March 31, 2023

DealBook: Goldman Retreats From Plan to Award Bonuses Later in Britain

Mervyn King, the governor of the Bank of England, criticized banks that were considering paying bonuses later than usual.Brendan McDermid/ReutersMervyn King, the governor of the Bank of England, criticized banks that were considering paying bonuses later than usual.

LONDON – Goldman Sachs decided on Tuesday that it would not delay the payment of bonuses to its staff in Britain, a move that would have helped investment bankers and other highly paid employees benefit from a lower income tax rate.

The decision was made as lawmakers criticized banks that were considering paying bonuses later than usual. The top tax rate in Britain is scheduled to drop to 45 percent from 50 percent on April 6.

Goldman Sachs’s compensation committee had considered delaying the bonus payments but decided at its meeting on Tuesday not to proceed, said a person with direct knowledge of the decision, who declined to be identified because the meeting was not public. Goldman Sachs is scheduled to report fourth-quarter earnings on Wednesday and usually announces the size of the annual bonuses to its staff soon afterward.

Even the consideration of such a move had threatened to become another public relations problem for the banking industry. Top executives had pledged to try to improve their reputations, which were tarnished by the financial crisis.

Goldman Sachs was already drawing scrutiny in the United States after it distributed $65 million in stock to 10 senior executives in December instead of January, when the company typically makes such awards. The move helped the executives avoid the higher marginal tax rates that will now be imposed on income of $450,000 or more.

Mervyn King, the governor of the Bank of England, told a parliamentary committee on Tuesday morning that even though a delay in bonus payments was not illegal, it was “a bit depressing that people who earn so much seem to think that it’s even more exciting to adjust the timing of it.”

Sajid Javid, a Treasury minister in Britain, called Goldman Sachs this week to urge it not to delay the payments, a person briefed on the discussion said.

The offices of Goldman Sachs in London in 2010.Toby Melville/ReutersThe offices of Goldman Sachs in London in 2010.

The British government announced last year that it would scrap the 50 percent top tax rate for income above £150,000, or about $238,000, which was introduced by the last Labour government to help reduce the budget deficit. George Osborne, the chancellor of the Exchequer, had called the tax “cripplingly uncompetitive” because it cost jobs and did not raise any money.

A spokeswoman for Goldman Sachs declined to comment.

Mr. King said that investment bankers were privileged because a lot of their compensation was made up of bonuses, which the banks can decide to pay whenever they want. But he also said that delaying bonuses to benefit from the coming tax cut “would be rather clumsy and lacking in care and attention to how other people might react.”

“In the long run, financial institutions, like all large institutions, do depend on good will from the rest of society,” he said. “They can’t just exist on their own.”

Earlier, several Labour Party politicians criticized the banking industry for considering a delay of bonus payments. John Mann, of the Labour Party, said such a step would be an “opportunistic money grab,” The Financial Times reported on Monday.

This post has been revised to reflect the following correction:

Correction: January 15, 2013

The headline on an earlier version of this article referred mistakenly to the timing of the bonuses awarded by Goldman Sachs in Britain. As the article correctly noted, the investment bank decided to award bonuses before the tax rate is adjusted on April 6, not after. An earlier version also misstated the currency conversion that would apply to the 50 percent top tax rate for income. The tax rate applied to incomes above £150,000, or about $238,000, not $181,000.

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DealBook: As Knight Capital Gains a Lifeline, It Loses Market-Making Duties

Errant trades from the Knight Capital Group began hitting the New York Stock Exchange almost as soon as the opening bell rang on Wednesday.Brendan McDermid/ReutersErrant trades from the Knight Capital Group began hitting the New York Stock Exchange almost as soon as the opening bell rang on Wednesday.

The Knight Capital Group confirmed on Monday that it had struck a $400 million rescue deal with a group of investors, staving off collapse after a recent trading mishap, even as the New York Stock Exchange temporarily revoked the firm’s market-making responsibilities.

The rescue package, which was arranged by the Jefferies Group, includes investments from TD Ameritrade and the Blackstone Group. Getco and Stifel, Nicolaus Company were also involved.

“We are grateful for the support of these leading Wall Street firms that came together to invest in Knight,” Tom Joyce, the firm’s chairman and chief executive, said in a statement. “The array of participants in this capital infusion underscores Knight’s critical role in the capital markets.”

In a regulatory filing, Knight Capital said the investors agreed to purchase $400 million of the brokerage firm’s preferred stock. Under the terms of the deal, Knight will also expand its board by adding three new members.

The deal could provide the investors with more than 260 million shares of the firm, affording the investors the right to buy the shares at $1.50 a piece, according to the statement. Last week, before the trading blunder, the firm’s shares closed over $10.

The rescue deal will hugely dilute existing shareholders of the company. In mid-morning trading, shares of Knight Capital were down 24 percent.

The lifeline was assembled in the wake of Knight Capital’s disclosure of a $440 million trading loss. The loss stemmed from a technology error that occurred on Wednesday when the firm unveiled new trading software, a glitch that generated erroneous orders to buy shares of major stocks. The orders affected the shares of 148 companies, including Ford Motor, RadioShack and American Airlines, sending the markets into upheaval.

Knight Capital said it reached the deal on Sunday, and it expected to close the transaction on Monday. It was a rapid a recovery for a firm that just days ago was facing collapse.

Still, the firm faces significant challenges. The New York Stock Exchange said on Monday it “temporarily” reassigned the firm’s market-making responsibilities for more than 600 securities to Getco, the high-speed trading firm that also invested in Knight. Market makers buy and sell securities on behalf of clients.

The move, the exchange said in a statement on Monday, was a stop-gap measure needed until the investor deal was final. Once the recapitalization plan is complete, Knight will resume its duties.

“We believe this interim transition is in the best interests of investors, our listed issuers, market stability and efficiency, as well as Knight, as the firm finalizes its equity financing transaction,” Larry Leibowitz, chief operating officer of NYSE Euronext, said in the statement.

Knight Capital also faces heavy regulatory scrutiny. The Securities and Exchange Commission is examining potential legal violations as it pieces together the firm’s missteps.

The problems for Knight Capital began at the start of trading on Wednesday. The firm tweaked its computer coding to push itself onto a new trading platform that the New York Stock Exchange opened that day. Under this program, trades from retail investors shift to a special platform where firms like Knight compete to offer them the best price.

But when Knight’s new system went live, the firm “experienced a human error and/or a technology malfunction related to its installation of trading software,” the firm explained in the filing on Monday.

Chaos ensued. The error caused Knight to place unauthorized offers to buy and sell shares of big American companies, driving up the volume of trading and causing a stir among traders and exchanges.

Knight had to sell the stocks that it accidentally bought, prompting a $440 million loss. The loss drained Knight’s capital cushion and caused “liquidity pressures,” the firm said in the filing.

“In view of the impact to the company’s capital base and the resultant loss of customer and counterparty confidence, there is substantial doubt about the company’s ability to continue as a going concern,” the filing said.

Knight and its chief executive, Thomas M. Joyce, began contacting potential suitors for parts of the business, and the firm consulted restructuring lawyers on a potential Chapter 11 filing, according to the people with direct knowledge of the matter.

But events soon turned in the firm’s favor.

The firm secured emergency short-term financing that allowed it to operate on Friday, and it used Goldman Sachs to buy at a discount the shares Knight had erroneously accumulated.

Some of the firm’s biggest customers, including TD Ameritrade and Scottrade, said that they had resumed doing business with Knight by Friday afternoon.

The firm capped its efforts to stay afloat on Sunday with the rescue deal. Knight expects to finalize the agreement on Monday morning and detail the financing terms in a regulatory filing.

“Knight’s financial position and capital base have been restored to a level that more than offsets the loss incurred last week,” Mr. Joyce said in a statement. “We thank our clients, employees and partners for their steadfastness during a brief yet difficult period and we are getting back to business as usual.”

Knight was advised by Sandler O’Neill and Wachtell, Lipton, Rosen Katz. Barclays is TD Ameritrade’s financial advisor.

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DealBook: Groupon’s Real Deals Trump Zynga’s Virtual Sheep

Mark Pincus, left, chief of Zynga, and Andrew Mason, chief of Groupon.Zef Nikolla/NASDAQ, via Reuters and Brendan McDermid/ReutersMark Pincus, left, chief of Zynga, and Andrew Mason, chief of Groupon.

This holiday season, investors seem to prefer real deals to virtual sheep.

It’s been several weeks since Groupon and Zynga went public. Yet it’s striking how the two companies have performed in the marketplace since their initial public offerings.

Groupon shares have fallen 15.4 percent since spiking on their Nov. 4 debut. Yet at $22.10, they still remain above their $20 initial offer price. Zynga shares have tumbled 14.5 percent since beginning trading last week, and at $9.47 remain below their I.P.O. price of $10.

It is perhaps more surprising given the amount of trouble Groupon raised during its run-up to going public. There were the controversial accounting measures, the inopportune comments from its chairman, the much-debated letter from its chief executive and its revenue restatements.

By contrast, Zynga had to revise its revenue only once — which had the effect of improving its current numbers.

Even by looking at the performance numbers, Zynga appears to be doing a bit better. The company posted $597.5 million in revenue and $27.9 million in earnings last year, full stop.

As for Groupon? The math gets a bit more complicated:

  • It posted $312.9 million in net revenue. Fair enough.
  • But in terms of gross billings, which includes money that would eventually be paid to merchants, it reported $745.3 million.
  • On a generally accepted accounting principles basis, Groupon recorded a $456.3 million loss.
  • And using one of Groupon’s preferred accounting metrics, the company recorded a $181 million loss.

So why is Zynga’s stock underperforming?

There’s a technical possibility: the difference in the two companies’ floats. Zynga sold about 14 percent of its outstanding shares in its I.P.O. But Groupon sold an almost absurdly low 5 percent of its stock, creating significantly more scarcity for the coupon company’s shares.

Time will tell how each fares, especially when the lock-ups for insider stock sales expire. That could show what the people with the deepest knowledge of each company’s prospects — management — thinks of where each player is headed.

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