Goldman Sachs Group Inc , under fire for gold-plated pay packages, cut average pay per employee by about a quarter from record 2007 levels, helping boost its profit to a record.
But the forecast-beating results were quickly overshadowed by anxiety about the impact of the Obama administration's proposed crackdown on financial risktaking, and shares in Wall Street's biggest proprietary trading institution slumped 5 percent.
Goldman Sachs is not a banking or financial story now, it's a political story, said Matt McCormick, portfolio manager at Bahl & Gaynor Investment Counsel in Cincinnati.
Goldman had been on track to shatter its compensation record from 2007, but instead decided to set aside nothing for compensation in the fourth quarter and give $500 million to charity.
The move, which cut average compensation per employee to $498,000, helped the Wall Street bank report a record profit for 2009 and a better-than-expected fourth-quarter net income of $4.95 billion.
Average pay was still up from $317,000 last year, but down from $661,490 in 2007.
The move helped Goldman answer critics who have lambasted the bank for setting aside so much for bonuses months after U.S. taxpayers rescued the banking industry during the financial crisis.
Goldman Sachs is not deaf to the calls for restraint, the bank's chief financial officer, David Viniar, told reporters on a conference call. The bank consulted U.S. pay czar Kenneth Feinberg regarding its bonus policies.
Political scrutiny of Wall Street firms is intensifying. President Barack Obama on Thursday proposed stricter limits on financial risk-taking. This could wallop Goldman, which often trades its own funds to help bolster the bottom line.
Goldman shares rose in early trading but later fell after Obama proposed steps including preventing major banks from owning, sponsoring or investing in hedge funds for their own profit.
Goldman became a bank holding company in 2008 during the financial crisis as a signal of safety to investors, but also opening itself up to more regulation.
It looks like Goldman Sachs has been given a reason to give back their bank charter, said Tom Sowanick, chief investment officer of the Omnivest Group in Princeton, New Jersey. Moreover, it also looks as though banks may be going down the path of being regulated like utilities.
Goldman denied it had any intention of giving back its bank charter, but its shares fell as much as 6.6 percent and were down 3.5 percent at $161.90 in late afternoon trade. Goldman shares are down 18 percent from their highs in October.
Goldman's debt protection costs also jumped after Obama's proposals.
Responding to outrage over high pay, the bank set aside 36 percent of net revenue for compensation for 2009, Goldman's lowest percentage as a public company. Compensation for the year totaled $16.19 billion.
A protest demonstration over Wall Street excess was planned for Thursday in front of Goldman's headquarters in New York. The investment bank, famously referred to as a great vampire squid wrapped around the face of humanity in a scathing piece in Rolling Stone last summer, is seen as a poster child for the excesses of Wall Street.
It will alleviate some political pressure, said Keith Davis, a bank analyst at money manager Farr, Miller & Washington in Washington, D.C. They've been in everyone's cross-hairs for how much money they make. I think they'll still be there, but the fact that they took down the bonuses will help incrementally.
The bank recorded negative compensation expense in the fourth quarter because of the contribution to Goldman Sachs Gives, the firm's charitable arm. The contribution was part of total commitments to charitable and small business initiatives during 2009 in excess of $1 billion, the firm said.
The compensation total was far below the record $20.2 billion the firm paid in 2007, and well below what the firm was expected to pay this year as it reported blockbuster profits.
Goldman's British staff is likely to bear the brunt of the bonus cut as the firm curbed payouts in light of Britain's supertax on bonuses, an industry source said.
The firm last month moved to deflect criticism on pay by announcing its top 30 managers would receive their bonuses entirely in long-term stock. The banking industry has moved to pay in equity in an effort to tie compensation to long-term performance and curb risk-taking.
Morgan Stanley , which has also changed its pay structures, on Wednesday reported an annual loss for 2009 but still paid out more than $14 billion as it ratcheted up its compensation ratio to 62 percent from 51 percent in 2008.
The House of Representatives Financial Services Committee, led by Rep. Barney Frank, will hold a hearing on Friday to discuss compensation for top executives in the finance sector.
Last week, a commission investigating the financial crisis called Goldman CEO Lloyd Blankfein to testify on Capitol Hill, quizzing him on the firm's role in the financial crisis.
Even after Goldman curbed its pay, it faced a fresh lawsuit from the Southeastern Pennsylvania Transportation Authority alleging excessive compensation.
Goldman's fourth-quarter profit amounted to $8.20 a share, topping analysts' average forecast by $3. In the year-earlier fourth quarter it posted a loss of $2.12 billion, or $4.97 a share.
The fourth-quarter compensation actions boosted profit dramatically. If the company had set aside $3.3 billion in the quarter for pay, which would have brought total compensation expense to about $20 billion for the year, Goldman would have earned less than $4.00 a share.
But low compensation expense may be difficult to repeat in the future, raising questions about how strong Goldman's performance really was in the fourth quarter, analysts said.
The bank's trading momentum fell off in the quarter. Goldman reported trading and principal investments revenue of $5.1 billion, down 43 percent from the third quarter. Rivals reported similar declines.
Investment banking was strong as Goldman reported revenue of $1.6 billion, up 58 percent from a year earlier.
Goldman reported revenues of $9.62 billion, which were in line with analyst expectations.
Goldman also drew down risk in the fourth quarter as its average Daily Value at Risk (VaR) declined to $181 million from $197 million a year earlier and $208 million in the third quarter. VaR, one measure of risk, stands for the maximum that could potentially be lost trading on a single day.
The firm paid $6.44 billion in corporate taxes, resulting in a tax rate of 32.5 percent for 2009. That is up from less than 1 percent in 2008.
After Obama's announcement, credit default swaps insuring Goldman's debt jumped by around 25 basis points to 120 basis points, or $120,000 per year for five years to insure $10 million in debt, according to broker Phoenix Partners Group.
Yield spreads on Goldman's 7.5 percent notes due in 2019 widened by 12 basis points to 150 basis points over Treasuries, according to MarketAxess.
(Reporting by Steve Eder, Dan Wilchins, Elinor Comlay, Jennifer Ablan, Karen Brettell, Dena Aubin; Editing by John Wallace, Gary Hill)