Former Goldman Co-Chief Calls Wall Street Pay Shocking

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John Whitehead, former co-chairman of Goldman, who with John Weinberg, presided over the firm when it went from being a commercial paper dealer and institutional equity broker to a top investment bank, decried Wall Street compensation levels in a Bloomberg interview:

“I’m appalled at the salaries,” the retired co-chairman of the securities industry’s most profitable firm said in an interview this week. At Goldman, which paid Chairman and Chief Executive Officer Lloyd Blankfein $54 million last year, compensation levels are “shocking,” Whitehead said. “They’re the leaders in this outrageous increase.”

Whitehead went even further, recommending the unthinkable, that Goldman cut pay:

Whitehead, who left the firm in 1984 and now chairs its charitable foundation, said Goldman should be courageous enough to curb bonuses, even if the effort to return a sense of restraint to Wall Street costs it some valued employees. No securities firm can match the pay available in a good year at the top hedge funds.

“I would take the chance of losing a lot of them and let them see what happens when the hedge fund bubble, as I see it, ends,” Whitehead, 85, said….

Goldman during its rise to preeminence had a very different compensation formula. The joke at the firm was that partners lived poor and died rich. That wasn’t precisely true, but new partners actually had lower cash earnings than senior vice presidents (their interest on the debt borrowed to buy their partnership interest left them with modest pay packages in their early years as partner, a brilliant formula to keep them working hard). Consider that Bob Rubin, who was co-chairman of the firm after the Whitehead/Weinberg era, had an estimated net worth when he left the firm of $100 mill on. Not shabby, but the point is that Blankfein in one year earned half of what Rubin made in this career at Goldman.

Whitehead is correct. Wall Street pay is unseemly and unjustifiable. But he errs in seeing this as a Wall Street phenomenon. Whitehead comes from another age, when investment bankers saw themselves as serving corporations, were concerned about looking too flashy (Gucci loafers were not acceptable footwear at Goldman), and there was a strong sense of noblesse oblige. Today, Wall Street sees itself in the driver’s seat, telling public companies like Costco that they should pay workers less and charge more for their products so they can deliver higher margins. Traders, who unlike investment bankers can measure their personal bottom line, are ascendant, and they have a notoriously myopic perspective. People I know at Goldman compare the current management group unfavorably to that of earlier eras.

But Wall Street’s behavior is part of a much larger change in cultural attitudes. In the 1980s, RJR’s private jets were seen as a sign of corporate excess; it’s now routine for corporate executives to use private planes. Lee Iacocca took a $1 salary while turning around Chrysler. Now, CEOs of distressed companies demand if anything higher than average compensation, allegedly for the difficulty and risk of the assignment. Anyone who has loyalty to the larger enterprise or society is a chump; the accepted, even celebrated posture is get as much as you can, as fast as you can, regardless of the collateral damage. A study by MIT economists Frank Levy and Peter Temin confirms that institutional behavior and social attitudes have played a significant role in the increase in income inequality.

Sadly, Whitehead’s railings are likely to be seen as a sign that he is out of touch, rather than an indicator that social bonds are unraveling.

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