Goldman, Morgan Stanley payouts hog the spotlight

NEW YORK Tue Jan 19, 2010 3:39pm EST

An employee of the Korea Exchange Bank counts one hundred dollar notes at the bank's headquarters in Seoul February 24, 2009. REUTERS/Jo Yong-Hak

An employee of the Korea Exchange Bank counts one hundred dollar notes at the bank's headquarters in Seoul February 24, 2009.

Credit: Reuters/Jo Yong-Hak

NEW YORK (Reuters) - Longtime rivals Morgan Stanley and Goldman Sachs Group Inc find themselves on different ends of the pay debate as the surviving Wall Street titans prepare to disclose their fourth-quarter results.

Goldman is expected to finish its blockbuster year with another quarter of multibillion-dollar profits, padding its bonus pool -- all while bracing for a fresh round of criticism for its lavish pay soon after U.S. taxpayers rescued the financial services industry.

Morgan Stanley -- widely seen as mistiming its pullback from risk -- is expected to report an annual loss and is stretching to stay competitive on pay with rivals. Morgan Stanley was late to the rebound, reporting a profit in the third quarter after three straight losing quarters.

Even with political pressure in the backdrop, both firms are expected to pay up after bonus levels sagged last year amid the financial crisis.

"That is probably going to overshadow what will probably be decent quarters for both companies," said Walter Todd, a portfolio manager with Greenwood Capital Associates. "The market is going to focus on the compensation side of the equation and not necessarily on the fundamentals, which should be good."

Goldman Sachs is on pace to set aside $22.3 billion for compensation last year, eclipsing the previous record $20.2 billion it set in 2007. Morgan Stanley is on pace to set aside $14.5 billion for 2009.

NUMBERS GAME

The banks could reduce those figures if they shrink their compensation ratios in the fourth quarter. Such a move would bow to public pressure, while bolstering earnings.

Investment banks historically set aside half of their net revenue for compensation expenses, but JPMorgan Chase & Co, for example, reduced its ratio to just 11 percent in the fourth quarter while still paying out record compensation.

Goldman's ratio was 47 percent for the first nine months of the year and Morgan Stanley's was about 64 percent. Morgan Stanley's ratio was inflated by the addition of brokers stemming from the Morgan Stanley Smith Barney joint venture, and because of accounting charges related to the appreciation of the value of its debt.

Michael Hecht, an analyst with JMP Securities, said a ratio reduction "could really move the needle" for earnings.

"It still leaves these companies in a position where they are paying people very competitively," Hecht said.

Goldman Sachs this week delayed announcing payouts to staff as the debate over bonuses heated up.

Protesters are also expecting to march on Goldman's headquarters after the firm reports earnings on Thursday.

Both Goldman Sachs and Morgan Stanley are expected to pay most of their top performers' and managers' salaries in equity instead of cash, a nod to an industry trend to reward long-term performance and curb short-term risk. Credit Suisse, Citigroup Inc and Bank of America have made similar changes.

SCALING BACK RISK

If JPMorgan results are an indicator, Goldman and Morgan Stanley will have scaled back risk in the fourth quarter. JPMorgan reduced its total trading value at risk (VaR) to $163 million in the fourth quarter from $302 million a year ago, a 46 percent drop.

VaR, which is one measure of risk, stands for the maximum that could potentially be lost trading on a single day.

Risk in fixed income trading at JPMorgan declined 38 percent in the fourth quarter from a year earlier, foreshadowing a slump in an area which has bolstered investment banking profits in the first three quarters. Nearly half of Goldman's third-quarter revenue came from fixed income, currency, and commodities trading business.

Even so, Goldman is expected to report earnings of $5.19 per share and Morgan Stanley is expecting profit of 36 cents per share, according to analysts polled by Thomson Reuters I/B/E/S. Goldman lost $4.97 a share and Morgan Stanley lost $11.35 a share in fourth quarter of 2008.

In light of the taxpayer bailout and consequent rebound, the Obama administration is proposing a fee to help the government recover losses from the rescue. Goldman Sachs had an effective income tax rate of 32 percent in the first nine months, while Morgan Stanley reported an average rate of 38.8 percent.

Goldman had a tax rate of less than 1 percent last year because of "changes in geographic earnings mix."

Both banks were probably helped in the fourth quarter of 2009 by rebounding M&A activity and a slew of new IPOs. Morgan Stanley ranked first in the worldwide M&A rankings in 2009, while Goldman ranked second.

Morgan Stanley's earnings could be as much 13.5 percent below the consensus according to Thomson Reuters StarMine's SmartEstimate, a consensus estimate that gives more weight to recent forecasts by top-rated analysts.

On the other hand, StarMine's SmartEstimates shows that Goldman Sachs' fourth-quarter earnings could be as much as 3.3 percent above the $5.19 a share consensus.

(Reporting by Steve Eder, editing by Matthew Lewis)

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