Only on Wall Street would a 58% decline in profit and a 30% drop in revenue be considered "good news", but that's the story Wednesday for Goldman Sachs.
The venerable firm reported fourth-quarter earnings of $1.84 per share on net revenue of $6.05 billion. The top-line was well shy of consensus estimates of $6.55 billion, but the bottom-line EPS was well ahead of the Street's $1.24 and Goldman shares were recently up more than 6%.
Goldman's earnings beat was derived largely on the basis of cost-cutting as investment banking revenue fell 43% vs. a year-ago, fixed-income trading was down 17% and equities trading slid 15% vs. year-ago levels.
In 2011, Goldman cut 2400 jobs and lowered its compensation expense 21% to $12.22 billion, or 42.4% of net revenue. On a conference call Wednesday, Chief Financial Officer David Viniar targeted $1.4 billion in cost savings, up from $1.2 billion previously. "We're not going to cut away our prosperity but we will try and size the firm appropriately for the environment," he said.
The problem is that while the industry has endured "huge structural changes, I don't think the compensation system has caught up to it yet," says William Cohan, a former investment banker and author of Money and Power: How Goldman Sachs Came to Rule the World.
While much is being made about lower bonuses across Wall Street, Cohan says they're still too high. "These people are their [employers'] assets that go up and down the elevator everyday, but I still don't think they need to pay them as much as they do," he says. "What other business on the face of the earth, as a public company, pays 42% of its revenue out in the form of compensation?"
The $12.2 billion bonus pool works out to around $367,000 per Goldman employee, which is an exorbitant amount of money in just about any other industry but down from nearly $431,000 per employee last year.
Historically, Wall Street firms have justified paying huge bonuses in the name of "employee retention." But Cohan says there just aren't many opportunities for the rank and file on Wall Street to move if they don't like their year-end bonus. "I don't think that bid is out there any more," he says.
- Goldman Sachs
- Wall Street