Volcker whacks Goldman Sachs

By Colin Barr, senior writer


NEW YORK (Fortune) -- A proposed trading crackdown backed by former Federal Reserve chief Paul Volcker overshadowed Goldman Sachs' biggest-ever profit Thursday.

New York-based Goldman (GS, Fortune 500) posted a gaudy fourth-quarter profit of nearly $5 billion. That number beat the Wall Street analyst consensus estimate by more than $3 a share, thanks to an unusual reduction in employee compensation that handed shareholders a $3 billion after-tax bonus.

paul_volcker_09.03.jpg
Paul Volcker has been an advocate of breaking up giant banks.

But investors weren't cheering. They were too busy fretting over the big banks' profit outlook in the face of a growing bonus backlash now seemingly joined by the White House.

"Profits were so immense in 2009, I think everyone assumes we'll see some settling out in 2010," said Paul DeLucia, a partner at Options Group, a New York-based financial consulting firm. "And there is a lot of chatter about the Volcker plan."

President Obama, speaking late Thursday morning at the White House with Volcker at his side, said he would seek to limit the size of big banks and the trading risks they shoulder with the backing of the federal deposit insurance fund.

"We should no longer allow banks to stray too far from their central mission of serving their customers," Obama said.

Goldman Sachs chief financial officer David Viniar said Thursday that an average of around 10% of its revenue comes from activities that could be hit by the Volcker plan -- such as private equity, internal hedge funds and proprietary trading.

Shares across the financial sector tumbled, with Morgan Stanley (MS, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) each dropping more than 5% and Goldman, Bank of America (BAC, Fortune 500) and Citigroup (C, Fortune 500) off 4%.

The selloff came even after Goldman, following in the footsteps of JPMorgan, poured an outsize share of its 2009 profits into shareholders' pockets.

Goldman typically sets aside between 40% and 50% of quarterly revenue to pay its workers. But in the fourth quarter, Goldman actually reduced the compensation pool it built up over the first nine months of the year by $519 million, to fund a big contribution to its Goldman Sachs Gives charity.

The decision meant that the average Goldman Sachs employee, who earlier this year appeared headed toward an annual paycheck as large as $773,000, ended up with $498,000 instead.

That's hardly chump change, but it is well below the $661,000 average payout in the previous record profit year of 2007.

The move comes as a furor grows in Washington about the sums paid to bankers just a year after the financial services industry was rescued in a multitrillion-dollar taxpayer bailout.

Goldman, for its part, insists it didn't set out to reduce compensation for the sake of producing a less gaudy average-pay figure -- even as its payout ratio fell to 36% in 2009 from an average of 47% over the past decade.

"The comp ratio was not reverse engineered," Viniar said Thursday in a conference call with analysts. Compensation decisions, he said, were made "one person at a time."

But with members of Congress proposing bonus taxes and the White House trying to rein in bank risk-taking, mere pay reductions won't be enough to head off regulation that could eat into future profits.

"There's a lot of deep-seated resentment out there right now," said DeLucia. "The way things are right now, everyone seems to have a problem no matter what the big banks do with their bonus numbers." To top of page

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