Pay slashed as Goldman shields its bottom line

GOLDMAN Sachs has been forced to slash pay as the turmoil engulfing the banking industry led to its revenues plummeting last year.

The bank revealed that returns on equity fell to their lowest level since it went public over a decade ago, generating just 3.7 per cent for shareholders in 2011 – well below the cost of capital.

That was on the back of plunging revenues, which dropped 30 per cent in the fourth quarter of 2011 compared to the same period the previous year. For the whole year, revenues shrank by a quarter and pre-tax profits more than halved to $6.2bn.

Chief executive Lloyd Blankfein said that “global macro-economic concerns… significantly affected our clients’ risk tolerance and willingness to transact”.

As a result, the bank is cracking down on the cost of rewarding its bankers. The expense of paying them dropped by 21 per cent to $12.2bn for the year.

That puts average pay at the bank at $367,000 for its 33,300 employees at year-end, a decrease of 14.7 per cent on 2010.

But one source said that bonuses are likely to be cut very unevenly in an attempt to hang on to the most talented staff while potentially paving the way for job cuts among others.

Those paid with large share awards – partners and executives – will also be hit by the dismal returns on their holdings.

Earnings were dragged down particularly by a sharp drop in the value of Goldman’s own investments: annual revenues plunged 72 per cent to $2.1bn, largely due to the wipe-out of its debt investments.

Revenues from its debt holdings vanished, dropping 96 per cent to generate just $96m for the year.

The bank also suffered heavy losses on its stake in the Industrial & Commercial Bank of China (ICBC), which dropped from a $747m gain in 2010 to a loss of $517m last year, and a 58 per cent drop in equities revenues to $1.1bn.

The market turmoil that eroded the profitability of Goldman’s own investments also hit its volumes in advisory work.

Equity underwriting revenues dropped by a quarter for the year and by two thirds in the last quarter of 2011, when they totalled $191m, reflecting the seizure of global capital markets.

Trading volumes in equities also dropped at the end of the year, with revenues from equities execution for clients tumbling by a third to $526m.

Bankers blame much of the decimation of equities-related business at the end of last year on the Eurozone crisis, coupled with quantitative easing in the US and UK that undermined the appeal of stocks as an asset class by forcing investors to buy more bonds to generate the same income.

Goldman’s fixed income, currencies and commodities division also suffered but held up slightly better. Revenues in the last quarter dropped by 17 per cent to $1.4bn.