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goldman-sachs-giant-bonus-pr-headacheGoldman Sachs Group Inc. (GS) faces a gargantuan public relations headache when it reports third quarter results Wednesday.

Investors will be angry if the New York-based bank fails to hit Wall Street's consensus of earnings of $4.24 per share on revenue of $11.02 billion, or if it does not give bullish enough guidance. The Obama administration and members of Congress, on the other hand, will be furious if Goldman Sachs' earnings are too good. They will wonder how much of its success was the result of the $10 billion in TARP funds that it received and has since repaid. Goldman also benefited from the government's bailout of American International Group Inc. (AIG).
Arguments over Wall Street compensation open a can of worms that many on Wall Street and Capitol Hill would rather avoid. Citigroup Inc. (C) last week agreed to sell its Phibro commodities trading business in order to avoid a $100 million payout to superstar trader Andrew Hall. Legal challenges are possible from bankers as government pay czar Kenneth Feinberg reviews the practices of banks that have received bailouts.

But the issue is neither contract law nor economics -- it's purely political.

Goldman Sachs received an avalanche of bad publicity in July when media outlets reported that the bank had set aside $6.65 billion for pay and bonuses following a record $3.4 billion second quarter profit, which would enable its workers to receive record bonuses. The backlash seemed to have caught the bank by surprise; however, slowly but surely, Goldman is showing its kinder, gentler side.

Last week, Chief Executive Lloyd Blankfein said the public's anger over Wall Street pay was "understandable and appropriate." He also called on rivals to dump multiyear guaranteed bonuses, saying they encouraged excessive risk taking. Nonetheless, Blankfein argued that Goldman -- like every company on Wall Street -- needs to pay competitive wages to attract and retain top talent. A recent survey of Wall Street financial professionals backs this up, with more than one-third of those surveyed saying they expect their bonuses to increase in 2009 vs. 2008.

CNBC's Charlie Gasparino points out that Goldman is trying to soften the impending public relations hit by paying the majority of its bonuses in company stock. Usually, about 20 to 50 percent of a Wall Street executive's bonus comes in the form of stock, depending on their position with the company. The bank also might make a "massive" contribution to charity from the bonus pool, the first time something like that has ever happened, according to Gasparino.

But none of that may matter, since Goldman's PR problems are too complicated to be solved by money alone.

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