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Goldman Sachs in ever so humble mode is a touch hard to take

On the surface, Goldman Sachs’s third-quarter financial results look pretty good. But drilling down into the numbers reveals major disappointment at almost every level.

“If people never trust a skinny chef, they shouldn’t want their bankers to be poor.”

This was just one gem I read on #GSelevatorgossip, a Twitter trove of testosterone fuelled one-liners supposedly overheard in the lift at Goldman Sachs, the epitome of Wall Street finance houses and pariah to much of the world.

But, truth be told, the feed has lost some of its shine of late.

Taking a close look at Goldman’s third quarter financial results, you could easily argue that the Twitter feed’s sharpness has a direct correlation to the firm’s financial prowess. In other words, Goldman Sachs, like the gossip in its elevators, has seen better days.

On the surface its third quarter results, issued late last week, looked pretty good. Earnings per share of US$2.88 roundly beat the consensus of Wall Street analysts’ forecasts by 44 cents.

But drilling down into the numbers revealed major disappointment at almost every level.

Investment banking revenues were just $1.2 billion in the third quarter, which was pretty flat compared with the same period a year earlier.

Fixed income, currencies and commodities trading had a terrible time of it. The former stalwart division delivered only $1.2bn, a decrease of 49 per cent on the previous quarter and 44 per cent lower than the same period last year.

Asset management showed almost no revenue growth, despite a small increase in assets under management.

So how did Goldman manage to shore up profits so significantly, not just to scrape past the prediction post by the skin of its teeth but to beat forecasts with such aplomb?

The answer reveals perhaps the greatest cultural shift in the firm’s history.

The partner structure at Goldman is credited with driving the sort of cut-throat competition that has kept the firm at the top of the tree for so long. Associates and directors all strive to become partners so they can take home a massive slice of the profits every year.

But in the past nine months the algorithm that has driven that culture has changed significantly.

In better times Goldman would pay its bankers based on a compensation ratio of as much as 45 per cent of revenues.

But for the first three quarters of this year the bank set aside the smallest sum for employee pay since it first sold shares to the public in 1999.

The most recent quarter was particularly hard hit with just $2.38bn set aside for pay, some 35 per cent less than in the same period last year and almost double the 20 per cent by which revenues declined.

The ratio is still hovering around the 43 to 44 per cent mark for the year to date, but it is the final three months of the year where the rate for the whole year is decided.

Last year, for example, the rate was ticking along nicely for the first nine months and then plunged to an unprecedented 38 per cent by the end of December.

All Goldman employees will feel the pinch, of course, but partners will see the biggest real-term losses. They are paid such enormous sums in the first place any proportional reduction will be sizeable.

Naturally, not a great many hearts will bleed over the decision to cut pay among the best paid, most reviled subset of arguably the world’s most loathed profession.

Indeed, there are a great many who believe this is precisely the tone Wall Street ought to be setting after spending much of the past 40 years or so setting us up for what appears to be the greatest economic catastrophe in a century.

Goldman has, since it went public at least, always been ahead of the curve on Wall Street. It has managed to predict the financial future with almost clairvoyant prescience. Even during the 2008 crash it seemed to come up smelling relatively sweet.

So perhaps paying bankers less is a sign of things to come on Wall Street. There are those, some call them naive, who believe that the old maxim of three-six-three works best in banking. That is, you borrow money at 3 per cent lend it at 6 per cent and make a 3 per cent return.

More likely it is Goldman appearing to eat humble pie as Washington crafts a new raft of Wall Street regulation to set the tone for the next economic cycle in the hope that the bankers will be not be hit too hard if they look like they are taking care of their own housekeeping.

Rest assured, the pay on Wall Street may be cut but it will never appear to be that low in comparison to the majority of the world’s workforce.

#GSelevatorgossip puts it best: “Some chick asked me what I would do with 10 million bucks. I told her I’d wonder where the rest of my money went.”


Updated: October 23, 2013 04:00 AM



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