Back on the gravy train

The investment bank Goldman Sachs delivered a clear signal that the good times are returning on Wall Street by milking a recovery in financial markets to generate profits of $3,44-billion, raising the prospect of average pay packages of up to $900 000 for its global employees.

Goldman’s second-quarter earnings, which amounted to $38-million a day, were up 65% on 2008 and confirmed the United States bank’s status as one of the stand-out winners since the credit crunch, which paralysed the financial industry for much of last year.

The firm’s revenue of $13,76-billion was the highest in its 140-year history.

Its success on the trading floor is likely to translate into record bonuses, to the dismay of critics who view runaway compensation as a significant factor contributing to the global economic meltdown.

Goldman’s chief financial officer, David Viniar, put the bank’s higher profits down to “basic blocking and tackling”.

Speaking on a conference call, Viniar said Goldman had done “very well” in its core operation of trading stocks, shares, debt and other financial products: “It was very widespread, day after day, client-facing business in very liquid markets and very liquid products.”

The bank’s trading and principal investments division saw revenue almost doubled, with a 93% leap to $10,78-billion. This easily offset a drop in income from Goldman’s financial advisory arm.

Viniar said the bank had a “very, very strong culture of risk management” and had secured loyalty from its clients: “At the depths of the crisis, we were there trying to provide them with liquidity and with the services they wanted.”

During the quarter Goldman dedicated 49% of its revenue to paying its staff — amounting to a compensation fund of $6,65-billion, or $226 000 for each of its 29 200 staff.

If the bank’s bottom line prospers to the same degree for the rest of the year, employees could end up with average annual pay of more than $900 000 — an increase of nearly 150% on last year’s figure of $363 000.

In London, where Goldman employs 5 500 staff, about 38 MPs have signed a motion noting the prospect of the bank’s bonuses “with concern” and calling on the government to intervene over vast payouts in the financial industry.

The Liberal Democrat treasury spokesman, Vince Cable, accused Goldman executives of having short memories: “In 10 months they’ve gone from taking a begging bowl to the United States government to paying out massive bonuses.

“If we are to have stability in the finance sector, we must see pay restraint in all banks, irrespective of which country they are based in.”

Goldman’s success has generated its fair share of detractors. Critics point out that the bank was the biggest counterparty in financial insurance policies to the insurer AIG and that its collateral calls contributed to the US company’s collapse, requiring AIG to seek $150-billion of government aid.

Furthermore, Goldman itself received $10-billion from the US government’s troubled asset relief fund, which it paid back last month to avoid any further caps on dividends or remuneration.

The firm converted to a “bank holding company” last year, allowing it to take retail deposits, as the business model of a stand-alone Wall Street bank came under threat.

A leading US labour organisation, the Service Employees’ International Union (SEIU), said Goldman’s pay practices are a strong argument for root-and-branch change in Wall Street’s compensation policy to end a culture of rewarding bankers for taking excessive risks.

Stephen Lerner, director of the SEIU’s financial reform campaign said: “They have some kind of moral and economic amnesia. After we bail them out with tens of billions in taxpayers’ funds, they go back to exactly the same practices as before.”

Defending the bank’s compensation practices, Viniar said Goldman had a long-established “pay for performance” policy and pointed out that staff saw a sharp drop in payouts when times were tougher in 2008. But he said: “If we do perform well, our employees will be rewarded appropriately.”

Analysts said that Wall Street trading houses face less vibrant competition after the demise of rivals such as Bear Stearns and Lehman Brothers, making it slightly easier to gain a financial edge.

Gerard Cassidy, a banking analyst at RBC Capital Markets, said Goldman’s brand, viewed as trustworthy, and its ability to attract top talent contribute to the firm’s success.

“The economy’s not out of the woods yet but I would say the dark days of Wall Street are behind,” said Cassidy. “In the first quarter we saw the first rays of sunshine.”–

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