Goldman Sachs Group Inc. is one of the best-performing financial shares in the past decade and it beat the S&P 500 Stock Index, helping to explain Lloyd C. Blankfein ’s $125 million in cash bonuses during the period.
Some investments did even better. One-year certificates of deposit earned an average rate of 3.17 percent in the last 10 years, beating the 2.78 percent annual total return on Goldman Sachs. Buying a 10-year Treasury note in mid-September 2000 would have yielded 5.8 percent annually.
Wall Street firms have defended the pay of chief executive officers, including Blankfein, by pointing to the value they generate for shareholders. Yet over the last decade, the S&P 500 Financials Index, which includes 80 members, has dropped 49 percent. Bank of America Corp., Citigroup Inc. and Morgan Stanley have lost money for shareholders, while JPMorgan Chase & Co. returned an annual 1.23 percent, Bloomberg data show.
“Some of the financial stocks were of course total catastrophes,” such as Lehman Brothers Holdings Inc., Bear Stearns Cos. and Citigroup, all examples of a “financial sector innovating itself into obscurity,” said John C. Bogle, the 81- year-old founder of the Vanguard Group of mutual funds.
Shareholders in Goldman Sachs, as well as most financial-industry stocks, would have fared better investing in other sectors of the economy. The S&P 500 Oil & Gas Exploration & Production Index, which tracks 13 companies, has returned an annual 11.3 percent over the decade, while the eight-member S&P 500 Industrial Machinery Index has produced annual total returns of 8.9 percent over the period, according to Bloomberg data.
Among individual stocks, Flowserve Corp., the Irving, Texas-based maker of pumps and valves, has rewarded shareholders with an annual return of almost 20 percent, while Jacksonville, Florida-based CSX Corp., the third-largest U.S. railroad by 2009 revenue, has returned 18.6 percent a year over the decade, according to data compiled by Bloomberg.
“The innovation in the productive part of our economy adds value to our society,” Bogle said. “The financial sector, by definition, subtracts value.”
David Wells, a spokesman for Goldman Sachs in New York, declined to comment.
Wall Street executives and employees have been the biggest beneficiaries of the industry’s growth, typically taking home more than 40 percent of their firms’ revenue in any given year. Employees of Goldman Sachs and Morgan Stanley, two New York- based securities firms that converted to banks in 2008, have received a total of $228 billion in compensation over the last decade. That’s more than five times the $45 billion operating budget of the National Cancer Institute over the same period.
“The low returns that the industry has given to stockholders certainly is not a great scorecard for managements,” said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York. “As a portfolio manager you could make an argument that lower risk is better than higher risk given the performance that we’ve seen.”
Financial companies slashed bonuses during the financial crisis and have tied a larger portion of pay to long-term stock returns. Blankfein, 56, whose cash bonuses over the last decade were less than half the $300 million worth of stock he owns, received no bonus for 2008 and got a $9 million all-stock bonus for 2009.
Wall Street firms may have to reduce compensation, their largest expense, and raise dividends in order to reward shareholders in the future, said Bernstein’s Hintz.
“I think it comes about both by institutional pressure, but also internal pressure,” said Hintz, who worked as a treasurer at Morgan Stanley and chief financial officer of Lehman Brothers before joining Bernstein in 2001. “If you’re an employee, and you’re being paid in a lot of stock and that stock is going to be locked away in a trust for five years, one way to reduce your risk is higher dividends.”
One investor who guaranteed himself a higher dividend was Warren Buffett, the billionaire chairman and CEO of Berkshire Hathaway Inc., who has produced an 8 percent annual return for shareholders over the last decade. When Buffett, 80, injected money into Goldman Sachs at the height of the financial crisis in 2008, he steered clear of the common stock and instead purchased a special class of preferred shares that pay him a 10 percent annual dividend.
The total return on Goldman Sachs shares was calculated using the closing prices on Sept. 15, 2000, and Sept. 17, 2010, and includes reinvesting gross dividends over the period. CD rates are derived from the Bankrate.com national rates on 1-year CDs over the same time frame. The 10-year Treasury rate is the market yield on 10-year notes on Sept. 15, 2000.
The total return calculation doesn’t take into account the different tax rates on equity and fixed-income investments.
To be sure, financial stocks can seem more attractive using different time periods. Goldman Sachs shares have returned an annual 7.3 percent since May 1999, the month the shares were first sold to the public. Investors who held Citigroup shares for the five years that began on June 7, 2002, would have gained 10.6 percent a year, Bloomberg data show.
Goldman Sachs shares climbed 20.9 percent between Sept. 15, 2000, when they closed at $124.875 apiece in New York Stock Exchange composite trading, and Sept. 17 of this year, when they ended the session at $150.98 apiece. The stock recently closed at $151.90.
Bogle, the Vanguard founder, said the financial industry became too large as a percentage of the overall S&P 500. The financial index, which was 14 percent of the S&P 500 a decade ago, jumped to 20 percent in 2007 and has since dropped back to 16 percent, according to data compiled by Bloomberg.
‘Florescence of Finance’
“Overall they went up too high, and then they went way down, and where they go from here nobody knows,” said Bogle, whose 2008 book “Enough: True Measures of Money, Business, and Life” decried what he sees as the excesses of the financial industry. The sector “became dominant, and there was just no way that could continue because sooner or later people would wake up — and they did.”
The expansion of the financial industry and its rising pay levels attracted criticism at a conference in Calgary earlier this month, where former Federal Reserve Chairman Paul A. Volcker said “this great florescence of finance, zillions of dollars being made on Wall Street” was of dubious benefit to society at large.
“The economy grew no faster in the first decade of this century than it had grown in the past,” Volcker, 83, said. “In fact, the tendency was to grow a little more slowly, and it all ended up with a big financial crisis.”
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