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Will Goldman Sachs Be Bulls, Bears, or Pigs?

Posted by Larry Doyle on August 21, 2009 4:46 PM |

There is no doubt that Goldman Sachs is currently the preeminent shop on Wall Street. JP Morgan is a respectable second. I am not sure if there is a close third.

Despite Goldman’s resurgence, they have a major problem — that being their public image. What are some of Goldman’s issues? They include:

1. the firm’s close ties with Washington insiders . . .

2.their agggressive trading and risk profile . . .

3. the proprietary nature of their business . . .

4. the mere fact that they have made so much money (with the assistance and in the presence of Uncle Sam), while the economy continues to suffer . . .

Charlie Gasparino of CNBC addresses a number of these points as well as the fact that Goldman will likely face the public’s wrath when they pay out billions in bonuses come year end. The Goldman execs exacerbate the situation by playing the ethnic angle as Gasparino writes, Goldman Execs Blame Anti-Semitism. In my opinion, Goldman makes a huge mistake playing that card.

The fact is the public sees Goldman specifically and Wall Street in general benefitting from taxpayer dollars injected into the system along with a host of Fed and Treasury programs. While Goldman has paid back its TARP funds, they have still benefitted from financing backed by the FDIC. Moreso than direct benefits to the firm, Goldman has clearly benefitted indirectly from the gamut of Uncle Sam’s largesse.

Uncle Sam clearly has a large amount of ‘skin in the game.’ Goldman can address its image and burgeoning reputation problem by increasing its own ‘skin in the game.’ How can they achieve this? They should compensate employees in stock to a much greater extent and have that stock vest over a longer time period.

Typically, senior executives, traders, and bankers are paid approximately 35% in stock and the stock would vest over a three year time frame. As such, individuals would typically have one year’s worth of compensation tied up in the firm.

Let’s see Goldman pay people 65-70% in stock and have it vest over a 5 to 6 year time frame. If Goldman is concerned about losing people, that pay structure would serve as a real disincentive for other firms to hire Goldman people. Make no mistake, Goldman employees would NOT be happy to be paid in this format . . . BUT there would be plenty of people on Wall Street who would take that pay structure right now to work at Goldman Sachs.

Goldman has the opportunity through this bonus cycle to display whether they are bulls, bears, or pigs.


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