We’ll Reserve Judgment

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Expert Perspective by Grahall’s OmniMedia Editorial Board

 

expert perspective telescopeIt may be easy to blame Goldman Sachs these days for just about any problem.  Don’t like your stock portfolio? It’s Goldman’s fault.  Don’t like that foreclosure on your home? It’s Goldman’s fault!  Don’t like the government?  Well, so many ex-Goldman executives hold elected and appointed positions some think we might be living in the United States of Goldman. 

 

Matt Taibbi penned a long and very critical story of Goldman in July’s issue of Rolling Stone titled “The Great American Bubble Machine“. The article suggests alarming involvement by Goldman in the ups and downs of  the US and world economies since the 1920’s.

 

Taibbi’s article like other Goldman exposes were likely completed in early summer to be published in July and have missed yet another recent and very fascinating fact.  In mid-July Goldman announced 2nd quarter compensation reserves that would, when annualized, amount on average to nearly $1 million dollars per employee.  In a July 14th article for Reuters titled Goldman compensation: $1 mln per employee in sight” Juan Logorio writes: “Goldman Sachs Group Inc employees, on average, are within striking distance of $1 million of compensation and benefits this year, just months after the bank received bailout funds and other support from the government.”

 

Goldman is not likely to spread compensation like peanut butter at $1 million per employee. Clearly the big bucks will go to the select few who have contributed most significantly to Goldman’s bottom line and will contribute to their next major undertaking, and those big bucks could be really, really big:  8-figures big for a handful of folks. 

 

But was it just Goldman’s outstanding 2nd quarter performance that inspired that level of reserving or could there be a subtle challenge in this action?  Well, just a week later, Morgan Stanley announced compensation reserves as well.  Christine Harper writes an article in Bloomberg (July 22): “Morgan Stanley set aside 72 percent of its second-quarter revenue for compensation and benefits, more than Goldman Sachs Group Inc. or JPMorgan Chase & Co., amid a ‘war for talent’ with rivals that generate more money”.

 

72 percent of revenues!  Wow!!  Maybe Morgan Stanley is making up for lost time, correcting lower reserves for the first quarter, for example.  But in an industry that reserves more typically at 45 to 50 percent of revenue, Morgan Stanley’s number is very big.  And why would Morgan feel the need to reserve at these stratospheric levels?  Well, as Harper writes, it’s about protecting their human assets. 

 

Matt Taibbi suggests that the next big bubble for Goldman will be “the fight to stop global warming [that] will become a ‘carbon market’ worth $41 trillion a year.” If Goldman’s prediction about this next big bubble is right, what better way to ensure they capture the lion’s share of this $41 trillion than to eliminate some competition.  The “fight for talent” just might offer a platform for Goldman to come out not only on top, but as the near-sole survivor on Wall Street by spending Morgan Stanley and second tier bank competitors into oblivion. 

 

How might this work? First Goldman throws down the challenge of  $1 million per-person reserve, next other banks need to follow suit in order to retain current talent and recruit new. Then comes a backlash by shareholders as profits decline or disappear, shareholders sell, talent leaves anyway and Goldman is left holding the money-bag.

 

If Ronald Reagan were alive we think he might be smiling as he reflect on the similarities of this situation to Russians’ costly reaction to Regan’s proposed StarWars program!

 

Email Grahall’s OmniMedia Editorial Director at edie.kingston@grahall.com

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