Bloomberg News | April 20, 2016
Getty Images Csteered Goldman Sachs through a decade of turmoil including
the 2008 financial crisis, but now the firm is trying to weather a storm
of a different sort.
Lloyd Blankfein’s decade ending on Wall Street
To see how Wall Street has changed over the past decade, look to Goldman Sachs Group Inc. under Lloyd C. Blankfein.
Goldman Sachs Group Inc., once the most profitable securities firm, reported the
lowest first-quarter revenue of Blankfein’s tenure as chief executive
officer, which began June 2006.
Return-on-equity, a closely watched
measure of profitability, fell to 6.4 per cent, well below where it
needs to be to show investors the firm can create value.
The results this week stem from sweeping structural changes buffeting
Wall Street and
renewed questions about whether firms including Goldman
Sachs are doing enough to adapt to the altered landscape.
The bank has
been trying to wait out
a years-long slump in fixed-income trading to
win market share and boost profits once conditions improve. But will the
industry ever rebound — and if so, will it be soon enough?
It was an “un-Goldmanlike quarter
with revenue pressures on just
about every business,” Glenn Schorr, an analyst at Evercore ISI, wrote
in a note. While market tumult at the start of the ye
ar eventually
subsided, “Goldman (and everyone else) really needs capital markets to
open further,” he said.
Markets stabilized in March and April
after a rough start to the year, which suggests
Goldman Sachs' revenue may improve in
the remaining months, Sandler O’Neill + Partners analysts Jeffrey
Harte and Sumeet Mody wrote in a note on Tuesday.
The first-quarter results at Goldman Sachs show how hard it is
for global investment banks to navigate increasingly difficult terrain.
Blankfein, 61,
led his firm through the 2008 financial crisis in better
shape than many rivals and posted record profit in 2009. In subsequent
years, he shepherded the company through
assaults on its reputation,
including a congressional inquiry into pre-crisis sale of
mortgage-linked investments.
Now the firm is trying to weather a storm of a different sort, as
- new
rules cut leverage used to amplify returns,
- make bond inventory more
expensive and
- prohibit the proprietary trading that was once one of Wall
Street’s biggest sources of profit.
In this year’s U.S. presidential
election, the bank has become a target for candidates including Senator
Bernie Sanders, who has repeatedly criticized it in debates, stump
speeches and campaign ads.
Goldman Sachs’s revenue was 10 per cent lower last year than in 2006,
when Blankfein took the helm.
At the start of this year’s first
quarter, typically Wall Street’s busiest, market volatility and falling
asset values drove clients to the sidelines, curbed deal making and
further cut into trading across the industry.
Goldman Sachs’s
investment-banking revenue fell 23 per cent to $1.46 billion amid a
dearth of initial stock offerings. Trading revenue tumbled 37 per cent
from a year earlier to $3.44 billion.
The same forces eroded earnings across Wall Street at the
start of the year.
In the past week, JP Morgan Chase & Co., Bank of
America Corp., Citigroup Inc. and Morgan Stanley all reported lower net
revenue.
Morgan Stanley, which has been shrinking its fixed-income
operations, posted the biggest drop in sales and trading of that group —
about 32 per cent less than a year earlier.
Investment-banking revenue
tumbled 27 per cent at Citigroup.
All of the companies cut expenses to
cushion the blow.
JP Morgan and Bank of America also were able to
generate more income from their consumer businesses.
Blankfein has taken some steps in that direction, building up the
firm’s Main Street operations and departing from its customary focus on
institutional clients by operating a deposit- taking bank and planning
an online lender. The asset management group purchased a retirement-plan
startup this year that serves small businesses and freelance workers.
He has invested in technology, too, both to drive innovation and
reduce the cost of having humans do tasks better served by machines.
Blankfein has touted the programmers and other support staff he’s added
in recent years.
The firm’s workforce has grown to 36,500, including
consultants and temporary staff, up from the 24,000 it employed at the
end of May 2006, when its figures didn’t include those people.
The Wall Street slump has led the CEO to cut pay and other costs,
with the $2.1 billion of non-compensation expenses in the first quarter
the lowest in almost seven years.
People familiar with his efforts have
said he’s also
embarked on the largest cost-cutting push in years,
dismissing support staff, rejecting bankers’ spending on airfare, hotels
and entertainment unless it directly serves clients, choosing not to
fill open positions, and spending less on printing pitch books or
brochures.
In the meantime, he and President Gary Cohn, 55, have
defended the
firm’s focus on trading, writing in their annual letter to shareholders
they will continue to wait out the downturn in fixed-income markets.
The
bet is that Goldman Sachs can withstand structural changes to the
industry and ultimately thrive as competitors, especially in Europe,
pull back.
At the core, “he kept a pure investment bank,” and it’s already
better adapted for the new market than most other firms, said Paul
Gulberg, an analyst at Portales Partners LLC.
“You have to judge it in
the context of the environment and relative to peers.”
The firm has created value, Chief Financial Officer Harvey Schwartz
said Tuesday, citing an
increase in book value and $25 billion returned
to shareholders over the past four years. The
dividend is about double
what it was when Blankfein took over.
Indeed, Goldman Sachs’s investors have fared better under Blankfein
than at many other financial firms.
The stock returned 17 per cent from
mid-2006 through the end of March, including reinvested dividends, while
the 90-company Standard & Poor’s 500 Financials Index lost 14 per
cent.
When Hank Paulson handed Blankfein the CEO’s title in 2006, Wall
Street’s mortgage machine was humming. The firm reported almost $38
billion of revenue that year and $46 billion in 2007 before seeing it
cut in half to $22 billion following the collapse of Lehman Brothers
Holdings Inc.
Revenue climbed back to about $34 billion by 2012, and has
hovered around that level for four straight years.
Many analysts have used the firm’s quarterly conference calls to ask
for more clarity on when, and how, it can increase. On Tuesday, Schwartz
attempted once more to defend the firm’s strategy from those demanding
more widespread changes.
“We can’t control what happens in terms of the environment,” he said.
“You really have to look at this over long periods of time.”
Bloomberg.com
Link:
http://business.financialpost.com/news/fp-street/lloyd-blankfeins-decade-ending-with-a-thud-on-a-humbled-wall-street
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