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Competitors build up Goldman’s mystique

The real test of Goldman Sachs’s new model will come in a prolonged downturn.

Ask the top executives at almost any investment bank or universal bank of note in the world to define their own institution in terms of the competition and they’ll likely compare themselves with the same iconic firm. Goldman Sachs remains the investment bank against which the rest of the industry routinely benchmarks itself. It’s hugely galling to all of its rivals that six years after it went public, that firm retains much of the mystique that cloaked it as a private partnership.

That mystique centres on its astonishing earnings power. But Goldman plays a smart game. Off the record, a senior executive at one of the world’s top three banks makes a more honest assessment. When credit was scarce, banks like his tried to cement CEO and CFO relationships by providing loans, which he himself describes as the dumb money. Goldman has sought to cement relationships by co-investing with clients, leading with equity, the smart money.

More troubling to its competitors than Goldman’s capacity to produce huge profits is their sense that it has changed the investment banking model in ways that they cannot see how to adapt to. Is Blackstone, perhaps, a more natural competitor than Merrill or Lehman? The 20-year old firm made its name as a private equity investor but also has a strong advisory business.

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