Readers Weigh In: Goldman Bonuses "Pure Greed"

Off topic, but thought you might enjoy the reader response to an Op-Ed I recently wrote for the New York Times on the astronomical bonuses awarded this year at Goldman Sachs.  I argued that although the bonuses obviously weren't fair in a moral sense, they were at least justifiable in the context of the amount of profit Goldman generated.  Even after the $16.5 billion payout, Goldman still generated more pre-tax profit per employee than almost any other company in the economy, including Google (so it is hard to say that Goldman's shareholders got cheated).

Not surprisingly, Times readers weighed in, and their responses were unanimous: The Goldman bonuses are undeserved, unfair, and the result of unadulterated greed.  So take that, Goldman (and me).

Wall Street does consistently generate otherwordly pay-packages, even for the rank-and-file, so the reaction is understandable.  Other industries generate vast wealth, too, though--it just doesn't come from salaries. 

For example, I wonder if the reaction would be the same if I had written about the average post-IPO wealth of pre-IPO Google employees.  My guess is no--most people have more respect for entreneurial success stories like Google than perennial success stories like Goldman--but even here the admiration would probably be fleeting.  Today's inspiring start-up is tomorrow's oppressive incumbent, as Microsoft employees learned in the 1990s and Google employees have been learning over the past two years.  (Goldman employees, meanwhile, have long since learned to preserve the health of their golden goose by remaining as discreet as possible.)

Success over a career at a Goldman--for those who can manage to get jobs there--is probably more likely than success in a series of promising start-ups (would love to see some numbers on this), so perhaps the comparison is unfair.  In any case, those of us who don't have the good fortune of working at a Goldman or Google this holiday season can always dream...

Comments

[anon]

I guess we mere mortals have trouble with firms like Goldman. When you look at Google we see major risk taking, massive tangible value and no other players with a comparable service. But with Goldman, we see little risk, people basically doing their job, no observable value and plenty of other firms who achieve similar results.

[anon]

It really just proves that unfettered capitalism is stacked in favor of the top.

[Victor]

Ugh, "not fair in a moral sense"? What a load of populist claptrap. What is fair is what people ar able to earn through free exchange without fraud. All these ad hominem arguments against the morality of people earning large sums of money speak more to the envy of those who haven't done as well for themselves.
It's really sad to read you pander to that sort of invidiousness.

[Neal S. Lachman]

I agree with Victor. Those who complain about big paydays and bonuses at Goldman and the likes are -most likely- blue with envy.

Goldman Sachs has a great history as a company, and it deserves a great place in the businessworld even today. The people who made and still make GS successful should be rewarded, it is as simple as that. The size of the reward is what bothers people, but what do they expect? Some form of communistic system where ALL ARE EQUAL? Yeah right, that didn't and doesn't work. Let those who are bothered move to China, a communist country. Oh I forgot, China is increasingly becoming capitalistic.

Shareholders must not whine either. There investment in GS is booming, the reward is a reflection of the company's success. Without these people GS would be an empty shell, just like Google would be without its engineers and brainacs.

[Henry Blodget]

I don't think you can say that this country's wealth and income disparity is morally fair until everyone really does have exactly the same opportunity at birth. And we're not there yet. Also, luck and timing play a significant role in all business success (as do hard work, smarts, competitiveness, etc.), and it's hard to see how that's really fair, either. And then you have the problem that the free market does not do a perfect job of rewarding success in proportion to the societal value that is created, especially in the private vs. public and non-profit sectors (i.e., profit is far from a perfect measure of overall value).

It's not a criticism of the Goldman and Google folks to observe that their compensation isn't morally fair. They are perfectly entitled to it--and entitled to be proud of what they've accomplished. LIFE isn't fair, and that doesn't mean that the folks who are luckier than most should feel guilty or unworthy. It might be appropriate to at least feel fortunate, however.

[Victor]

Henry you say that things can't be justified as morally fair until we all have the same opportunity at birth. Then you go on to admit that life itself isn't fair. That's right. It's absurd to think that we can all be born with the same opportunity at birth. Some of us will be smarter, some taller, some more beautiful. The lottery of life cannot be eliminated.
The lottery we all participate in does not justify a system that tries to make things more equitable through theft (e.g., taking money from successful goldman execs) and redistribution.
If you follow that logic then you should equally be an advocate for a system that forces beautiful people to marry ugly people, because that would be more equitable for those who lost the beauty lottery at birth.
That whole school of thought is bankrupt.

[Josh]

Hey Henry,

Have u read the book, The Accidental Investment Banker...

[AG]

I think we need to look no further than the GS's recent stock behavior (after the announcement of their stellar earnings). On December 19th, the firm reported "spectacular" record revenue numbers, net earnings and ROE. Yet the stock is up less than 1% since then! How can this be?

This, in my opinion, validates two salient aspects that are critical to the firm right now (the first one I state below being directly related to the bonus situation):

1) General Sentiment Regarding Outsized Bonuses - I am not a believer in telling people "how much they should or shouldn't make..." (note: GS's recent compensation payout is well within its historical % range) However, like it or not, with negatively-pointed articles/discussions in the NY Post, New York Times, and other major publications, the public is left with a "bad taste in its investment mouth". As a result, I believe general sentiment can have an an adverse impact (even to a small degree) upon the price behavior. So I would say that at a minimum, the outsized bonus may have somewhat of a negative effect on GS.

2) Unsustainable Revenue Growth - Can the firm really continue to basically "print" cash? Not so sure this is possible. If you back out the one-time Chinese ICBC $900 million deal then the earnings are not as strong relative to their Q4 stated earnings estimates. And, perhaps more imporatantly, can their famed trading desk continue to pound out returns as they have recently? My guess is no! With their VAR (value-at-risk) metric increasing significantly every quarter, I think at some point the firm will have to realize that their appetite for risk is probably not worth the expected return. In fact, it makes me wonder if their appetite for risk is even quenchable. I would expect to see a 2Q07 slowdown in FICC.

With that said, I believe the current stock price behavior (after the announcement of the compensation payout) is a halfway-decent proxy for the level of concern or general sentiment regarding GS. I think this year is an exception and I would expect their compensation (along with their earnings) to normalize in the next year or two.

[Dimitar Vesselinov]

Is Greed Good?

Gordon Gekko: Address to Teldar Paper Stockholders
"The point is, ladies and gentleman, that greed -- for lack of a better word -- is good.

Greed is right.

Greed works.

Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.

Greed, in all of its forms -- greed for life, for money, for love, knowledge -- has marked the upward surge of mankind.

And greed -- you mark my words -- will not only save Teldar Paper, but that other malfunctioning corporation called the USA."
http://americanrhetoric.com/MovieSpeeches/moviespeechwallstreet.html

See also:
http://en.wikipedia.org/wiki/Greed
http://en.wikipedia.org/wiki/Wall_Street_%28film%29

[Neal S. Lachman]

Dimitar,

Greed is not the right word here, "reward" is.

If you allow me to paraphrase:

"The point is, readers of IO, that reward -- often misunderstood as greed -- is good.

Rewarding is right. It is a system people from all classes -from the working class to the ultra-high-net-worth-individual- understand as an incentive to wake up, get dressed, go to work, and be productive.

Rewarding works. Because, in return for their productivity, people expect monetary gain. The gain will be relative to one's input and the specialism.

Rewards clarify, cut through, and capture the essence of the evolutionary process called business. We have seen newspaper delivery boys becoming millionaires, and we have witnessed billionaires becoming paupers.

The thirst for rewards, in all of its reciprocative forms -- reward for life, for money, for love, knowledge -- has marked the upward surge of mankind.

And rewards -as structured in its capitalistic form as we know today- has helped the corporation called the USA remain the most dominant and powerful economy in the world."

There is nothing wrong with the USA and the way it rewards its businesspeople and talents. If people have a problem with that, and are so concerned about the inequalit and unfair distribution of wealth, let them then donate money -they otherwise spend on a latte- to some organization that actually saves helpless childrens' lives. I wonder how many of these so-called advocates of equal distribution of wealth have decided to give up their lattes in favor of donations.

Arm-chair philosophers are whining people who will never make a difference themselves. Just bitching at people with big paychecks won't help the poor and helpless. Get up, organize a benefit aimed at getting some money from these wealthy and well-to-do people, and actually do something about the inbalance of wealthy and poor people. Or draw your checkbook.

[Josh]

If u want to look at a quick VaR comparison of the banks go to the focus section of this BCG report.

http://www.bcg.com/publications/files/Q2_06_Market_Report_Final.pdf

[Sam E. Antar (former Crazy Eddie CFO & ex-felon)]

Dear Goldman Sachs:

I congratulate you on the huge bonus amounts you awarded your employees this year. Your largess to these hard working employees is the American dream at its best.

One question please, when your company talks about jobs moving overseas because of the high cost of labor do you believe that your high labor costs through these large bonuses helps contribute to this problem?

Yes, I know, you mean those blue collar jobs in the auto industry etc.

Recently your previous Chairman and now our esteemed Treasury Secretary Henry Paulson discussed that regulations like Sarbanes-Oxley are too cost prohibitive and are driving IPOs to foreign markets.

He failed to mention the possible impact of high fees paid to investment bankers like you. Surely those bonuses were paid from such high fees.

Unlike many that criticize your high bonuses I believe you are entitled to them. However, if you keep it up those high bonus days may end soon. The foreign markets may take away more of your business due to your high fees which pay your high bonuses.

You may end up like the auto industry – uncompetitive and losing market share.

You may end up with an even worse situation. To "protect" American jobs the government may step in and regulate the level of bonuses or worse your fees. Maybe the government will impose highly progressive tax rates on high earners like you.

Now we both don’t want that. However, you have been warned.

Respectfully,

Sam E. Antar (former Crazy Eddie CFO and ex-felon)

PS: Thank you for your glowing analyst reports on Crazy Eddie. It made a tough fraud easier.

[vanil]

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[BrianG]

I can hardly understand why someone should be HATED for being successful. If the Gold Sachs guys got BIG bonuses,good for them! It should just lead those of us who didn't get similar bonuses to strive harder.

[Neal S. Lachman]

This is in response to Sam Antar.

Sam, first of all, you are comparing apples and eggs. The blue-collar jobs being moved abroad is something of a global trend, and it is only wise for businesses to somehow, somewhat do this. This in order to remain competitive. There can be argued whether outsourcing/moving jobs is a good thing or not (seen in the greater context of business).

The great rewards have been part and parcel of these kind of institutions. It is nothing new that should warn for a somewhat risk trend. What you are warning for is something the businessworld had to consider since decades. Yet, the outlook is (still) good for the financial insitutions.

The post scriptum remark you make is a low-blow, because the people at GS and other financial institutions will look at the information you give them, then they will look at trends and market conditions and whatnotmore. Basically, if YOU decide to commit fraud, you cannot blame others for not having seen through your web of lies and deceit.

This is not a personal attack, just a personal response.

[Robert Atkinson]

Victor's comment "If you follow that logic then you should equally be an advocate for a system that forces beautiful people to marry ugly people, because that would be more equitable for those who lost the beauty lottery at birth" evokes Kurt Vonnegut's 1961 short story "Harrison Bergeron," set in a dystopian future in which beautiful and strong people are handicapped by masks and weights in order to enforce equality.

http://instruct.westvalley.edu/lafave/hb.html

[Sam E. Antar (former Crazy Eddie CFO & ex-felon)]

Neil:

I respect your comments. First, I criticize the level of bonuses at Goldman Sachs not at out jealousy but to prod this great organization to do better for our great capitalist economic system.

You may be correct as you say that my “post scriptum remark you make is a low-blow, because the people at GS and other financial institutions will look at the information you give them.”

You and the readers here need to understand exactly where I am coming from when I am making my comments.

I am fully the blame for my crimes and not any analyst that I fed my selective disclosure and spin to. Neither is anyone else the blame for any of my crimes. I make no excuses for my crimes and committed them simply because I could.

The financial community depends and relies on the selective representations of management, the checks and balances provided by so-called independent Audit Committees, and the effectiveness of audits conducted by independent external auditors for the reliability of financial information which is the basis for the research reports of financial analysts.

What upsets me, as a person who has committed one of the worse financial frauds of the 1980’s is that the same victims of my crimes (many in the Wall Street community) have lobbied to weaken reforms like Sarbanes Oxley which they and other detractors say are too costly and burdensome to corporations.

At the same time they do not take into account their own fee structure into the mix when they say that the cost of Sarbanes Oxley is driving IPOs out of US markets.

The main pillar of a great capitalist economic system is the integrity of financial information. It’s the economic predators like I was that are destroying it. What drives me “insaaane” is when great companies like Goldman Sachs and its former Chairman now Treasury Secretary Paulson cannot understand the necessary steps required to insure a strong and vital capitalist system – especially from one of the venom that knew how to subvert it has advised just about everyone about its weaknesses.

So Neal, I know you did not attack me personally. I just did to make my point.

Respectfully,

Sam E. Antar (former Crazy Eddie CFO & ex-felon)

[Neal S. Lachman]

Sam,

Thanks for the swift response. I just read the interview you gave on Bloggingstocks.com http://www.bloggingstocks.com/2007/01/02/interview-with-a-reformed-fraudster/

Amazing in-sight. I enjoyed reading the interview, and I think I actually learned a bit about keeping an eye on the companies we invest in. Really a must-read for investors. Thank you for "sharing".

Now, to come back to the subject. I recently commented on DealBook on the Hedge Fund regulation and mentioned SarbOx. http://investorworld.wordpress.com/2006/12/22/my-comment-on-hedge-fund-regulation/

I believe there should be regulation in the Hedge Fund, but not in the Private Equity industry. Of course, you could say I am saying this because I have a self-serving interest in the PE and Venture Capital industry not being regulated, but there is a huge difference between HFs and PE or VC firms. The most important one is the redemption period (i.e. period of lock up of the investor's capital in the fund).

I belief that big paychecks are the result of hard work and good luck, but also subject to timing and performance. The fact is that SarbOx is actually driving the businessworld crazy. It is a massive burden on even the smallest companies. As a matter of fact, SarbOx sometimes invites conflict of interests, which it was meant to prevent.

IPOs are increasingly expensive, true. But not because of the high fees of the underwriters and analyst reports. In that case the stock exchanges are to blame, not the investment bankers.

Sam, I don't think you maintain a blog. I'd like to read a blog by you, simply because you have a great perspective on business. You should keep things coming. Let me know when/if you decide to launch a blog.

[Sam E. Antar (former Crazy Eddie CFO & ex-felon)]

Neal:

I do have a blog. I do not know if its appropriate to list it here so look at the first page of my web site.

We can respectfully disagree on the various issues involved. When we both disagree however, its because we both want to see things get better.

I will discuss in more detail later.

Respectfully,

Sam

[dan in michigan]

If Goldman were still a private partnership then no problem. Problem is they step in front of the shareholders in the good times and when things go bad the public shareholders will get hammered.

[Alexander]

Some have a problem with someone making $50 million/year. I don't, and that's probably because money doesn't impress me.

To me, the guy has probably worked extremely hard and been extremely lucky. (Too bad, we don't hear all the ones of his age group who suffered serious health issues due to the enormous work pressures; the typical survivorship bias).

I do hope the guy gives most of his salary away….this kind of money easily screws one peace of mind and value system. "More", in fact becomes "less"….

Many "financially rich" people are just pathetic "poor" individuals, as they have become the slave of their wealth and have lost the true sense of life. They have forgotten that the best things in life are basically free…

What do bothers me is that in our Western society "rich" is always being defined by financial criteria…

Of course, it's a Herculean task for any individual (with his typical stone age mind) not to be brainwashed by the endless marketing message of today's consumption society that would like us to believe that "more equals more happiness"….1000s of years ago, we never knew if we would have enough food the next day…so it's no wonder that our genes are programmed to gather always more and more… Yet, so often, the more money one has, the more one wants, the more self-destructive one becomes

I do favour a society with an efficient (but limited) welfare system and where there is not an enormous discrepancy between rich and poor. It's just not healthy, when there is no large middle class.

[Michael Gittins]

This was not greed. "Greed" isn't the correct word. "Spoils" perhaps, if one insists upon a pejorative term, but not greed. Goldman simply made the best, lawful profits possible from their activities, and others are welcome to compete to take a share of Goldman's profits. Where better should these spoils have been sent? To the IRS? They got their share, for sure. Shareholders? They got their shares too, and besides, that's their business...