Goldman’s Gold

If you were looking for evidence of a stock market top–which, to be sure, you shouldn’t be doing–it’d be hard to beat the news that investment bank Goldman Sachs will be going public later this year. Rumors about a Goldman IPO have been a perennial fixture of the Street throughout this bull market, and in fact Goldman partners have officially considered and rejected a public offering seven different times in the past. But no longer. The combination of record profits and a stock market that’s valuing securities firms at record levels has proved too much to resist, and so the firm’s 129-year history as a private partnership will soon come to an end.

The company’s co-CEOs, Jon Corzine and Henry Paulson Jr., took great pains to insist that the decision had nothing to do with the huge capital gains that Goldman partners will reap from the IPO. But it’s hard to believe that no one was thinking about the fact that the stakes of senior partners will now be worth hundreds of millions of dollars. To be sure, partners will be barred from selling their stock for lengthy periods of time–in some cases, as long as seven years–but the numbers are still staggering in their own right.

On the other hand, Goldman has already earned more than $2 billion in pretax income in just the first half of this year, and all of that money is essentially the partners’, to do with as they wish. In that sense, the Goldman IPO will be qualitatively different from Internet company IPOs, which create multimillionaires overnight. The Goldman partners are already swimming in money. It’s just that now some of that money will belong to public shareholders. (Outside owners already own more than 20 percent of the company.)

Goldman says that whatever money is raised in the IPO–probably close to $3 billion–will be reinvested in the corporation, allowing it to expand in terms of staff and perhaps acquire an asset management firm. That raises the perhaps surprising question of why the company didn’t just take on the money in debt, particularly with interest rates as low as they are. Selling equity is easier in the sense that there are no interest payments to make, but taking the company public will inevitably transform the way Goldman does business.

In particular, shareholders can be expected to scrutinize the firm’s compensation practices more closely than anyone at Goldman is used to, and to demand that the company retain more of its earnings rather than paying them out to its employees. In the short run, the impact of that scrutiny undoubtedly pales next to the prospect of the huge sums of money everyone at Goldman stands to make. But in the long run, having thousands of new bosses–which is what, ideally, shareholders should be–will make a difference. In a bull market, issuing equity appears to be a way of making money with no strings attached. But, as Al Dunlap found out on Monday, the strings are there, even if shareholders pull them only rarely.