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Goldman Sachs' partner class should be even smaller

November 14, 2012: 4:10 PM ET

The king of Wall Street is facing its own fiscal cliff.

Clarification: 11/14, 4:54 PM.

FORTUNE -- There's a lot less gold to go around. Even Goldman Sachs doesn't seem to realize how empty the mine is where it used to dig.

On Wednesday, Goldman (GS)  named 70 new partners. It's the smallest class of new firm heavyweights since Goldman went public back in 1999. The last time the firm named new partners, in 2010, 110 Goldmanites got the call.

Still, at least by one metric, the new partner class is not small enough.

Goldman names new partners every two years, even though the firm is no longer technically a partnership. These days it just means you're going make a whole bunch of money - more than the other guys. The problem is Goldman itself doesn't make nearly as much as it used to.

MORE: Jefferies flight to safety: Is this the new Wall Street?

This year's additions bring the total number of Goldman partners to 477. That's seven more than the 470 partners Goldman had back in 2010. Goldman's profits, on the other hand, have been heading in the other direction. The result: Goldman's own fiscal cliff.

Two years ago, Goldman generated an average of $23 million per partner in profits. (I'm taking an average of the two prior years of profits before each new class.) Now that figure is down to $11.1 million.

It shows the tight spot Goldman is in. This is a firm that is still staffed for a much more profitable time. And it needs to hand out promotions or, like all firms, its best people will move on.

What's more, even if Goldman named no new partners this year, it would still only be generating $13 million a year per partner. Even to get back to what Goldman was earning per partner back in 2008, it would have to bring the number of partners down to 310. That's a lot of head chopping.

Goldman might be willing to have all these partners at a time when profits are not what they used to be, because it thinks that will change. But at least in the near future, it's hard to see where that huge boost of profitability will come from. New bank regulations are curtailing the trading Goldman can do. And soon it will have to sell off the firm's own private equity investments. (Goldman says it intends to stay in that business, just as a manager of other people's money, which isn't as profitable a role.) Mergers have been held down by the problems in Europe, and those aren't going away anytime soon. And a lot of the investment banking business these days is being driven by cheap money, and Goldman's never going to have as much access to cheap money as JPMorgan Chase (JPM), which has a huge base of deposits it can draw on.

MORE: The fiscal cliff may be overblown

To that end, Goldman's CEO Lloyd Blankfein recently said at an investment conference that the firm was trying to be the Wal-Mart of Wall Street - the low-cost provider. That doesn't sound like talk from someone who thinks a big burst of profits is on the horizon.

There are number of ways the firm can deal with this. Goldman can collectively say this is a new era and our people are going to make less money. But investment banking is all about people, and what you can pay them. Goldman has always paid the most, so it gets the best people. I don't think the firm is going to give up that edge.

Another option is you can fire a whole bunch of people. Goldman is doing some of that. But there are still about 33,000 people who work at Goldman, only about 2,000 less than at its peak. And, of course, the number of partners hasn't budged much. What's more, firing lots of people is not really all that much fun.

The other way to go about it is to continue to pay your partners a lot, but everyone else not so much. That way you can have all these crazy rich people walking around your office, lending their underlings their Hampton houses every now and then, or handing them a stack of chips during the bachelor party trips to Vegas. The peons will still feel grateful for being around all that wealth, because that's why you go to Wall Street after all.

What's more, you still will get your best people to stick around, because they think they will make partner. The people who are not on track to make partner will leave earlier than before, which is fine because you can't afford them anyway. This is probably what will likely happen. Even at Goldman, the 99% and the 1% are moving farther apart.

Clarification: An earlier version of this piece said that Goldman, due to the Volcker rule, would have to spin off its private equity business. In fact, Goldman can hold onto its business of managing private equity funds. It would just have to sell off its own investments.

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About This Author
Stephen Gandel
Stephen Gandel

Stephen Gandel has covered Wall Street and investing for over 15 years. He joins Fortune from sister publication TIME, where he was a senior business writer and lead blogger for The Curious Capitalist. He has also held positions at Money and Crain's New York Business. Stephen is a four-time winner of the Henry R. Luce Award. His work has also been recognized by the National Association of Real Estate Editors, the New York State Society of CPA and the Association of Area Business Publications. He is a graduate of Washington University, and lives in Brooklyn with his wife and two children.

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