Goldman grail gets holier – but less rewarding

November 15, 2012

By Richard Beales
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Goldman Sachs’ holy grail is becoming harder to reach – but less rewarding. The Wall Street firm named 70 new partners on Wednesday, the smallest biannual class since it went public in 1999. Fewer of the old guard are moving on and Goldman’s total headcount is shrinking. While a partnership is still a ticket to riches, lower profitability means it’s tougher to achieve and less of a bonanza.

That won’t stop a few dozen nearly-men and nearly-women from feeling frustrated – 110 top Goldmanites made the cut two years ago. But the total number of partners will remain about the same as a proportion of total headcount. At 32,600 at the end of September, that has shrunk 13 percent since two years ago. Another factor making new partnerships scarcer is that unhelpful market conditions have led more people to stay put rather than quitting for even grander jobs at rival firms or, say, to start hedge funds.

Old and new partners alike may also be nostalgic for the days when the serious wealth came more quickly. Goldman’s return on common equity in the two years to 2006, when it named 115 partners, averaged around 27 percent. A strong 2007 followed by the crisis year of 2008 brought an average ROE of 19 percent and 94 partners. By 2010 the two-year return had slipped to 17 percent, but the firm still named 110 partners. By comparison, the problem for this year’s cohort is stark. The return on equity averaged over last year and the first nine months of 2012 is running at just over 6 percent.

ROE is not exactly a measure of what partners are paid, though it’s related. It’s more an indication of the amount of pressure on Goldman’s rainmakers to bring in more money for the firm and take less for themselves so that outside shareholders do better. Returning to past bonanzas looks tough: all banks must now carry more capital that five years ago, reducing returns. For the new arrivals in the top rank of Wall Street’s elite, that means harder work for less.


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