Hobbling Goldman

By Felix Salmon
October 13, 2009
Andrew Ross Sorkin today picks up the Law of the Excluded Middle and runs with it, in a column headlined "Don’t Fail, or Reward Success":

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Andrew Ross Sorkin today picks up the Law of the Excluded Middle and runs with it, in a column headlined “Don’t Fail, or Reward Success”:

We can’t have it both ways, either. At one moment, many in the nation crossed their fingers hoping Goldman and the rest of Wall Street would be saved to halt the country’s downward spiral. But when the banks finally get up on their feet, we want them to fall flat again. Mr. Blankfein can’t win.

It’s true that we didn’t want Goldman Sachs to fail. But that’s got nothing to do with some kind of national wish for Lloyd Blankfein’s continued success, and everything to do with the fact that Goldman Sachs is too big to fail. Had the natural order of capitalism been allowed to work its course, then AIG and Morgan Stanley and Goldman Sachs and Citigroup and Bank of America and the rest of the financial system would have essentially imploded. Needless to say, that would not have been good for the economy as a whole. But just because we need these banks to exist does not mean that we want these banks to make enormous profits.

Sorkin does, eventually, arrive at the nub of the argument:

The bad news is the absolute number. It is far greater than any other bonus figure on Wall Street. Goldman says that its compensation program is based on pay for performance, and it is hard to argue that it has not performed well.

The company also says that it needs to pay these large sums to retain its best people or risk losing them to rivals. That may be true for a small percentage of its most senior executives, but some experts suggest it is a disingenuous argument…

Indeed, it is possible that Goldman’s bonus largess is creating a vicious circle: other, perhaps lesser firms, are probably going to pay even higher bonuses to try to compete with Goldman.

And therein lies the rub: While Goldman may have the Midas touch, the rest of Wall Street never seems to be able to keep up. And the only way for rival firms to compete with Goldman is take to outsize risk.

Believe it or not, there’s a simple (if not easy) solution to this problem: Goldman should just pay its employees less money, and have more left over for shareholders. That’s not asking Goldman to “fall flat”, it’s just asking that it not contribute in a harmful way to the culture of risk-taking that pervades Wall Street.

How should Goldman do this? One way would be by putting a cap on bonuses. Most people, in most jobs, don’t get any bonus at all. When there is a bonus, it’s generally small: maybe a thousand dollars here, 5% there — enough to buy some nice Christmas presents, perhaps, but not enough to buy a small Latin American nation.

It’s entirely conceivable that if Goldman started paying its bankers less money, the firm as a whole might become less profitable. From a public-policy point of view, that’s fine: the nation has no particular interest in Goldman making spectacular amounts of money every quarter. From a philosophical point of view, there’s a bit of a problem with artificial restraints on trade, but that’s something which goes hand in hand with too-big-to-fail status. If you’re a small investment-banking boutique, feel free to pay your people as much as you like. But if you have a trillion-dollar balance sheet and pose a major systemic risk to the economy, then you lose that freedom.

So the answer to the question Sorkin poses in the question is, essentially, “yes”: we don’t want Goldman to fail, and neither do we want Goldman to reward success in the way it has of late. What we do want is less excess and less systemic risk. Allowing a super-sized Goldman to pay out untold billions in bonuses every year — even if they’re cleverly structured in the form of slowly-vesting stock — achieves neither of those aims.


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7 years and 7 days after 9/11 America became a command economy run by the banking lobby and led by Goldman alumni. This configuration lives or dies according to public opinion, so visible greed at GS is just not on. I thought we’d already figured this out last August 6th from the reaction to Mrs. B getting grumpy waiting for her crab cakes.

Wouldn’t the easiest thing to do would be to ditch limited liability for the recipients of these out-sized salaries? So long as it’s only OPM at stake the high-stakes gambling will continue.

Posted by Jessica6 | Report as abusive

Goldman & banks in general seem to operate in a world where labor costs are not an issue. Do they advise their clients that is the case also? Is any other business able to say ‘if we pay our employees LESS we will be LESS profitable?’ Especially one that has labor as its #1 cost!

Cost cutting around all businesses is what has driven profit in the corporations that Goldman gets its fees from. The rules of business apply everywhere.

Posted by winstongator | Report as abusive

while working at GS quite a few years ago I used to joke and say that we were ahead of the competition for a simple reason: we were the one-eyed man among blind men. Nothing has changed and it is amazing that all the smart people in the competing firms and the media have not yet figured out the simple ingredients in Goldman’s recipe for success – after 25+ years!

This is not disagreement, just thinking out loud. But say Goldman were broken into 1000 small boutique firms. Then suppose that someone syndicated a large and risky debt instrument to all 1000 mini-Goldmans. And say that same thing happened many times over. Is the financial system better off than if a single Goldman had been responsible for all those questionable investments?

Posted by Daniel Whalen | Report as abusive

Felix –

You are right to go after Goldman time and again because it is true that they are harmful in certain ways to the economy. But I don’t think it is convincing to simply go after high pay because that sounds Marxist, even though you are not a Marxist. In areas such as professional sports and entertainment, very high pay is common and furthermore it reaches a fairly high percentage of revenue; we accept that.

I would say that the source of that pay is at issue, and herein lies the reason why Goldman has done so much harm. By trading using a privileged, seemingly insider position in relation to government, by peddling financial products they they themselves would not own, by legally and illegally front-running retail investors and funds through their trading ability (including high-speed trading), there are many ways Goldman enriches itself to the detriment of the greater economy and the world.

Of course, there is a great deal of positive economic activity by Goldman as well. Perhaps even a majority of their economic activity is useful and positive; it’s hard to tell.

But when you mix feces and ice cream it tastes a lot more like former than the latter, or so I’ve heard.

Posted by Dan | Report as abusive

How do you know that Felix is not a Marxist?

There are two arguments for bonuses:

1. To attract the best people to the field. I don’t see people leaving Goldman et al to make less in other industries.
2. To keep your people from competitors. This is more of an issue because not all companies can or will be regulated. I have absolutely no idea how this idea then translates to paying lots of non-essential, not real stars way more money. Maybe it’s just spillover.

Posted by jonathan | Report as abusive

Goldman would have survived. And even if not, we should have gone through an orderly liquidation of them, and all of the other investment banks, rather than giving them public money. It is wrong to take money from the taxpayers to support private interests.

The last masterpiece of the Bush legacy (with GS insiders) was saving the financial institutions (and GS)! And Obama does not have any intention to stop those increasingly arrogant entities.

So conclusion: All industries in the US should do one defensive thing – Put colleagues in the Government and take whatever outsize risk it can take so that when the bubble pops, the taxpayers – not the institutions, suffer while bonus can be paid as normal!

Posted by Rose Eli | Report as abusive

How is it possible for Goldman Sachs to make so much money when the economy is doing so poorly and there is so little private investment? Does anyone else find this extremely suspect?

Posted by Brian in Chicago | Report as abusive