Slumping Goldman Sachs faces questions about its strategy as technological change disrupts the finance industry
Slumping Goldman Sachs faces questions
Long associated with the super rich and powerful, Goldman
Sachs has been involved in complex and sometimes controversial transactions and
dealings
APF 10 SEP 2017
A slump in Goldman Sachs's long-dominant trading business
has sharpened questions about the Wall Street kingpin's strategy as
technological change disrupts the finance industry.
"Goldman Sachs has run out of steam," said
Richard Bove, analyst at Vertical Research.
"It needs inspiration. It needs new management, new
businesses, new activities."
Goldman's travails are something of a surprise given its
unparalleled prestige in American finance.
Long associated with the super rich and powerful, Goldman
Sachs has been involved in complex and sometimes controversial transactions and
dealings.
Its global alumni includes European Central Bank head
Mario Draghi and several current White House officials, including Treasury
Secretary Steven Mnuchin and National Economic Council director Gary Cohn, who
is attempting to shepherd a major tax reform bill through Washington.
Gregori Volokhine, president of Meeschaert Capital
markets, said the 148-year-old firm "must be reinvented."
Goldman reported an unprecedented 40 percent plunge in
revenues for trading in fixed income, commodities and currencies (FICC) in the
second quarter, a performance that lagged that of rivals JPMorgan Chase and
Morgan Stanley.
FICC has long been a key profit center at Goldman and
helped launch the rise of top brass such as chief executive LLoyd Blankfein,
president and co-chief operating officer Harvey Schwartz and chief financial
officer Martin Chavez.
But since the 2008 financial crisis, the role of trading
desks has eroded as powerful automated trading algorithms have gobbled up more
transactions and as more investors have embraced exchange traded funds which
have lower costs.
And competitors like Morgan Stanley slashed jobs in that
business two years ago.
This trend also has been encouraged by tougher
regulations on speculative activities, especially the Volcker rule which
restricts proprietary trading.
Around 70 percent of volumes on the New York Stock
Exchange now are on automated trading systems, Volokhine noted.
Analysts are eager to hear how Goldman plans to right the
ship, and Schwartz is scheduled to address investors at a conference next week
hosted by rival bank Barclays.
Bove wants the firm to acknowledge that many high-risk
transactions that once boosted results are no longer bankable and it sees new
opportunities ahead.
"Hopefully," Schwartz will say that Goldman is
going to be "doing more trading with Procter & Gamble and less trading
with XYZ hedge fund and that this quarter was a lousy one," Bove said.
- Surprise slump -
So far, Goldman Sachs has argued that trading remains a
viable business, which will pick up in times of market volatility. The company
also said business should be boosted by deregulatory moves by President Donald
Trump's administration.
CEO Blankfein has spoken of opportunities to serve as a
"full-service" bank, but acknowledged in an interview last month:
"We underperformed. We know what we have to do it and we're doing
it."
Still, he said, "we have a good reputation for
resiliency and adaptation."
Bove said Goldman should shift to more conventional
lending, an area it has begun to embrace with the creation of GS Bank, which
has savings accounts, and Marcus, an online lending program.
And Goldman should consider acquisitions of smaller
lenders.
"The place where financial companies make money is
loans," Bove said.
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