Goldman’s enduring mystique
TWO YEARS AGO, at the Euromoney’s Awards for Excellence dinner, a senior investment banker at one of the leading global firms reflected, over his coffee, on the great talking point for the industry in 2006: the extent to which Goldman Sachs appeared to have reinvented itself as a mix between a giant hedge fund and a leading private equity investor.
LBO firms had emerged as the key drivers of M&A volume, launching ever larger and more audacious bids for public companies. Investment banks courted these clients – such a rich source of advisory fees, spreads on financing and IPO commissions – with the same ardour they once devoted to developed-world governments. Goldman was both one of these private equity giants and yet also an adviser to many of the others who were its rivals for investments. It was still managing both to advise corporate clients and, at times, to enter bids for them. This had disgruntled senior figures at one or two companies, notably BAA in the UK.
The US firm’s rivals had, in private and public, denounced an egregious conflict of interest at the heart of Goldman’s new business model. Now the investment banker wanted to come clean about these criticisms.
"Look, we may all say that," he confided to Euromoney, "but the truth is we’re all going after their business model. Every investment bank out there wants to follow Goldman and do much more principal as well as client business. The only question left is how quickly we’re each going to go down that route."
Skip forward two years and the same investment banker sits in his office pitching to Euromoney how well his firm’s investment banking business has fared amid all the distractions of huge write-offs, staff lay-offs, capital-raising to repair the balance sheet, changes in the executive suite. "We’ve not been one of the losers," he asserts rather outrageously. "Relative to our peer group of firms like Morgan Stanley and UBS, we’re doing well."
Euromoney wonders: isn’t Goldman Sachs in the firm’s peer group? Isn’t that the firm the banker had set out to model his business on back in 2006. "I can’t benchmark us against Goldman Sachs," comes the reply. But surely? "Look," he says, "they are on a different planet."
If Goldman was at the front of the investment banking pack during the boom years, when leverage boosted all markets and its prop traders and its success in private equity became the envy of Wall Street, now that the crash has hit, Goldman seems to have detached itself entirely from the pack.
It’s not been immune. It has suffered trading losses and reduced earnings. In its most recent quarterly results last month it disclosed a $775 million credit loss, including $500 million from hedges on non-investment-grade credit origination. But other divisions compensated. The firm still produced strong profits. And a turbulent market for financial stocks tracks a clear relative outperformance. Goldman’s shares sank 17% in the 12 months from mid-June 2007, on the eve of the great deleveraging, to mid-June 2008. That’s slightly worse than the S&P 500, which is down 14%.
The index of US broker dealers has fallen by 40% over the same period.
The CFO of one of the largest European banks, one that has so far avoided large-scale write-offs and not needed to raise capital and dilute shareholders, surveys the wreckage of the financial services industry. The inability of many rivals to fund lending to corporations or trading with investing customers is opening up to his own bank’s second-tier markets and investment banking business a chance to grab market share. His chief worry is maintaining his balance sheet when so many bank counterparts might be doubtful credits. "Only a few of us have emerged with our reputations intact," he says. "We have. JPMorgan has. And then there’s Goldman which has, if anything, emerged with its reputation enhanced."
As panic and retrenchment hit the financial industry, Goldman strides further ahead while its broken rivals struggle behind and abandon the dream of ever catching up.
There but for the grace of God
Goldman tops the M&A league tables; it rides high in the primary equity league tables, it is doing well in commodities and rates. Compensating, in the most recent quarter, for the $775 million credit hit on hedges gone awry, were strong revenues from higher client flows in equities, revenues from securities services 30% ahead of the second quarter of 2007 on higher customer balances from clients no doubt fleeing some of its prime brokerage rivals, and revenues 10% ahead on the same quarter a year ago in asset management, where clients are allocating money into Goldman’s unglamorous but long-established and well-regarded money-market funds.
Not that Lloyd Blankfein, Goldman’s chairman and CEO, is getting carried away.
"In terms of market share, our business has grown," he says. "We’ve certainly seen some clients actively seeking out firms that have avoided the worst of the problems. I should say ‘there, but for the grace of God’...but the truth is, we’ve so far avoided massive write-downs and that’s allowed us to focus on our clients and their needs, and not have to be very focused on ourselves."
Client demands have been simplified by the credit crisis. They want good advice and crisp execution. They don’t want to hear that a banker can’t get senior management approval to commit finance to a transaction because his bosses are out roadshowing the firm’s own capital-raising.
And for a firm that rivals predicted would destabilize its client franchises by raking in huge profits from principal trading and investing in the bull market, clients seem to be very keen to do business with Goldman in a down market. Advising clients on M&A, raising equity finance for them, making markets in securities to them, managing their money: this is what Goldman has spent the past year doing. It’s pretty basic stuff. And it pays off.