Macaskill on markets: Goldman’s Game of Marketing gets desperate
As Goldman Sachs released the worst first quarter results by a leading US dealer in April, it placed a video discussion with Game of Thrones co-creator David Benioff in prime position on its corporate website.
There is a connection between the bank and the hit TV show, as Benioff’s father Stephen Friedman is a former chairman of Goldman. There was also a timely element to the website posting, as Game of Thrones was readying the launch of its sixth season on April 24 to huge world-wide viewership and social-media buzz.
Traffic to Goldman’s site was no doubt heavier than to the home pages of its main banking rivals, which range from the utilitarian to the insipidly aspirational.
If the posting was in part an attempt to divert attention from weak first quarter numbers it did not work, however. If anything, Goldman’s increasingly antic marketing of technology and retail initiatives is highlighting the extent to which it remains reliant on trading businesses that are in a prolonged slump and is still heavily exposed to proprietary securities positions.
Goldman’s first quarter results were dire. Its fixed income revenue fell by 47% compared with the first quarter of 2015, equities declined 23% and group-wide return on equity was just 6.4%, far below Goldman’s cost of capital, which is at least 10%. Investing and lending revenue – the way Goldman reports its own securities holdings – fell from $1.3 billion in the first quarter of 2015 to just $87 million in the most recent quarter.
The result for that segment of the firm highlighted the extent to which Goldman still has substantial proprietary securities exposure, despite the reduction of short-term risk-taking by its trading businesses due to compliance with the Volcker rules. It also underscored the lack of transparency in the firm’s holdings of bond, equity and loan positions.
Markdowns on Goldman’s public equity holdings were exactly offset by mark-ups in its private equity positions, in a curiously symmetrical valuation that left its revenue from shares at zero, thus avoiding a loss. Debt holdings produced all of the reported $87 million of revenue for the investing and lending segment, which was disappointing compared with $509 million the year before, but at least kept the ledger positive.
CEO Lloyd Blankfein and president Gary Cohn said Goldman would not waver from its commitment to full-service sales and trading across fixed income and equities markets in their annual letter to shareholders. The letter was released just before the weak first quarter results and marked an attempt to head off anticipated criticism of Goldman’s stay-the-course strategy, especially in fixed income.
Blankfein and Cohn noted that the balance of Goldman’s business mix had changed. Investment banking revenues from advisory and underwriting work are now roughly the same as those for fixed income, currency and commodities (FICC), a shift from 2012 when investment banking brought in only half as much as fixed income trading.“This does not mean we are moving away from FICC,” they said. “Rather, we remain committed to meeting the needs of our clients, while managing to structural and cyclical headwinds.”
Analysts on the call following the quarterly earnings release were unusually sceptical about Goldman’s strategy, while CFO Harvey Schwartz was less assertive than normal about the supposed gains in market share that Goldman will reap from its commitment to fixed income and equities while peers in Europe and elsewhere scale back.
Carefully worded claims about expected gains in market share have been a regular feature of Goldman’s earnings calls in recent years, with very little in the way of actual evidence. The hard numbers of the first quarter showed demonstrable underperformance to competitors such as JPMorgan and Citi, by contrast.
Soon after the weak earnings release, Goldman rolled out further details of its push to compete with both larger universal banks and new fintech lenders in the market for online retail banking in the US.
The marketing push for GS Bank drew plenty of attention, but this was partly due to the sheer implausibility of a firm that has always focused on big-ticket investment banking starting to compete for deposits as low as $1 (the floor for a new account) and partly due to Goldman’s inescapably high profile.
The bank remains a popular symbol of everything that is wrong with Wall Street, and the current presidential campaign is ensuring that Goldman’s move to rebrand itself as a technology-based bank that welcomes clients of all types is overshadowed by its continuing reputational issues.
Goldman settled mortgage market abuse charges later than its peers and final details of its agreement to pay $5.06 billion of fines did not emerge until April, just in time to feature prominently in the battle for the Democratic presidential nomination between Bernie Sanders and Hillary Clinton.
Sanders blanketed the New York area with TV ads that opened with the mortgage settlement and condemned Goldman Sachs as the epitome of Wall Street greed, in an attempt to tarnish Clinton by association with the firm that paid her $675,000 for three speeches in 2013.
In the most contentious debate before the New York primary vote, Clinton was questioned again about her refusal to disclose the content of the speeches given for Goldman and mocked by Sanders for downplaying her ties to Wall Street.
Clinton struggled to explain why she won’t disclose details of the speeches and though she won the New York primary and is closing in on the Democratic nomination, the episode once again positioned Goldman as the bank the public loves to hate.
So why would younger, tech-savvy customers attracted to online banking want to deposit their money with GS Bank? Higher-than-average rates are being offered, which is one reason, but it is difficult to see how Goldman can make attractive returns on that basis, given that bigger banks can fund themselves at lower costs and online banking is by its nature prone to swift erosion of lending differentials.
The marketing that Goldman is applying so energetically to its rebranding as a tech-based firm is also unlikely to be a differentiating factor for GS Bank. Reminding young depositors that their money is going to the firm formerly known as the vampire squid could just as easily deter potential customers.
That will leave Goldman reliant on its traditional customer base for the foreseeable future. Here its advantages should not be downplayed. Goldman remained number one in announced M&A in the first quarter, though Morgan Stanley boasted that it was number one for completed deals and JPMorgan pointed out that it generated the highest fees, in a prime example of the Game of Marketing Thrones played with industry rankings.
Goldman also remains a leader in both fixed income and equities in an era when many firms feel they have to choose one sector or the other.
But the frenetic marketing of Goldman’s non-core business is looking like an increasingly desperate bid to distract from the new reality of the firm’s position as just one of the pack in an industry that is struggling to generate viable returns.