April 14, 2009 - The founders of Goldman Sachs can stop rolling over in their graves. Management is about to bring the firm back to its rightful place on Wall Street. With a $5 billion equity offering in the pipeline, the esteemed firm is going to pay the government back the money it received from the TARP and get on with being the biggest, baddest firm on the Street. Enough of the handcuffs. They want to get back in the capital markets ring and knock everybody else out.

The firm just reported first quarter earnings. It made $1.81 billion. In 3 months. That's great. Plenty of opportunities in markets that are as frightened and illiquid as the one we're in. But under the new TARP rules, most of that profit will stay in the firm. Management can't hand out the huge bonuses now because of the restraints set by TARP. So some of the smart guys who made all the money are leaving the firm. As a service company, Goldman's only asset is people. When they leave, the firm suffers.

In 2007, Lloyd Blankfein, Goldman's CEO, took home $68.5 million. Last year, 1 in every 30 Goldman employees made over $1 million. In fairness, much of that compensation came in the form of stock grants which vest over time so no one was getting cash. Still that's a pretty good wage for a year's work. The argument goes that they made much more for the company so they're entitled to larger pay. But it's the firm's capital that they use, not their own. If they were willing to share in the losses as well as the gains, most people would see that as fair. No one shares in the losses. They're all taken from the firm's equity. Since it's a public company, that means all shareholders absorb the losses.

The real issue, I think, for the moment, beside getting out from under the government rules is people. Not jus the ones that are already there, the ones Goldman wants to keep with better bonuses, but the ones that are now hungry to leave other firms, the ones opening their own hedge funds or private equity shops. Goldman wants those people. There are very bright people available now who are hungry to get back to the Wall Street way of pay. There's no place to go at the moment unless they open their own private firms where there is no limit to their pay.

If Goldman can offer them large amounts of capital to do deals and make big money, it takes away a large concern. The new guys don't have to go out and raise their own capital, a tough proposition in this market. Of course, there are still some constraints: the rewards won't be as high when the ball goes out of the park, but a steady paycheck and big bonuses should sound mighty good right about now.

So Goldman will raise $5 billion, pay off the government (if allowed) sooner than anyone planned, and go head hunting. They want to be the biggest, baddest capital markets firm on the planet. By keeping their current employees and bringing in only the best and the brightest, they'll be walking with a little more bounce in thier step and once again rule the roost.

- Ted Allrich