Sideways: Goldman Sachs – cashing in and cashing out

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By:
Jon Macaskill
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Goldman Sachs CEO Lloyd Blankfein seems to be on a comfortable glide path towards maximizing the value of the performance stock units that will provide most of his future compensation.

If he meets undemanding return on equity targets relative to the performance of rival banks over the next three years, Blankfein has an excellent chance of receiving 150% of the initial value of his compensation awards. The units will then settle half in cash and half in ‘shares at risk’, which have restrictions on when they can be sold.

The inbuilt cash conversion component of this arrangement will be welcome, as senior bankers face both risk management and reputational challenges from the post-crisis trend of ensuring their compensation is overwhelmingly in shares.

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Stock sales by senior executives must be disclosed, so bankers face questions about whether or not they have lost confidence in the firm whenever they dispose of a large block of shares. This normally leads to off-the-record briefings that the sale was simply made in order to meet tax obligations – ‘Nothing to see here’ – the CEO still has an unshakable belief in the mission of the bank and so on.

Steady stock sales would be prudent personal risk management, but the era of the imperial CEO demands that confidence is projected, rather than prudence.

JPMorgan CEO Jamie Dimon sets the tone for Wall Street with his boasts that he never sells his stock. He backed this talk with a high-profile purchase of 500,000 shares in the bank when its price dipped to a two-year low last February. 

This act of bravado cost just over $26 million or roughly Dimon’s compensation for the year. It also turned out to be an excellent bet, as JPMorgan stock is up 50% since then, further burnishing Dimon’s image.

Gary Cohn, the former Goldman Sachs president, also enjoyed the benefits of the rally in bank stocks when he began to dispose of his holdings upon joining the Trump administration as director of the National Economic Council.

The revelation that Cohn owned roughly $16 million of stock in Industrial and Commercial Bank of China (ICBC) drew understandable attention. There were connections for any conspiracy theorist to enjoy. 

Trump made anti-Chinese trade rhetoric a key feature of his election campaign, but ICBC – the world’s biggest bank by assets – is also the largest office tenant for Trump Tower in New York.

Trump held a press conference just before he took office in which he announced that his sons would take over his business, but he has not actually divested his beneficial interests, so a coming renegotiation of ICBC’s lease will add to the myriad conflicts of interest surrounding his presidency.

Cohn’s ICBC holding will be sold and has a relatively uncontroversial likely explanation. Goldman Sachs, along with private equity funds including those in which Goldman staff could invest, paid $2.75 billion for a 7% stake in ICBC in 2006. Cohn’s stock is likely to date from then. 

Goldman accelerated access to stock awards and other compensation due to Cohn when he joined the Trump administration, which effectively give him an exit package of around $285 million. Later reports estimated his total wealth at around $600 million, with about 40% in Goldman stock that he can now sell to reinvest in lower-risk securities, such as short-dated treasuries.

Cohn was accordingly already reasonably well-diversified by the standards of bank executives with multi-decade careers at the same firm and has the opportunity to exit his Goldman stake while bank stocks are buoyant.

His former boss Blankfein may be worth more, given his seniority and what is likely to be a similar pattern of investment in Goldman sponsored deals. 

With Cohn’s departure for Washington, Blankfein now faces little potential pressure from below to give up the CEO slot at Goldman in the next year or two. He will have to hope that when he does decide to go, he is able to cash out on his Goldman holdings with similar ease.