Why Goldman Should Pay a Special Dividend

It is 9 o'clock in the evening and the brilliant reflections of Lower Manhattan's neo-classical buildings stream through the mahogany blinds of a gargantuan office on the 29th floor of 85 Broad. They illuminate, just barely, a middle-aged man with a balding pate. He is pacing, agonizing like a present-day Hamlet about what to do with an amount of money that gives new meaning to what is, unmistakably, an embarrassment of riches. An unlit cigar dangling from the right side of his mouth (he's no Jimmy Cayne after all), Lloyd Blankfein picks up a Goldman stress ball he picked up at a conference in Kiawah from his desk, nervously transferring it from hand to hand, and wonders, semi-audibly, to no one in particular, "To bonus or not to bonus; that is the question."

With the firm just posting over $3 billion in profit for the quarter and planning to dispense $16.7 billion in annual bonuses in a year which the country's unemployment rate is set to breach the politically-important 10% level, a circumstance that would normally allow top executives at a publicly-traded Wall Street firm to sleep the sleep of the just is engendering no shortage of sleepless nights. They ask themselves, "how do we do what we normally do (i.e. take the money and run), when it would, at best, appear unseemly, and, at worst, attract the ire of a restless and increasingly populist nation?"

While this is, to be sure, a high class problem, it is no less a simple one. There is of course a question of the "optics" of it all, especially when the country's top financial cops are looking for more scalps than Navajo Joe. Regretfully, early indications suggest that Mr. Blankfein and his lieutenants are going to take their cues from our political elite, designing a Rube Goldberg compensation scheme that will attempt to fool enough people into thinking that they have satisfied both their top producers and the needs of the greater financial system simultaneously.

Of course, like all politically motivated decisions designed to have one's cake and eat it too, it will fool no one, and probably only result in making both the firm's stake-holders and the public at large unbearably self-righteous once bonuses are paid. The pre-emptive announcement of a $200 million donation to the company's education foundation foreshadows this coming kabuki dance and would almost be hilarious if it weren't so hideously transparent and unnecessary. In free societies, good companies should have nothing to fear from their successes and charity should be accompanied, not by cynicism, but by at least some modicum of the milk of human kindness.

Austrian writer and satirist Karl Kraus once advised that in the "case of doubt, decide in favor of what is correct." And so, it would seem that the irony of Goldman's attempts "to suffer the slings and arrows" of their outrageous fortune gracefully may lie with perhaps the most inherently capitalistic solution of all - distributing this year's windfall to the actual shareholders (formerly known as "owners") of the company in the form of a special dividend. This would provide an instant and not insignificant return to countless individual investors, pension plans and endowments. Corporate management and the employees would also receive tax-advantaged compensation. And maybe, just maybe, it would discourage the ugly mercenary culture that has surrounded investment banks since they abandoned their partnership structures and became public companies.

Dividends are, of course, still considered a Victorian notion for many in corporate America, a less muscular, creative, and fun choice for any self-respecting imperial CEO. But, a good bar bet, at let's say Rothmann's on 54th, might be to ask your average financial services professional what percentage of the equity market's historical return has been derived from dividends. Chances are pretty good that there wouldn't be one in ten that would be within 5% of the correct answer - 51.5% - although nine out of ten could probably tell you how much median home prices in the Hamptons have declined year over year out to two decimal places. Goldman's record in this regard has been less-than-stellar, its current dividend yield is 0.8% and it has paid out a little less than 9% of its $46 billion in net income it has earned as a public company. With the stock at $180, no one's complaining, but what happens if, however implausibly, the firm's principal transactions dice turn cold?

Of course there will be those that claim that such a scheme would unnecessarily place the firm's talent (perhaps the most over-used term in American English today) at risk of mass exodus. But let's face it, we've all been re-priced in this business over the last year. Intelligence, ambition, and a willingness to work hard are admirable qualities but are hardly in short supply today given the carnage that has taken place in our industry.

Being the proprietor of a small Wall Street partnership, it is obvious that I have no clue about the stresses that accompany a CEO of a large public traded financial services firm with over 30,000 employees. Hamlet reminds us that "conscience does make cowards of us all," and so I would be lying if I didn't say that I'm speaking my own book here - I am a shareholder and have an intense interest in how our industry is perceived by the public at large. I met Mr. Blankfein only once, during an interview for a trading job coming out of business school. I remember only that he asked me about my SAT scores and his saying, perhaps presciently given my career and his own current circumstance, that good salesmen rarely make good traders and that good traders rarely make good salesmen. A special dividend from Goldman might just prove that he can be both.