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Last updated: January 15, 2013 7:49 pm
In the face of withering criticism Goldman Sachs has abandoned a plan which would have allowed bankers to benefit from a cut in the top rate of income tax by delaying UK bonus payments until after the new UK tax year.
The Wall Street bank decided at a board meeting on Tuesday not to press ahead with the proposal after the governor of the Bank of England attacked the proposal.
The idea – first reported by the Financial Times on Sunday – would have seen the payment of the deferred portion of Goldman’s UK bonuses from the last three years delayed from February until early April, potentially saving bankers tens of millions of pounds in tax. The top rate of tax falls from 50 per cent to 45 per cent on April 6.
Although the plan was perfectly legal, the news prompted a flurry of criticism from lawmakers and even from within the banking industry.
Addressing the House of Commons Treasury select committee earlier on Tuesday, Sir Mervyn King, governor of the Bank of England, denounced the idea.
“I find it a bit depressing that people who earn so much find it would be even more exciting to adjust their payouts to benefit from the tax rate, knowing that this must have an impact on the rest of society, which is suffering most from the consequences of the financial crisis,” Sir Mervyn told MPs.
“I think it would be rather clumsy and lacking in care and attention to how other people might react. And in the long run, financial institutions do depend on goodwill from society,” he added.
The UK Treasury also applied pressure. Sajid Javid, the former Deutsche Bank trader who is now the Treasury minister responsible for the City of London, arranged a call with a senior Goldman executive on Tuesday.
“The bank obviously floated the idea to see how it lands,” said one Treasury source. “They then find the government wants to talk to them about it and the reaction is bad, so it is good news they shot it down. It means the leadership are aware of public feeling about it.”
Fellow bankers had also criticised Goldman’s stance. On Monday, at a hearing of the Parliamentary Commission on Standards in Banking, Anthony Browne, chief executive of the British Bankers’ Association, told lawmakers that the Goldman initiative was bad for an industry that was trying to reinvent its image and restore faith in its ethics.
“It clearly doesn’t restore trust,” Mr Browne said. Goldman Sachs is the only major City institution not represented by the BBA.
About half of the big City institutions had earlier considered delaying bonus payouts until after April 6, according to tax experts. But Goldman had been the only leading bank to persist with the plan after rivals retreated, fearing further reputational damage on top of a torrid 12 months of scandals.
Goldman is expected to unveil much-improved earnings when it releases fourth-quarter results on Wednesday. Analysts forecast the bank will report adjusted profit per share of $3.66 – more than double the $1.82 a share the bank posted in the same period last year. Net income should jump by about 80 per cent thanks to cost-cutting measures and the sale of the bank’s erstwhile hedge fund administration business. Revenues are expected to have increased by almost a third to $7.83bn on improved markets activity.
Additional reporting by Tracy Alloway in New York
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