Goldman CFO Speaks On Compensation And Holding Company Status

Goldman Sach's Chief Financial Officer, David Viniar, said some interesting things in a speech at a conference today in Miami. He indicated that 2010's compensation scheme won't likely resemble how the bank paid employees in 2009. He also said that Goldman has no intention of shedding its bank holding company status. I find both these statements perplexing.


Let's start with what he said about bonuses. The Wall Street Journal reports:

Goldman Sachs Group Inc, which held down executive pay last year, has no "magic formula" for setting compensation in 2010, Chief Financial Officer David Viniar said on Wednesday.

Viniar said pay this year would depend on a number of factors, including the firm's performance, competition and "the world around us."


Viniar said Goldman did not target a compensation ratio.

"We try to pay our people fairly," he said.

Indeed. The Journal also notes that Goldman's 2009 compensation sunk to 36% of its net revenue, well below its historical average of 50%. Yet, Viniar says that 2010 compensation won't necessarily resemble 2009's strategy. What does this mean?

I guess you could take this one of two ways. On one hand, he could mean that Goldman intends to curb its compensation even further. Stop laughing: it's possible, at least metaphysically. But right, not very plausible. What he more likely means is what most people expect: Goldman's 2009 compensation levels were just a one-off to try to calm public controversy. In 2010, the firm will likely resume paying their employees even more "fairly."

That is, unless the government and Federal Reserve regulate compensation practices. Barring that possibility, I wonder how short the public's memory will be. In the latter part of 2010, when reports of Goldman's bonus pool begin to surface, unemployment is largely expected to still be above 9%. If Goldman's bankers make even more money than they did in 2009, but the rest of the nation is enduring a painfully slow economic recovery, won't people dust off their pitchforks and start screaming again?

Bank Holding Company Status

You might recall that, during the financial crisis, it was largely thought Goldman was on the brink of failure. Since it was deemed "too big to fail," the Federal Reserve decided to quickly convert Goldman from a traditional investment bank to a bank holding company, so that it could borrow emergency money from the Fed. But now that the crisis is over, Goldman no longer needs that status, and theoretically could go back to being a traditional investment bank.

But Viniar also confirmed that Goldman has no intention of doing so. I don't understand why. I mean, I do understand -- there are certain pleasant benefits that Goldman derives by being a bank holding company. But what I don't understand is why the Federal Reserve would allow the bank to keep that status. Now that banking has healed, it could convert back. The Fed should demand that it does so.