Goldman Sachs’ every which way over Ashanti

I was contacted last week by David Amporful, a Ghanaian, who lost money in the collapse of Ashanti Gold. An LSE graduate, he works as an economics researcher specialising in the emerging markets, and lives in London.

In 1998, Amporful points out, Ashanti Gold was "the third-largest gold mining company in the world." He adds: "The first black' company on the London stock market, it had just purchased the Geita mine in Tanzania, positioning Ashanti to become even larger."

Then in May 1999, the UK Treasury decided to sell off its gold reserves. The market was flooded and the price of gold fell. Ashanti turned to its financial adviser, Goldman. The bank recommended that Ashanti protect itself by shorting gold, and arranged for it to enter into futures contracts.

But a month later, 15 European central banks announced that they would stop selling gold on world markets for five years. The announcement immediately drove up the metal to $307 an ounce. By October 6, it had risen to $362.

Ashanti was in trouble. On Goldman's advice, it had bet that gold prices would drop. Under the futures contracts, the company was obliged to buy gold at the higher, market price and sell it at the lower, contract price.

In a few weeks, Ashanti found itself facing huge losses. It had to beg the holders of the contracts not to force their execution.

Says Amporful: "Who negotiated with them on Ashanti's behalf? Goldman." But Ashanti shares collapsed and thousands of investors, Amporful among them, saw the value of their holdings wiped out as the company was declared insolvent.

In the end, in 2003, Ashanti was snapped up by its largest African competitor, AngloGold, a British company headquartered in South Africa. Asks Amporful: "Who was the financial adviser to AngloGold? Goldman."

At every turn along Ashanti's dismal way, Goldman made money. In the US, in baseball, they have a phrase for the Goldman approach, which is covering all the bases. Nobody is saying Goldman did anything wrong, but you can see why people get so annoyed.

Time to take a look at the flawed system that's paying bankers far too much

In announcing its results last week, Goldman Sachs said "the proportion of net revenues allocated for compensation and benefits was its lowest ever for the quarter at 43%".

That still meant that Goldman had a pay and bonus pot of $5.49 billion (£3.56 billion). But that's OK — the bank's "comp ratio" was perfectly acceptable by industry standards.

The whole business of comp ratios needs overhauling. Usually, in a bank as with other companies, the shareholders can influence the pay of the senior executives via the board's remuneration committee.

But that's about all — as to the level of net income devoted to staff pay, they have little say. What matters, surely, is not the ratio but the actual amount paid to each employee. The ratio has become a PR tool, to be highlighted when it falls within the market norms.

The truth is that too many bankers are paid too much. Setting a ratio based on the ratios set by others is not the answer. The bankers say they are following the market rate but that market has been shown to be hideously flawed, and came close to bringing down the entire system.

They need to pay themselves a lot less. And for that to happen, the comp ratio needs to come right down.