Is a 20% ROE really still possible?

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Back in 2007, a return on equity of 20% plus was all the rage. At Goldman, the return on equity in 2006 was a staggering 32.8%.

High returns on equity helped fuel high pay. After all, if a business was generating big returns for shareholders, shouldn't its employees be paid accordingly?

These days, returns on equity are considerably lower. Bernstein Research, for example, is predicting a ROE for Goldman of 10.8% for 2009 and 9.8% for 2010.

Despite this, banks continue to quest after the returns of the recent past. BNP Paribas is rumoured to have tied last year's bonuses to the achievement of 20% ROE in years to come.

And Jamie Dimon says returns of 20% will again be a possibility in future as market share increases.

Is a 20% ROE wishful thinking? Or is the market about to polarize into those that can do it (and can pay accordingly) and those that can't?

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