxes from the employees.
>
>
> For example, try this on for size - suppose a company makes $100
> after tax. That means pre-tax they made about $150. So the government
> has already made $50 from that $150 in earnings. Then if the company
> pays out $50 in bonuses, the government collects another $15~$20
> from the employees who received the bonuses. So the government has
> now received $65~$70 from the company's original $150 in pre-tax
> earnings, meaning the government has taken almost 50% of the company's
> earnings in taxes. Now extrapolate these figures to the earnings
> that companies like GS have put up over the years and the government
> (meaning you and me) has benefited HUGELY. So I don't think it's
> totally unfair that the taxpayer helps to prop up some of these institutions
> every couple of decades, especially considering most of the taxpayers'
> investment will be repaid handsomely anyway.

Oct 15 04:43 PM

[a fat panda:]

These banks, and not just GS, were never HUGELY profitable. They simply claimed that they were hugely profitable by underreserving for risk.

Their so-called "profits" came from leverage without factoring in the real risk cost. The taxpayer absorbed the cost of risk here, not GS, not Bear, and not Merrill. By comparison, Lehman's shareholders and its bond holders absorb the risk costs. Do you see the difference?

If GS were so profitable, why did they do the deal with Buffett which wasn't exactly on favorable terms. If GS is so profitable why did they become a bank holding company other than to have access to cheap money. The reason is that it, and its outraged shareholders, aren't above taking welfare, just above admitting it.


On Oct 14 09:36 AM Angry Banker wrote:

> As a GS shareholder, I want GS to continue to perform, which means
> I want its employees to continue to be happy, which means I want
> GS to pay its employees the big bonuses.
>
> People forget that the primary responsibility of a corporation is
> to "maximise shareholder wealth". Shareholders of GS will continue
> to benefit by the company treating its employees right. Besides,
> most of GS's employees are also huge shareholders.
>
> Lastly, people should quit excoriating GS (and all the other current
> and former TARP banks) for their duty to "repay the taxpayers." Remember,
> before the crisis when these banks were hugely profitable, they were
> paying billions in taxes every year. Further, when they pay huge
> bonuses, the government again collects taxes from the employees.
>
>
> For example, try this on for size - suppose a company makes $100
> after tax. That means pre-tax they made about $150. So the government
> has already made $50 from that $150 in earnings. Then if the company
> pays out $50 in bonuses, the government collects another $15~$20
> from the employees who received the bonuses. So the government has
> now received $65~$70 from the company's original $150 in pre-tax
> earnings, meaning the government has taken almost 50% of the company's
> earnings in taxes. Now extrapolate these figures to the earnings
> that companies like GS have put up over the years and the government
> (meaning you and me) has benefited HUGELY. So I don't think it's
> totally unfair that the taxpayer helps to prop up some of these institutions
> every couple of decades, especially considering most of the taxpayers'
> investment will be repaid handsomely anyway.

Oct 15 04:55 PM

[Kinabalu:]

From a taxpayer perspective the only one of your options that makes sense is Number 4 - Pay back the AIG money. Without that money Goldman could easily have gone under. I believe Paulson did the right thing by bailing out AIG. It was the details he got wrong. There definitely should have been a haircut when all that collateral was posted.

Oct 15 06:50 PM

[jesterx:]

when can we stop the rot these iditots get up to.

They make money from teh small guy and pay the rich guy....its still hasnt stopped has it.

I am a subscriber at www.forecastfortomorro... and that guy has been calling the shots and getting things right for months....when has MSM ever done that.

Oct 15 10:56 PM

[Marli:]

"Goldman makes billions from HFT? Says who?"

It says so in their quarterly earnings statements. Pay attention.

On Oct 13 06:34 PM CFB wrote:

> Fortunately, I reached the end of this article and realized the author
> was being tongue-in-cheek. Because clearly Goldman Sachs is not in
> a position to do any of these things except #2.
>
> 1) Raising the dividend on 500 million shares from 1.40 to like 2.50
> would be a deminimus use of cash. But raising it to $10/share would
> never be allowed by regulators. A 'special dividend' is more possible,
> but with unknown new capital constraints on the horizon, no financial
> institution can dividend away its cash until the new 'rules of the
> game' are set.
>
> 2) Buying back stock is highly likely. Goldman has issued a lot of
> equity in the past twelve months. This year's bonus payout will be
> largely in stock (politics). That is tantamount to an additional
> $15B in equity issuance, give or take. Current investors will HATE
> the dilution. With a current market cap of $95B, employees will soon
> be 20%+ owners. Talk about skin in the game. If employees are forced
> to hold their shares, stock buybacks will cause that percentage of
> employee ownership to climb very high over the next few years. Won't
> have to worry much about a say-on-pay vote going against management....
>
>
> 3) Goldman has no retail presence, and does not need marketingto
> help attract clients. Dumping money down a hole with no hope of profit
> isn't exactly aligned with executives fiduciary duty to owners.<br/>
>
> 4) If Goldman was hedged with collateral and counterparty insurance
> vs AIG, they clearly were in no position to take a loss. Would the
> various counterparties have paid Goldman in full? Maybe yes maybe
> no. But speculating about that outcome and saying Goldman should
> pay money to the government based on what may have, could have happened
> is just wishful thinking. And an unjust reward for Goldman, a company
> that actually exercised sound risk management to protect itself when
> others did not.
>
> 5) Generous gifts to anybody violate fiduciary duty to shareholders.
>
>
> 6) Goldman 'makes billions' from HF trading and is a big proponent
> of it? Says who? Assertion without proof if you ask me. And why would
> Goldman fund a study of a market that is about to get shut down by
> the SEC?
>
> 7) Hire Pandit from Citigroup? Laughable. It would be undeniably
> fun to see one of the most complex financial institutions on earth
> (Citigroup) run by one of these yahoos off the street who bleat that
> 'they would run Citigroup for $100,000 or $1 million' or whatever.
> A new reality TV show, perhaps?

Oct 16 08:17 AM