Bonuses: Wall St's Neutron Bomb
Goldman Sachs has always been considered the leader in investment banking, so it's no surprise that the firm felt the need to apologize on behalf of the entire industry for creating the current crisis.
'While the firm has distinguished itself through many aspects of the crisis, we cannot ignore the fact that we are part of an industry that is directly associated with the ongoing economic distress,' a spokesman for the firm told our colleague, Sue Craig, as he confirmed that Goldman's top executives will get only their base salaries of $600,000, with no bonuses this year.
A cynic might reply to that, 'What industry?' Investment banking, as we know it, is dead. The markets have steadfastly refused to accept Goldman Sachs's assurances that nothing at the firm will change. Goldman's shares are trading at about half the value they had even a month ago. Investors are concerned that Goldman Sachs has no industry any more, that the one-time leader of Wall Street is now a king without a country.
Blankfein and his team may be the only ones at the firm to entirely forgo bonuses, but others at the firm will see deeper cuts than they have in over a decade. Debt markets dried up this year, with investment-grade debt monthly issuance volume declining 57% versus last year and high-yield issuance down 97%, according to research from buyside firm Sanford C. Bernstein. Equity markets also suffered, with 97% less money raised in initial public offerings this year compared to last year. Several capital-raisings by financial firms, including JPMorgan, Goldman itself, and Wells Fargo, aren't enough to offset the larger slowdown in equities. Bernstein expects equities revenue to fall 45% at Goldman for this year. Goldman's investment-banking revenue could see a 55% decline compared to the fourth quarter of 2007, Bernstein suggested.
Goldman's principal investments business - in which the firm invests its own money - is also likely to suffer as Bernstein predicts a write-down on Goldman's stake in Industrial & Commercial Bank of China.
The best prospects for decent bonuses are the investment-banking old school: the M&A bankers who fell out of favor for years as fixed-income brought in the lion's share of profits. The mergers-advisory business has done well, which translates to only a 37% decline since the fourth quarter of 2007. In particular, Goldman's financial institutions group, or FIG, should do well since nearly one-third of the completed M&A transactions in the quarter occurred within the financial space, and 60% of the capital-raisings, according to Bernstein research.
Goldman is the first to acknowledge that bonuses might be a powerful show of contrition this year, but if its history of leadership is any indication, it won't be the last. UBS announced that it will put all of its bonuses in escrow. Citigroup is laying off 50,000 employees and selling off assets, while preparing to cut bonuses of highly paid employees. Cutting bonuses and staff will comfort shareholders that Goldman and its rivals won't profit while shareholders suffer. But, while symbolically welcome, it won't solve the one thing shareholders want most: a return to profitability. |
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