Wall Street Seeing Biggest Return Since 2003 as Employees Suffer

The bank’s return on equity, a measure of how well it has reinvested shareholder money, dropped to 8.8 percent through the first nine months of 2012 from 19.2 percent in the same period in 2009. The stock traded below book value every day this year.

To boost returns, Goldman Sachs cut about 2,800 jobs and reduced firm-wide compensation 16 percent in the past two years. CEO Lloyd C. Blankfein, 58, who was awarded a record-setting $67.9 million bonus for fiscal 2007, received $12.4 million in compensation for 2011.

Across Wall Street “there’s a recognition that things are going to change and that it’s very difficult to justify paying people entrepreneurial wages when they’re really utilizing the platform and the capital of a public company,” said Michael Aronstein, founder of New York-based Marketfield Asset Management, which manages about $3.5 billion. “This has been in the cards for five years, but it takes a long time.”

Record Fines

A focus on boosting shareholder returns also helps senior employees and executives, who are getting a larger portion of their compensation in stock than they did before the financial crisis. Blankfein owned 1.79 million shares of Goldman Sachs as of Nov. 28, according to a company filing. Their value has climbed $67 million since the beginning of the year to $228 million as the stock rose 41 percent.

Banks have been humbled this year by trading losses and unprecedented fines. HSBC Holdings Plc, Europe’s largest bank by market value, agreed to pay a record $1.92 billion this month to settle U.S. probes of money laundering after being accused of helping to provide terrorists and drug cartels with access to the U.S. financial system. Standard Chartered Plc was fined $667 million by U.S. regulators for facilitating transactions with Iran in violation of sanctions. Both banks are based in London.

Trading Losses

Kweku Adoboli, 32, a former trader at UBS, Switzerland’s biggest bank, was sentenced to seven years in jail on Nov. 20 for fraud in connection with $2.3 billion in losses on unauthorized trades. The U.K. regulator fined the bank 29.7 million pounds ($48.3 million) on Nov. 26, saying the loss revealed weaknesses in management systems and internal controls.

UBS is set to pay as much as $1.6 billion to settle regulators’ claims that it manipulated the London interbank offered rate, or Libor, according to a person familiar with the probes. The fine would be more than three times what London- based Barclays agreed to pay in June. About a dozen banks are under investigation for rigging the benchmark or equivalent borrowing rates in Europe and Japan.

Barclays’s 290 million-pound fine led to the resignation of CEO Robert Diamond after 16 years at the U.K.’s second-biggest bank by assets. The day after he resigned Diamond, 61, told Parliament’s Treasury Select Committee that “clearly there was behavior that was reprehensible.” It was an abrupt turnaround for a man who had declared, 18 months earlier, that the period of banks’ “remorse and apology” should end.

Dimon Apology

JPMorgan CEO Jamie Dimon apologized for a trading loss of at least $6.2 billion at his New York-based bank. As head of the biggest and most profitable U.S. lender, he also was the highest paid of his Wall Street peers, awarded $23 million in pay and bonuses for 2011. He was one of the most aggressive defenders of his industry against politicians and regulators, having publicly mocked U.S. Treasury Secretary Timothy F. Geithner, challenged Federal Reserve Chairman Ben S. Bernanke and faulted former Fed Chairman Paul Volcker.

“We have let a lot of people down, and we are sorry for it,” Dimon, 56, told the Senate Banking Committee on June 12 about the loss at a JPMorgan unit that the bank said was supposed to invest the firm’s own money and hedge its risk.

At least four senior executives have left the company or been reassigned since the loss was revealed in May.

No Sympathy

Morgan Stanley CEO James Gorman, 54, said last month that scandals such as Adoboli’s trading loss have made it difficult to improve the industry’s reputation. He said employees should stop complaining about lower pay.

“There’s not a lot of sympathy,” Gorman said at a Nov. 29 Securities Industry and Financial Markets Association conference in New York. “The rest of society is going through at least as difficult a time from a much lower starting base.”

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