Friday, June 14, 2013

Succession at Goldman Sachs: The Wealthy Games

Succession at Goldman Sachs: The Wealthy Games

Gary Cohn, the President and COO of Goldman Sachs, has probably been receiving sympathetic calls ever since The New York Times ran a front page story[1] detailing Mr. Cohn’s increasing frustrations because his rightful role as Chairman and CEO is blocked.  According to the Times, Lloyd Blankenship, age 58, has no plan to retire any time soon, and:

“It is no laughing matter for Mr. Cohn, who as Goldman’s 52-year-old president is the Prince Charles of Wall Street, a man for whom the crown seems just beyond his grasp. Mr. Cohn is growing increasingly restless, according to friends and colleagues.”

This matter is hardly worthy of a front-page story, except that it’s about two incredibly rich guys whose friendship is beginning to fray because of power and greed.  Mr. Cohn followed Mr. Blankfein out of Goldman’s commodities business into broader and broader roles until they ruled Goldman Sachs.  After a few years of coexistence, the story line followed the usual path.   Every decade or so, we get this article about Goldman Sachs. If the number two guy doesn’t get the top job soon, he’s going to leave, putting the firm in jeopardy.  Some people leave, some people stay, and Goldman goes on making money.
Investment Meeting (1996)
I’ve constructed a Tale of the Tape, so you can examine Mr. Cohn’s financial grievances.  I don’t have data before 2006 because Mr. Cohn had not yet assumed his position as COO.  At that point he was merely head of Fixed Income, Currency and Commodities, and making untold tens of million of dollars.  Thus, we don’t have a complete picture of Mr. Cohn’s financial shortfall relative to Mr. Blankfein.  Nonetheless, we can see that Mr. Cohn trails Mr. Blankfein by over $12 million in total compensation over the past seven years, and more significantly, Mr. Cohn only owns about $289 million worth of Goldman stock versus Mr. Blankfein’s $507 million stake.

As senior executives, both gentlemen are entitled to invest in Goldman Sachs PE, real estate, and hedge funds.  Unlike regular clients, the executives enjoy significant breaks on the fees.  While we don’t know how much Mr. Blankfein or Mr. Cohn invested in these offerings, the proxy statements show that they received $126 million and $93 million respectively in distributions from those investments. Again, Mr. Cohn trails.

Perhaps it's the small things that are irking Mr. Cohn.  Since 2006, Mr. Blankfein has received $1 million more in “other compensation.”  As far as I can tell, they’ve received about the same amount of benefits, such as their 401(K)s, medical and dental plans (they have a special plan for the management team), executive life insurance, tax consulting, and car allowances.  Mr. Blankfein receives security protection, which appears to account for much of the difference.  The company also discloses the amount of money it donates to charity on behalf of its senior executives.  In the past three years, Goldman has donated $12.4 million on behalf of Mr. Blankfein and $12.0 million to Mr. Cohn’s causes.  It’s clear that Mr. Cohn deserves the chairmanship so he can finally reap the rewards.

I know it’s hard for mere mortals to comprehend all these figures and the growing tension between these two men.  However, let’s put this story into terms we can all understand.  Over the past seven years, Mr. Blankfein has earned an average of about $9,200 per hour, while Mr. Cohn has brought in $8,600 per hour.[2]  By contrast, the average private sector American receives total compensation of $28.89 per hour according to the US Department of Labor.   It takes Mr. Blankfein just one day to earn what the average American makes in a year, while Mr. Cohn has to put in a bit of overtime.

As the days and months go by, the succession struggle at Goldman Sachs will consume more and more time, and yet the CEO and COO will continue to get their fabulous pay packages.  If you were to spend your time plotting to keep your job or figuring out how to replace your boss, the way executives scheme on Wall Street, you’d probably be fired.  However, Wall Street plays by a different set of rules, and The New York Times seems fascinated by their excesses.

[2] I’m assuming they only take two weeks vacation and work 60 hours per week.  If they take more vacation or leave early for the Hamptons, the hourly rate would be higher.

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