'Bonus heaven' at Goldman Sachs after record year
NEW YORK: Money is not supposed to grow on trees. Unless you happen to work at Goldman Sachs.
Scores of Goldman bankers and traders were to find out, starting Wednesday, what their bonuses will be, and chances are that they will be impressive. The bank is paying $16.5 billion in compensation this year, an average of roughly $623,418 per employee.
The investment bank reported earnings Tuesday that left jaws agape on Wall Street. Quarterly profit soared 93 percent. The bank earned nearly as much per share in 2006 as in the previous two years combined, both of which were also record years. Immediately after the results were released, they were labeled the best ever by an American investment bank.
Wealth on Wall Street is not distributed evenly, of course. Rainmakers in investment banking can expect to see $20 million to $25 million each, and traders who booked big profits will take home a chunk of those profits, as much as $50 million each, according to senior executives at leading Wall Street banks.
"Anyone at the bonus line at Goldman Sachs died and went to bonus heaven," said Michael Holland, chairman of Holland & Co., a New York- based investment firm. "It doesn't get any better than this."
The bonuses at Goldman, the leading merger adviser in the industry, and elsewhere on Wall Street (Lehman Brothers and Bear Stearns report earnings Thursday, and their earnings are expected to be robust as well) are expected to give the New York area's economy a substantial boost, particularly in sales of high-end residential real estate, luxury cars and other costly goods.
"When these guys learn what their bonuses are, we are among the first people they call," said Pamela Liebman, chief executive of Corcoran Group, a residential brokerage. "They call their mothers, and then their real estate brokers."
Investment banking earnings are often proxies for the health of the American and global economy. And conditions have been ripe for Goldman and its competitors to mint money.
Stock markets have been on a tear for months, while credit markets — far bigger than the equity markets — have continued to be robust. Credit derivatives continue to grow at a geometric pace, with $27 trillion outstanding. Opportunities to invest in companies, trade securities or advise clients in markets around the world, including China, Russia and the Middle East, abound.
Private equity firms continue to buy larger and larger companies — witness Blackstone Group's $36 billion acquisition of Equity Office Properties Trust, the largest U.S. office-building owner and manager, a deal on which Goldman advised. And hedge funds, which account for 40 percent to 80 percent of trading in certain markets, represent significant profit-making potential for Wall Street — and, of course, for Wall Street's persistent leader.
For the year, Goldman produced record revenue of $37.7 billion and a record profit of $9.5 billion, or $19.69 per share.
In the quarter, the bank earned $3.15 billion, or $6.59 a share, on revenue of $9.41 billion. Investment banking revenue climbed 42 percent to $1.3 billion, and trading and principal investments rose 57 percent to $6.6 billion.
Even David Viniar, Goldman Sachs's cautious chief financial officer, sounded vaguely optimistic.
"Our economists' view is that we will continue to have good economic growth, somewhat slower in the U.S., somewhat better in Europe and very good in Asia," Viniar said. And "our business tends to be tied to economic growth more than anything else."
Fueling Viniar's optimism is the breadth of Goldman's business as well as the number of deals the bank has in the pipeline.
Like many universal and investment banks, Goldman Sachs has transformed its business to capitalize on sea changes in the capital markets, particularly new opportunities in far-flung markets and a shift from issuing and trading conventional stocks and bonds to building and trading complex derivative products. .
In 1997, investment banking and trading and principal investments produced roughly the same revenue ($2.6 billion and $2.9 billion, respectively) in a total net revenue of $7.4 billion.
In 2006, investment banking earned $5.6 billion while trading and principal investments produced $25.6 billion — almost 70 percent of the $37.7 billion in net revenue.
Goldman derives significant profit from acting as an investor, deploying the firm's capital to buy and sell companies. In the second quarter, the bank spent $2.6 billion for a 5 percent stake in Industrial & Commercial Bank of China, the largest state-owned bank in China ($1.6 billion came from Goldman Sachs's private equity funds, and the rest was financed off Goldman's balance sheet). When the Chinese bank went public in October in the largest initial public offering ever, Goldman's stake soared in value. For the fourth quarter, Goldman made $949 million in profit on the investment.
It made a further half a billion dollars
on the sale of Accordia Golf, a portfolio of Japanese golf courses that Goldman began to acquire in 2001.
Investors seemed to question whether the good times could continue, as Goldman's stock traded down 1.2 percent to close at $200 Tuesday. "The stock being down almost shows they are victims of their own success," said Jeffrey Harte, a securities industry analyst at Sandler O'Neill.