Wikinvest Wire

It's good to be Goldman

Friday, July 24, 2009

Lucian Bebchuk, professor of law, economics and finance at Harvard Law School, has some thoughts to share in this WSJ op-ed on "paying for performance" at Goldman Sachs.

Last week, after reporting stellar second-quarter profit of $3.4 billion, Goldman Sachs announced the setting aside of $11.4 billion for compensation – which, broken down per employee, is similar to what Goldman set aside in the first half of the boom year of 2007.
Rewards for short-term results can produce over-compensation by enabling executives to cash out large amounts of compensation on account of results that are subsequently reversed. In many financial firms whose aggregate earnings over the past several years are negative, executives have still been able to cash out large amounts of bonus compensation during the first part of this period – and they kept these amounts despite the large losses subsequently borne by the firms.

In addition, and perhaps most importantly, bonuses for short-term results provide incentives to seek improvements in short-term results even at the expense of excessive taking of risks of an implosion later on.
Hmmm... "an implosion later on"...

I wonder if the next implosion might have anything to do with high-frequency trading, as discussed in the blogosphere lately and in this NY Times story today.
Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.
Uh oh...


Expected Returns said...

There's no way this ends well. Speculative fever is taking hold once again.

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