The founders of Goldman Sachs (NYSE: GS) can stop rolling over in their graves. Management is about to bring the firm back to its rightful place on Wall Street. With a $5 billion equity offering, the esteemed firm is going to pay the government back the money from the TARP and get on with being the biggest, baddest firm on the Street. Enough of the handcuffs. It wants to get back in the capital markets ring and knock everybody else out.
Goldman Sachs as a bank? Just wasn't in their entrepreneurial blood. They could no more cater to the whims of regulators than a Ferrari can be used as a school bus. These guys are risk takers and big rewarders. They do their homework, make big bets, and reap the profits, if there are any, or lose millions. And when they're right, they want the money. As a bank and TARP recipient, there were rules about risk and limits on pay. That really chafed.
The firm just reported first quarter earnings. It made $1.66 billion. In three months. That's great. Plenty of opportunities in markets that are as frightened and illiquid as the one we're in. But under the new TARP rules, most of that profit will stay in the firm. Management can't hand out huge bonuses because of restraints set by TARP. So some of the smart guys who made all the money are leaving the firm. As a service company, Goldman's only asset is people. When they leave, the firm suffers.
In 2007, Lloyd Blankfein, Goldman's CEO, took home $68.5 million. Last year, one in every 30 Goldman employees made over $1 million. In fairness, much of that compensation came in the form of stock grants which vest over time so no one was getting cash. Still that's a pretty good wage for a year's work. The argument goes that they made much more for the company so they're entitled to larger pay. But it's the firm's capital that they use, not their own. If they were willing to share in the losses as well as the gains, most people would see that as fair. No one shares in the losses. They're all taken from the firm's equity. Since it's a public company, that means all shareholders absorb the losses.
The real issue, I think, for the moment, beside getting out from under the government rules is people. Not just the ones already there, the ones Goldman wants to keep with better bonuses, but the ones that are now hungry to leave other firms, the ones opening their own hedge funds or private equity shops. Goldman wants those people. There are very bright bankers available now who are hungry to get back to the Wall Street way of pay. There's no place to go at the moment unless they open their own private firms where there is no limit to their take-homes.
If Goldman can offer these bankers large amounts of capital to do deals and make big money, it takes away a large concern. The new guys don't have to go out and raise their own capital, a tough proposition in this market. Of course, there are still some constraints: the rewards won't be as high when the ball goes out of the park, but a steady paycheck and big bonuses should sound mighty good right about now.
So Goldman raised $5 billion to pay off the government (if allowed by Congress), sooner than anyone planned, and then it will go head hunting. It wants to be the biggest, baddest capital markets firm on the planet. By keeping current employees and bringing in only the best and the brightest, all their employees will be walking with a little more bounce in their step and once again they'll rule the Wall Street roost.
Ted Allrich is the founder of The Online Investor, founder of Allrich Investment Management, LLC, as well as author of the book Comfort Zone Investing: Build Wealth and Sleep Well at Night. In this weekly column, he'll offer advice to investors who are just getting started.