How to Think About Goldman’s Financial Crisis Bonus


In the darkest days of the financial crisis, Goldman Sachs handed out billions of dollars of options and restricted stock to prized employees—most likely, senior partners at the firm.

Goldman disclosed the awards, which were made on December 17 of 2008, in January of the following year. Now the awards are receiving new attention, thanks to a report from Eric Dash and Susanne Craig, written on the back of research by

“Nearly 36 million stock options were granted to employees in December 2008 — 10 times the amount issued the previous year — when the stock was trading at $78.78. Since those uncertain days, Goldman’s business has roared back and its share price has more than doubled, closing on Tuesday at nearly $175,” Craig and Dash write.

Those options were awarded during Goldman’s infamous “orphan” month. In connection with Goldman officially becoming a “bank holding company,” it changed its fiscal year to run along with the calendar year. This left December 2008 out in the cold—the results from that month would not appear as part of any quarterly or annual report, except as a side note. This meant that when Goldman reported its first quarter results for the following year, it didn’t have to include the losses from December.

Many in the financial press more or less complied with this switcheroo, as Ryan Chittum of the Columbia Journalism Review pointed out. At the time, Goldman’s critics accused the firm of stuffing its losses into that orphan month.

“The orphan month featured — surprise — lots of write-offs. The pretax loss was $1.3 billion, and the after-tax loss was $780 million,” Floyd Norris wrote on his blog.

It turns out that it wasn’t just losses that were stuffed into the orphan month. So were the stock and options awards. The effect of this seems to have been that the award went largely unnoticed—until The New York Times and Footnoted began digging into it.

Felix Salmon provides some details on the awards:

The first thing you see is that between November 2008 and December 2008, Goldman granted 20,664,896 restricted stock units. And according to a footnote, the fair value of RSUs granted in the month of December 2008 was $67.60 apiece. Which means that in December 2008, Goldman gave out $1.4 billion in RSUs.

Then you get to the options. Goldman granted 35,988,192 options at a strike price of $78.78 between November and December 2008; the filing goes on to say (look at the top of page 200) that the fair value of those options was $14.08 apiece. Which means that on top of the RSUs, Goldman also gave out $500 million in options during its orphan month.

Obviously, those options are worth far more today, with the share price having more than doubled since they were awarded. They also have greatly increased the level of ownership of Goldman shares by its partners. As they’ve been exercised, the portion of Goldman’s shares owned by its partners has risen from 8.7 percent to 11.2 percent. By my calculations, if Goldman partners keep exercising their options—which they obviously will do, since they are so deep in the money—and do not sell down their positions, Goldman’s partners will soon own more than 16 percent of the company.

What’s gone unnoticed is that the award came the day after Goldman announced its fourth quarter results for 2008. Goldman lost $2.3 billion—or $5 per share—for the quarter ended November 30, 2008. That was the first quarterly loss for the firm since it went public in 1999.

The market had been preparing for Goldman’s loss. Two weeks earlier Susanne Craig—then at The Wall Street Journal—had reported that “industry insiders” expected a loss of $2 billion. In the weeks that followed, Goldman shares traded between an intraday low of $60.22 and an intraday high of $78.53. When Goldman announced its loss on December 16, the shares price leaped from the prior day’s close of $66.44 to open at $78. The market, it seemed, was relieved that the losses were in line with expectations.

There are two ways to characterize the awarding of an enormous tranche of stock and options the day after announcing a huge loss. Since Goldman is everyone’s favorite punching bag these days, I’ll start with the nefarious version. If you want to adopt a diabolical view of Goldman, you could say that the partners saw the market’s upbeat reaction to the losses and grew concerned that the chance to create a windfall gain by awarding options at a low point was passing them by. Indeed, the very next day, the stock traded even higher.

I don’t think that’s really a fair way of looking at things. Goldman probably felt constrained from awarding the options ahead of announcing quarterly results—since the board would have been in possession of material non-public information at that point. The fact that the stock rose after the results were announced would have been circumstantial evidence that Goldman’s partners had used this information to profit.

More importantly, this is the kind of compensation that many of the critics of Wall Street have been urging on the financial sector for years. The options can only be exercised in limited amounts over a period for years, aligning the economic interests of the partners with the long-term performance of the company.

Nonetheless, the enormous stock and options award of December 2008 creates the impression that the partners of Goldman once again outsmarted the rest of the world—and gained an enormous windfall because of it. I cannot help but think that at least some of Goldman’s partners think that this perception—that Goldman is always and everywhere outsmarting everyone else—is a good problem to have.


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