Goldman Sachs and Morgan Stanley can't afford to pay big bonuses this year
As we noted here, Morgan Stanley seems to have topped up the bonus pool in its investment bank in the fourth quarter of 2023 relative to the previous year. - Compensation spending in the institutional securities unit rose 5% year-on-year in the last three months, and the bank spoke promisingly of spending more “higher discretionary compensation” than in the past. 🔥
Whether Morgan Stanley can afford this apparent generosity is questionable, though: profits in the institutional securities group fell 54% year-on-year in the final quarter and costs there consumed 92% of revenues. The return on equity in the unit fell to just 2%, well below its cost of capital.
Goldman Sachs no longer breaks out the profitability of its global banking and markets division alone, but as we noted here, Goldman has a cost issue too. Costs across the firm rose to 75% of revenues in 2023, up from 66% in 2022. Although Goldman increased its spending on compensation by 2% during the year (which isn't bad considering that headcount fell by 7%), this might explain why compensation spending in the fourth quarter - when bonuses are typically accrued - was cut by 4% compared to the previous year.
At Goldman, the cost increase reflected the confluence of various one-off items including a $1.5bn impairment on real estate investments, a $506m writedown of the Greensky investment, a $504m impairment of goodwill on consumer platforms, and a $529m FDIC special assessment fee.
Morgan Stanley was blighted by one-off items too. It attributed its nearly 20% increase in fourth quarter non-compensation expenses at the investment bank to the $249m fine relating to the block trading settlement and a $121m FDIC special assessment fee.
The one-off items mean that both banks will be stretching themselves to pay generous bonuses this year. At Goldman Sachs, this presents a particular problem - bonuses there were poor last year and traders have high hopes of getting paid. "I just don't see how they have the cash to pay us," one Goldman insider complained earlier this week. While an exaggeration, the pain is real. Neither Goldman nor Morgan Stanley can afford to be as lavish as before.
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