The Stash

How Goldman Can Rehabilitate Itself: Go Private

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I have to say, I'm underwhelmed by the ideas the company is tossing around so far. Per this morning's Times piece:

Goldman said Thursday that it would donate $200 million to its charitable foundation (that figure represents 6 percent of its third-quarter profit, or about six days of earnings).

Rumors are swirling on Wall Street that Goldman might donate even more money to charity, perhaps as much as $1 billion, in an effort to defuse public resentment directed at the bank. Mr. Blankfein has even urged his free-spending bankers to be mindful of conspicuous consumption.

Goldman is also weighing changes to some of its compensation practices. Its executives receive a significant portion of their total compensation in stock. But like other banks, it is considering increasing that portion for all employees, giving deferred payments and introducing provisions that would enable the bank to claw back bonuses if trades go wrong.

The $200 million donation is chump change. A billion isn't nothing, but it's neither is it much alongside a bonus pool that will likely exceed $20 billion this year. And the fact that the idea is playing out this way--float a trial balloon, see if the media and Washington react favorably--makes it seem grudging and calculated, which kind of defeats the purpose.

As for the clawbacks--again, not a bad idea. But: 1.) Let's see it happen. So far this is just vague, off-the-record chatter. And 2.) It all depends on the length of the clawback period. According to the same Times piece, Goldman competitor Morgan Stanley recently implemented a three-year clawback arrangement. But three years really isn't much time for something like this. Speculative booms can certainly last much longer, so a lot of ill-gotten gains from those periods would remain both ill and gotten. 

What's my answer? Goldman should announce that it's taking itself private and becoming a partnership again. Future bets would be made entirely with the executives' own equity, and they'd have to keep much, if not most, of their own capital at the company until they left. Obviously, you'd still have the too big/interconnected to fail problem, which means excessively risky bets because your downside is bounded, and that you can borrow cheaply because of the implicit government guarantee (not to mention access to the Fed's discount window). But it would certainly introduce more discipline. Justin Fox reports that CEO Lloyd Blankfein alluded to this discipline in a conversation he had with Fortune magazine this morning: "Blankfein brought up 1994 as Goldman's worst year in memorythe partners actually had to give back money to the firm that year to make sure more junior employees got paid." Sounds good to me.  

As Blankfein apparently went on to say, Goldman continues to think of itself as a partnership, so this wouldn't be much of a cultural change--to the contrary, it would help Goldman preserve what it likes about itself. ("We regard it as a key element of our success," Blankfein said. ... this culture is central to "our ability to recruit, retain and motivate people.") And just think of the PR value of that sort of announcement. "We've decided we can no longer justify gambling with the public's money. From this day forward, we bet only our own money," Blankfein could say. Again, it wouldn't be entirely accurate--there's that implicit guarantee. But it would certainly be a compelling gesture. Unlike the other ideas being tossed around, which, as one compensation consultant told the Times, apparently approvingly, amount to arranging "the chairs on the deck so things look different." 

P.S. Princeton's Alan Blinder wrote a good op-ed on the merits of partnerships v. public ownership back in May.

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