Mon, Sep 11, 2017 - Page 14 News List

Need for reinvention at Goldman Sachs: analysts

SLUMPING:The Wall Street giant’s FICC revenue fell 40 percent in Q2. Many people are hoping that its president will provide some answers at a conference this week


A slump in Goldman Sachs Group Inc’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,” Vertical Research Partners LLC analyst Richard Bove said. “It needs inspiration. It needs new management, new businesses, new activities.”

Goldman’s travails are something of a surprise given its unparalleled prestige in US 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 President Mario Draghi and several current White House officials, including US Secretary of the Treasury Steven Mnuchin and National Economic Council Director Gary Cohn, who is attempting to shepherd a major tax reform bill through Washington.

Meeschaert Capital Markets Inc president Gregori Volokhine 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 & Co 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.

However, 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.

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.

About 70 percent of volumes on the New York Stock Exchange now are on automated trading systems, Volokhine said.

Analysts are eager to hear how Goldman plans to right the ship, and Schwartz is scheduled to address investors at a conference this week hosted by Barclays PLC.

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 Co and less trading with XYZ hedge fund and that this quarter was a lousy one,” Bove said.

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 US President Donald Trump’s administration.

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.

Goldman should also consider acquisitions of smaller lenders.

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