Tuesday, July 14, 2009

It's Earnings Season!

. Tuesday, July 14, 2009

Goldman Sachs, the investment bank, today announced that its second quarter earnings rose to $3.44 billion, and that it had put aside $11.4 billion for salaries, bonuses and benefits in the quarter, up by nearly half from a year ago.

At that rate, Goldman employees could, on average, earn roughly $770,000 apiece this year — or nearly what they did at the height of the boom.

Senior Goldman executives and bankers would be paid considerably more. Only three years ago, Goldman paid more than 50 employees more than $20 million apiece. In 2007, its chief executive, Lloyd C. Blankfein, collected one of the biggest bonuses in corporate history -- nearly $70 million. The latest headline results — $3.44 billion in profits — were powered by earnings from the bank’s secretive trading operations and exceeded even the most optimistic predictions.
Many analysts were surprised that Goldman posted such hefty prospects, especially since it was only last month that Goldman repaid the $10 billion that it received from the U.S. Treasury Department in October. Although it is widely believed that Goldman was required to take the funds, even though they probably didn't need the extra capital.

Megan McArdle comments on why these profits shouldn't have come as such a surprise:
This is not actually hugely surprising, given that three of their biggest competitors went out of business or were acquired in the last year; as financial markets unfroze, Goldman, which had one of the cleanest balance sheets, was bound to see a hefty increase in their profits.
Goldman's stock price has also rebounded nicely, up about 77% since the beginning of the year. (Dammit, should've bought it!) It also turns out that by paying back the TARP monies last month, Goldman also freed itself from any government interference into their compensation practices, thus allowing Goldman to freely pay its employees these nice little bonuses.

Many are up in arms about paying these people so much money, even if they did as well as it seems they did this past quarter; McArdle addresses a bit of this in her post. But what are we supposed to do? Have the government intervene again, this time to cap pay inside a private corporation that made record profits, just because they made record profits while the rest of the economy is still tanking and unemployment is about to cross 10%?

I don't think that'd be a good idea; we already set a pretty bad precedent by bailing out the banks in the first place, even though it was probably needed to restore market confidence and recapitalize institutions that were in trouble. Further meddling, especially into the compensation practices of a financial firm not under government ownership, would be setting another bad precedent.


Kindred Winecoff said...

I don't buy McArdle's explanation. I don't have any data on this 'cos I don't feel like digging into it right now, but all American investment banks had some domestic competition removed in the past year. And while some of them(like Citi) have improved their profit margins, only Goldman has done this well. Moreover, they all face international competition that could/should have sopped up any profits to be made from the collapse of Lehman et al.

More likely (in my mind) is that Goldman's business plan was just somehow better; maybe they were less exposed to the toxic MBS and CDS than other banks and/or were able to unwind their positions earlier than other banks. Whatever the reason, Goldman has faced the same environment as all the other banks, so just pointing to systemic effects can't explain why they've done better.

Kindred Winecoff said...

here's a bit of explanation from those (including Felix Salmon) who live-blogged the Goldman conference call on the earnings report:


It's Earnings Season!




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