What’s driving Goldman’s earnings?

Marketplace Staff Jan 21, 2010
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What’s driving Goldman’s earnings?

Marketplace Staff Jan 21, 2010
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TEXT OF INTERVIEW

Kai Ryssdal: The stock market didn’t much care for what the president had to say today. Rumors of the White House plan started leaking out last night, and all three major indices suffered right from the opening bell this morning. Financial shares led the way down, and that didn’t quite match up with some other news today — that Goldman Sachs cleared just under $5 billion last quarter.

Goldman is one of the banks that is sure to be affected by the president’s proposals if they do become law, especially that part about trading with its own money. Our New York bureau chief, Amy Scott, is on the line to talk about that. Hi, Amy.

AMY SCOTT: Hey, Kai.

Ryssdal: So the president was talking today about these proprietary trading desks, as Alisa was just telling us about, and how much money they make for the firms. We had a real life example of that with Goldman Sachs’ profits this morning. How profitable is it?

SCOTT: Well, we don’t know exactly. But Goldman’s chief financial officer said today that about 10 percent of the firm’s revenue comes from its proprietary trading desk where the traders are just playing with the firm’s money. But, you know, a lot of the trading that they do that is theoretically on client’s behalf, like taking the other side of a trade, still benefits the firm, and all of that trading made the firm a lot of money last year. But another big part of what drove Goldman’s profits up is that it set aside a much smaller share of its money for bonuses.

Ryssdal: Well, this is where I wanted to stop you, because it’s my understanding that Wall Street’s claim about these bonuses and their size is that, listen, we have to pay them or people are just going to go work somewhere else. But now Goldman says maybe not?

SCOTT: Well, we should put this in perspective. Goldman is still paying out almost half-a-million dollars per employee on average. So we’re not talking chump change, even though the overall amount of just over $16 billion is still lower than it was a couple of years ago. But Goldman is paying less than 38 percent of its revenue in compensation, typically it pays closer to half. So it’s apparently calculated that the risk of this political backlash was greater than that of people walking out the door. Shareholders have sued the company, they’ve had protesters outside their headquarters in lower Manhattan, and Goldman’s CFO said today that the firm is not deaf to these calls for restraint.

Ryssdal: What are the odds, would you say, that this is an actual change of heart on the part of Goldman Sachs and maybe eventually by all of Wall Street? Or it’s just done in the heat of battle to dodge the political bullet?

SCOTT: Well, it’s hard to say. I talked to a Goldman spokesman today who wouldn’t speculate about future compensation. And I also talked to other people who say, you know, right now Goldman is aware that people hate bankers, and this is maybe a temporary solution, reducing that overall figure that it pays in bonuses. But what might change they say is how these firms pay their bonuses. There’s already been more emphasis on long-term incentives, less incentives that might encourage risky behavior. The top 30 executives at Goldman Sachs will get their bonuses paid completely in stock that they can’t cash in for five years. So there are some indications that there might some real changes, even if the amounts that we’re seeing are still mind boggling.

Ryssdal: Wall Street bonuses, the story that keeps on giving. Marketplace’s Amy Scott in New York. Thanks, Amy.

SCOTT: You’re welcome.

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