Goldman Sachs in danger of looking average
By Jeffrey Goldfarb
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Goldman Sachs has lost its luster. The firm earned a best-in-class reputation for its history of profitability and navigating upheaval. But it seems less assured lately. In fact, Goldman is in danger of looking downright average.
It’s not the first time. Goldman has been sent reeling by shocks from Penn Central’s bankruptcy in 1970 to Russia’s default in 1998. But the Goldman advantage comes from an ability not only to climb off the canvas but to thrive in the face of adversity.
Today’s investors are expressing doubt, or at least not giving the firm led by Lloyd Blankfein the benefit of it. Over the last decade, Goldman’s shares have outperformed those of the biggest U.S. banks, including JPMorgan and Morgan Stanley, as well as the S&P 500 Index. But they have tumbled 16 percent this year, lagging rivals and the broader market.
One reason is Goldman’s struggle to get out of the headlines and clear its name in Washington even after last year’s record $550 million settlement with the Securities and Exchange Commission. The bank still faces the possibility the Justice Department will come after it or some of its people. Two analysts cut their ratings on Goldman’s stock last week for that reason. And news reports suggest the New York Attorney General has begun a fresh investigation into the role of the firm, and others, in the mortgage crisis.
Goldman’s gold-plated advisory business has been disappointing, too. For example, instead of its normal perch atop the U.S. merger rankings, nearly halfway through the year it ranks a dismal sixth, according to Thomson Reuters. That may help explain Monday’s reshuffle of senior bankers, which among other things saw the promotion of London-based Richard Gnodde to become a third co-head of the investment bank.
The firm isn’t even so sure of itself any more. Top executives told Barclays Capital last week that uncertainty about financial reform meant it couldn’t stand by its long-term high-teens return on equity target. European rival Credit Suisse recently dialed back its own from 18 percent to “above 15 percent.”
And while Goldman still commands a valuation premium to its largest rivals, it is trading at just 1.1 times book value. That implies it will barely cover its cost of capital. Five years ago, around the peak of the boom, Goldman fetched 2.6 times book, nearly twice JPMorgan’s multiple. The advantage has shrunk to just 10 percent, only part of which can be put down to the compression associated with an industry-wide bad patch.
Goldman and its supporters can argue the naysayers merely see the glass half empty. But to truly shine again, Goldman’s glass needs to be more than just half full.