Goldman’s mixed messages

By Reuters Staff
October 7, 2011

 

This is part three of a three-part examination of how Goldman Sachs has fallen from grace under the leadership of Lloyd Blankfein, a tale chronicled by a series of columns from Reuters Breakingviews. Part one can be read here, and part two here. The series is also available in downloadable book form here.

REPUTATIONAL VOLATILITY

BY ROB COX

Zuckerberg displaced Lloyd Blankfein atop Vanity Fair’s 2010 list of the most influential people. Goldman would later be hired to manage a controversial $1.5 billion private placement for Facebook. REUTERS/Norbert von der Groeben

 

Reputations aren’t all that different from stock market valuations. Very often people are overrated, fail to live up to expectations and decline in the eyes of their peers. Perhaps they then become underrated, like cheap stocks, their intrinsic value under-appreciated by the masses. And so it goes for Lloyd Blankfein.

The Goldman Sachs Chief Executive just went from the cultural equivalent of a “strong buy” investment rating to a “sell” on Vanity Fair magazine’s list of the 100 most influential people, dubbed “The New Establishment.” Blankfein did not merely cede the top slot to Facebook founder Mark Zuckerberg – he fell to 100.

Both ratings probably miss the mark. A year ago Goldman appeared to be one of the few Teflon financial institutions in America and its leader, Blankfein, was the king of Wall Street. Hence his arrival at the top of Vanity Fair’s list. That very success, however, helped sow the seeds of Goldman’s annus horribilis.

The firm was pilloried in the press and by politicians for making too much money out of government bailouts of the financial sector. Its lack of a contrite response, Blankfein’s coy public remarks and, latterly, a Securities and Exchange Commission fraud allegation — subsequently settled — badly tarnished the Goldman boss’s crown.

So, like a stock price, Blankfein’s rating has swung from bubble to beaten-up territory. Where does it go from here? From Goldman’s perspective, the best outcome would actually be to disappear entirely from the list. After its PR nightmares, the less written about the firm — still run a bit like a private partnership — the better.

But don’t count on it. One reason, ironically, is Facebook. Social networkers have so many options that Zuckerberg probably isn’t really top of the heap, as Vanity Fair has ranked him. But a Facebook IPO — expected in the next year — will undoubtedly anoint investment banking monarchs. And there’s a better than 50-50 chance that a prominent manager of the floatation will be — you guessed it — Goldman. Running the Facebook IPO would help Blankfein’s firm top the IPO league tables. Unlike the Vanity Fair list, these rank money, the true measure of Wall Street.

Published on Sept. 2, 2010

 


OFF THE BOIL

BY ANTONY CURRIE
 

TRADER JOES — Goldman traders traditionally boast a sparkling reputation, but in the last few years, amid the market turmoil, their performance has been more up and down. REUTERS/Brendan McDermid

Goldman Sachs is coming down to earth with a bit of a bump. Sure, the Wall Street giant’s third-quarter earnings of $1.9 billion handily beat analysts’ expectations. That’s good news in any quarter, and especially after talk of a summer slowdown. But Goldman’s results usually lead the pack. Not this time.

Take the firm’s market-leading franchise in fixed income, currency and commodities trading, where revenue fell 14 percent from the second quarter, or around 10 percent once accounting for losses taken marking up the value of its own debt.

That’s not bad. But it’s the biggest drop of the major firms that have reported so far. Citigroup’s FICC revenue was almost flat, and JPMorgan’s actually improved slightly after adjusting for marking its liabilities to market value. Traders at a resurgent Bank of America raked in more than 50 percent more revenue than in the previous three months and crowed about logging a perfect record, meaning no trading losses on any day in the quarter.

It’s the second quarter in a row that Goldman’s traders have slipped. Previously, the firm’s equities unit took a hit after being on the wrong side of the volatility trade. That helped push the firm’s second-quarter return on equity down to 9.5 percent, excluding the one-off UK bonus tax and the cost of settling a lawsuit with the Securities and Exchange Commission. This time, the firm only managed to improve to a humdrum 10.3 percentreturn. Compare that to JPMorgan: its investment bank clocked 13 percent, and its asset-management unit returned 25 percent.

Goldman’s showing is hardly disastrous. Its investment bankers enjoyed a decent summer, with underwriting revenue jumping 40 percent and M&A work bringing in 5 percent more lucre. Equities trading recovered somewhat, and at $3.77 billion Goldman’s FICC revenue is still the largest in its peer group – just.

And the relative underperformance of the bank’s traders of late may just be a blip in their otherwise enviable record. But for once these sometimes omniscient-seeming masters of the financial universe are looking much more like mere mortals.

Published on Oct. 19, 2010

 


AUTUMN GAMES

BY JEFFREY GOLDFARB

 

Achieving partner status at Goldman Sachs is like winning the decathlon of the Olympics of banking. And the degree of difficulty in the latest biannual competition, which anointed 110 new medal winners, rated higher than ever. This crop has not only survived two years of financial mayhem but also Goldman’s special publicity and regulatory hell. That means achieving Elite Status membership now warrants an extra point of pride. Yet these victors may lay claim to lesser spoils.

Entering the Goldman inner circle is about more than just bragging rights. It may not come with quite the same influence it did in the 130 years leading up to the firm’s conversion from private partnership to public company in 1999. The salary hasn’t improved either; it’s the same $600,000 it was back at the time of the IPO. But partnership still provides plenty of other perks, not least of which is access to a slice of a special bonus pool above and beyond what is doled out to the bank’s lesser mortals.

It hasn’t been getting any easier to impress the judges. Though Goldman has in recent history maintained the partnership ranks at a little less than 2 percent of its full-time staff, this time around roughly one of out every 240 of them was added to those who wear the garland, bringing the count to 470. When the good times rolled four years ago, closer to one in 190 were brought into the fold.

Of course, Louis Vuitton bags and Ferretti yachts can’t be paid for in pride. And there could be less lucre available to the Goldman Class of 2011. The firm is revamping its business model to adjust to a brave new post-crisis world. It’s not that Goldman hasn’t adapted to change well in the past, but fewer bets with the house’s money, greater regulation, lower leverage and higher capital requirements all will put the model to a more serious test.

They have already taken a toll. Goldman’s 24 percent return on tangible common equity over the past 11 years is moving in the wrong direction, slipping to less than half that over the last two quarters. And payouts to the privileged club are more highly geared to the firm’s performance than for other staff. Those who achieve Goldman partner status may still be faster, higher, stronger — just not necessarily richer.

Published on Nov. 17, 2010

 


FOLLOW THE LAGGARD

BY ROB COX

 

Wall Street rivals usually follow where Goldman Sachs leads. It is unlikely to be any different when the findings of Goldman’s Business Standards Committee become public early next year. But on one important point Goldman lags some big competitors — the separation of the chief executive and chairman jobs. Now it has a chance to catch up.

Since May, the bank has been conducting the financial industry version of group psychoanalysis. The standards group chaired by veteran partners Gerald Corrigan and Michael Evans is scrubbing the bank’s business practices to “reinforce the firm’s client focus” and improve transparency.

The firm is examining, among other things, how it manages conflicts between its own activities and those of customers; how it discloses what it does; what responsibilities it has to clients; and, critically, how to inculcate a sense of professional ethics in its employees.

The results aren’t just highly anticipated among Goldman’s 35,400 employees. Every firm on Wall Street will pore over them. The firm’s public image may have been tarnished by reams of bad press and a Securities and Exchange Commission suit — since settled — alleging that the firm shortchanged some of its customers. But the bank is still considered the gold standard among its peers.

So if Goldman decides, say, to exit a business because it feels it creates conflicts of interest with clients, other banks will feel pressure to do the same — or risk expending considerable energy explaining to clients why they are different.

What’s not obviously on the business standards agenda, though, is Goldman’s own governance. This seems odd given the intensity of the soul-searching going at the firm. Goldman’s financial performance has not suffered in any obvious way from having Lloyd Blankfein hold both the CEO and chairman roles.

But Goldman, and specifically Blankfein, did take quite a beating in the public arena of late. Though some of the opprobrium was undeserved, the experience should have underlined the merits of separating duties at the top of the firm. The skills that brought Blankfein the top job at a competitive securities firm that consciously avoids the retail end of the market aren’t necessarily the same ones that are effective in the unwanted glare of political and Main Street scrutiny.

Having a seasoned chairman would have given the firm someone to navigate the shifting political and regulatory tides while Blankfein focused on the firm’s operations and employees and, most importantly, on its big corporate and institutional customers. Executives at banks that did separate the top two jobs — a list that includes Citigroup, Morgan Stanley and Bank of America — say the move paid off at the height of the recent crisis and in efforts to shape the regulatory reform bill passed by Congress.

Of course, a division of responsibilities is not a substitute for strong leadership. A chairman who does a poor job of interfacing with politicians or the media won’t be able to offer a chief executive much cover. And it’s critical that the chairman and CEO have a consistent vision for the company, a good working relationship, and complementary skills.

That’s not always the case, as British energy giant BP amply illustrated during the months it spent trying to stanch the flow of oil — and attendant negative press coverage — from its leaking Gulf of Mexico well. Carl-Henric Svanberg earned the sobriquet of “invisible chairman” for his low profile during the fiasco. And when the Swedish native did speak publicly, he did little to help gaffe-prone chief executive Tony Hayward, famously referring to the oil leak’s victims in the Gulf as “the small people.”

Blankfein is no Hayward. He has the confidence of shareholders, his board and his staff, and he survived antagonistic political hearings in much better shape than Hayward, if not completely unscathed. Having steered Goldman through the financial crisis and the annus horribilis the bank’s image endured in 2010, his job looks secure.

But that makes the timing right for a change in governance. The Business Standards Committee itself offers one possible candidate to step in alongside Blankfein in the form of Corrigan, a former president of the New York Federal Reserve. By proposing to add a chairman now, Goldman would avoid the common stigma of separating the two top jobs at a time of weakness. Doing so from a position of strength would set another example for its rivals.

Published on Dec. 14, 2010

 


MEET, SAY, LOVE

BY JEFFREY GOLDFARB

 

Goldman Sachs’ spiritual journey mostly leads the firm back to where it started. A highly anticipated report from the firm’s Business Standards Committee will disappoint anyone expecting wholesale reform. Its 39 recommendations mainly reaffirm the business principles that guide the bank. But along with added disclosure and heightened compliance, Goldman may strike a new balance with its most important constituency: clients.

The eight-month soul-searching exercise began after Goldman’s financial success through the crisis gave way to a lambasting in the press, a public mauling in Congress and a $550 million regulatory settlement. So the anticipation was that Goldman might find some new religion. That’s not quite what emerges from the 63-page hymnal.

Rather, the advice consists largely of tweaks to internal practices and procedures. For example, the committee recommends Goldman employees be judged not just on the numbers but also on how well they represent the franchise and build client relationships. It advocates the creation of a matrix to determine which products are suitable for which customers. And complex transactions will require additional reviews and approvals.

True, much of this sounds like MBA mumbo jumbo. But it’s a fair bet Goldman employees will read the document closely — and think twice about potential conflicts and the interests of clients as a result. To further ensure they do, the firm is implementing a training initiative built around the recommendations for senior staff, led by boss Lloyd Blankfein. The overriding message is clear: Goldman lives and dies by its reputation.

And on the margins, Goldman will open up a bit. The bank will report revenue from four business groups instead of three in a change that will see its proprietary investments distinguished from those of clients.

Goldman’s balance sheet will lay out assets by division, including information on liquidity and client margin lending positions. These disclosures could be cathartic for Goldman and potentially reassuring for investors.

But the main effect will be to give clients a stronger sense that they come first. Without that trust, the firm’s ability to wrest fees from them is imperiled. In that sense, this latest iteration shows Goldman is truly enlightened.

Published on Jan. 11, 2011

 


DON’T BECOME THE STORY

BY RICHARD BEALES

 

Perceptions about Goldman Sachs have shaped the reality of its Facebook fundraising. The Wall Street firm is now excluding U.S. investors from buying into the social network after media scrutiny made a private placement seem too public. Facebook invites attention – but Goldman does too these days. For all its focus on clients, the firm still has a blind spot about its own public image.

Getting hired by Facebook for a $1.5 billion private placement was a coup for Goldman. But in hindsight, bankers took a chance on their ability to keep a lid on things. With Facebook easily the hottest Internet property and carrying a putative valuation of $50 billion, it was always likely that reporters would unearth details. And that danger was surely multiplied by the association with Goldman.

The firm used to be the investment banker’s investment bank – highly influential, but operating mostly under the radar. That started to change at the time of its IPO a little more than a decade ago, and attention rocketed during the financial crisis as Goldman and its alumni faced negative headlines andoften failed to explain themselves successfully. That spawned conspiracy theories, mostly far-fetched. But the firm has become a regular media target.

Goldman would have been on safe ground with Facebook had there been no leaks and even, probably, if the placement documents had reached the public domain in full. As it was, bitty and inaccurate revelations meant some potential investors might not be getting a full picture – and under U.S. private placement rules, Goldman couldn’t pipe up to clarify. The decision not to sell the deal to U.S. investors was probably the right response.

This doesn’t mean Facebook made a mistake by hiring Goldman. It looks as if Mark Zuckerberg’s company will easily get all the investment dollars it wanted. But the episode suggests companies considering hiring Goldman — especially those hoping to do deals that break new ground or test existing rules — may need to weigh the firm’s profile as a potential risk factor. Goldman, meanwhile, needs to realize it’s no longer toiling away in the background. Recognizing that may help it one day regain a measure of obscurity.

Published Jan. 18, 2011

 


BABY STEPS

BY ANTONY CURRIE
 

MODERN FINANCE — Following a wide-ranging internal review, Goldman opted to provide more disclosure about capital alloca-tion and its balance sheet, overseen by Chief Financial Officer David Viniar. REUTERS/Yuri Gripas

Any extra disclosure that sheds light on the murky workings of Wall Street should be applauded. So Goldman Sachs deserves credit for adding some useful new data to its annual report. But the investment bank’s flirtation with increased openness only goes so far.

Perhaps the most obvious overall improvement is in the way parts of the annual report are written. It won’t win any prizes for flowing prose, but the sections on risk management, liquidity and other balance sheet issues have been infused with clearer language than usually can be found in regulatory filings.

On a more substantive note, Goldman has provided a more detailed breakdown of how it allocates assets to each of its business units. Institutional Client Services, for example, which houses the firm’s client trading desks, accounts for $364 billion, or just over a third of Goldman’s $911 billion in assets. Investing and Lending, meanwhile, where all loans and proprietary investments reside, takes up $58 billion. Since Goldman also started revealing pre-tax income for its various business units earlier this year, investors can get a more detailed sense of returns on the firm’s assets.

Goldman also now breaks out credit exposures by quality, region and industry. Last year, the bank increased its exposure to assets rated A or lower by 11 percent. It bumped up exposure to banks and other financial institutions by more than a quarter and its activities in the Americas by 14 percent. Meanwhile, governments and central banks were slightly out of favor at Goldman, as were Europe, the Middle East and Africa.

That’s more detail than most rivals hand over. But Goldman could easily have gone further, for example by detailing how much capital and leverage it allocates to various businesses, especially trading. And while the firm does lay out some scenarios for liquidity stress tests that its Business Standards Committee report in January implied would be forthcoming, it offers less detail than the promise implied. No doubt it’s a work in progress. But if Goldman is to maintain a financial divulgence lead, it will need to do more still.

Published on March 1, 2010

 


SILENCE IS GOLDMAN

BY ANTONY CURRIE

 

Goldman Sachs should take more credit for its failures. That’s a bitter pill to swallow for a firm that prides itself on its wits. But being less clever than most people think is one of Goldman’s best defenses against claims of engaging in mortgage shenanigans during the crisis.

Top brass, including Chief Executive Lloyd Blankfein, have argued the position before. They claim that while Goldman was net short in subprime mortgages in 2007, its overall housing book was closer to neutral that year — and lost $1.7 billion in 2008. Yet only now does Goldman seem to be considering reinforcing the idea by disclosing specifics about some of the trades, almost two months after U.S. lawmakers bashed the firm. In a hulking report, Senator Carl Levin accused Goldman executives of exploiting clients, misleading his subcommittee and making money on a net short position in mortgages in 2007.

That was the time for Goldman to jump in with its version of events. The senators even served up some howlers, several times mistaking the firm’s earnings for revenue and thus wildly overstating the impact of one mortgage desk’s gains on the overall bottom line. Putting the spotlight on such a basic error may have added some weight to the claims now leaking out that the congressional report miscalculated its long and short mortgage positions.

 

 

CARL MARKS — After grilling Lloyd Blankfein and other Goldman executives, Senator Carl Levin, a Democrat from Michigan, accused them of exploiting clients and misleading his subcommittee. REUTERS/Jason Reed

 

Yet Goldman instead stuck with a terse unspecific response. Choosing not to pick a bigger fight with the nation’s legislators probably seemed prudent at the time. But the Senate’s allegations have since helped turn yet more attention onto the firm’s activities as the housing market crashed — including a subpoena for still more information from Manhattan District Attorney Cyrus Vance.

Going on the offensive now makes the firm’s executives look wrong-footed, harried and even a tad desperate. They might not have made many friends had they decided to talk up their losses and exposed the congressional math sooner. But silence hasn’t helped either. The shares have steadily crept down toward book value amid fears of more costs growing out of Levin’s version of events. In a perverse way, the better Goldman had advertised its trading shortcomings of a few years ago, the better investors might feel today about the firm.

Published on June 6, 2011

 


CHAPTER 7

 

THE FUTURE

NOT WHAT PAUL WANTED

BY ROB COX
 

CASTING A PAUL — The Volcker Rule, named for former Fed Chairman Paul Volcker, may have some consequences he didn’t intend when President Barack Obama trotted him out in January 2010 to discuss financial reform. REUTERS/Kevin Lamarque

Goldman Sachs is lobbying to weaken limits on proprietary trading imposed by the Volcker Rule provision in last year’s U.S. financial reform. But like most hastily-crafted legislation, the rule has unintended effects that are only now becoming apparent. One may make the business of managing private equity investments even more lucrative for the likes of Goldman.

That’s hardly what Paul Volcker envisioned when the White House trotted him out amid a frenzy of anti-Wall Street sentiment in January 2010. The former Federal Reserve chairman said the rule would make banks safer by curtailing high-risk behavior, including investing in leveraged buyouts.

The Dodd-Frank law stipulates that a bank’s own money cannot comprise more than 3 percent of a private equity fund it manages, and that aggregated fund holdings cannot total more than 3 percent of its Tier 1 capital. For most banks, that’s no big deal. Many got out of the buyout business altogether to avoid conflicts with clients like TPG and Kohlberg Kravis Roberts.

Not Goldman. It raised a $20 billion fund, its sixth, at the height of the pre-crisis boom. Moreover, the firm and its partners accounted for around a third of the fund’s money.

Part of the allure for state pension funds, sovereign wealth funds and others is investing alongside Goldman and its people. That model is threatened by the Volcker Rule. But while the rule limits how much of their own money banks can sink into a fund, it doesn’t on its face place the same restriction on investments made directly from their balance sheets.

In theory, that means Goldman or another bank could make a direct investment and bring other investors along for the ride through a single purpose mini-fund managed by the bank — a bit like the merchant banks of yore. In a traditional buyout fund, losing bets offset winning ones in calculating the manager’s performance fees. Not so if the deals are done one by one: the manager would collect on the winners, but there would be no offset for the losers. That potentially works to the fund manager’s advantage.

True, the rules potentially limit this kind of investment in other ways, such as through higher capital charges. And investors might push back, too — demanding, for example, lower fees, higher performance hurdles or some sort of clawbacks. But however it turns out it’s something Tall Paul surely didn’t intend.

Published on May 12, 2011

 


LONG-TERM LLOYD

BY ROB COX

 

As Goldman Sachs continues to be the subject of legal inquiry, guessing the longevity of Lloyd Blankfein’s tenure as chief executive has become the summer’s Wall Street parlor game. Even Warren Buffett opined on the subject earlier this month (naturally he wants him to stay).

Barring any new, unsavory disclosures, it’s hard to see why Goldman’s board shouldn’t back Blankfein for his handling of pre-crisis business practices. The greater worry is Goldman’s financial performance. Either way, Goldman should use this period of soul-searching to seize on a chance to improve its governance.

Talk of Blankfein’s safety atop Goldman, which he has now led for five years, stems largely from questions of whether the firm acted improperly ahead of the 2008 financial crisis by, among other things, short-changing clients; and whether Blankfein misled Congress about the firm’s bets against the housing market.

On balance, these offenses look like misdemeanors no worse than those committed by other banks. JPMorgan recently settled similar charges. As for Blankfein’s Congressional testimony, his remarks on Goldman’s bets against the housing market surely ring today as economical. But to make a case for perjury requires a far higher standard of proof — one that the facts at present don’t seem to support.

Of course, the Justice Department and New York’s Attorney General are continuing to scour legal documents, emails and trading records. They could still find something fresh that implicates the firm. For that reason alone, the board needs to keep Blankfein in place. As a former top partner of the firm says, Blankfein’s resignation could be the “collateral for a trade” that authorities eventually seek as a settlement — or, in extremis, to head off an indictment. In light of this, the board should also have a succession plan in place. And there are some alternatives to Blankfein floating around, such as Asia-based vice chairman Michael Evans or investment banking head David Solomon.

But barring any further bad legal news, Blankfein looks safe, no? Only to a point. What matters most to Goldman’s board and shareholders is financial performance — a glimpse of which will come when the firm reports second-quarter earnings on Tuesday.

On this front, the news is mixed for Blankfein. The stock has shed nearly a quarter of its value so far this year, on a par with Morgan Stanley but worse than declines in Citigroup and JPMorgan. Indeed, the stock is now hovering at around book value — outside of the financial crisis that’s a rarity for Goldman, though it’s still a premium to most peers.

True, under Blankfein, the value of Goldman’s assets minus liabilities per share has more than doubled. And the firm is still the leading adviser to global companies on mergers. This is viewed as a critical symbol of the bank’s focus on clients.

Yet even if Blankfein can pull Goldman out of its market slump and avoid further legal issues, the board should strengthen the way the firm is run by separating the chairman and CEO positions, something many of its rivals have already done.

Moreover, there’s a catalyst in the near future for doing so. By next year the firm needs to name a new presiding director to replace John Bryan, the former Sara Lee chief who turns 75 this year and chairs Goldman’s corporate governance and nominating committees. Though Goldman’s top brass may argue Bryan has played a role akin to an independent chairman, he’s been invisible to most of the firm’s rank and file, regulators and politicians.

The past two years of stinging public opprobrium, regulatory woes and congressional scrutiny should have highlighted a glaring weakness in the Goldman model to its board.

A seasoned chairman, distinct from the CEO, would provide cover in navigating the shifting regulatory and political tides. And the more independent the chairman is, the more likely he’d be to judge when Goldman’s practices veered too closely away from assisting clients to serving its short-term interests. That would be a great help to Blankfein — or any of his possible successors.

Published on July 18, 2011

 


PIECE OF MIND

BY ROB COX

 

Goldman Sachs has often helped chief executives boost their companies’ shares by breaking them into pieces. The U.S. bank run by Lloyd Blankfein is currently advising Kraft Foods on its split and counseling McGraw-Hill on whether it should do the same. So it’s logical that some inside Goldman have run the numbers on their employer. The results are compelling. Should the firm’s stock linger below its book value, or assets less liabilities, of about $130 a share for much longer, a breakup could be hard for the firm’s board to resist.

There’s no suggestion for now that Goldman is considering such a radical maneuver. Most of its peers are also trading at a discount to book value, suggesting a sector-wide issue rather than something Goldman can easily tackle individually. And the company has a long-held view that the individual pieces — an industry-leading investment bank, a massive securities trading operation and an asset management arm — function best in combination.

Yet based on current market metrics, Goldman’s parts are potentially worth a lot more than the whole. And many of the justifications that the firm has given in the past for maintaining its structure look out of step with the changing global regulatory framework.

The starkest illustration of this mismatch comes in asset management. The Volcker Rule provision of the U.S. Dodd-Frank Act stipulates that a bank’s own money cannot comprise more than 3 percent of a private equity fund it manages. At present Goldman’s own capital accounts for a third of the $20 billion fund overseen by GS Capital Partners. Once the Volcker Rule becomes effective, the benefit of investing Goldman’s money alongside clients’ cash will be much diminished.

It could, however, be the simple dollars and cents that eventually talk loudest. Valuing each of the firm’s pieces is art as well as science, partly because the company’s published financial statements do not show the profitability of each segment in detail. But the available information does support a rough sum-of-the parts analysis.

First take Goldman’s investment banking unit, which includes advising companies on mergers and acquisitions and underwriting on behalf of clients. If the group extends its first-half performance for the rest of the year, it will make about $5.4 billion in revenue. On a multiple of four times sales — a deserved premium to smaller rival Greenhill which trades at three times — the unit could be worth $22 billion.

Then there’s asset management, which oversaw $844 billion of assets as of June 30. This includes Goldman’s private equity funds, with all the Volcker Rule uncertainty over their future. It’s hard to value this business because its profitability isn’t clear. The firm is also restructuring the unit. But valued at 10 percent of assets under management — roughly in line with Blackstone Group — Goldman’s alternative investment activities alone may be worth $15 billion. At 2 percent of assets, the rest of the unit would fetch a price of around $14 billion.

 

 

Add these pieces up and fold in a near $7 billion stake in Industrial and Commercial Bank of China and some other investments held directly on the Goldman balance sheet, and their value already exceeds the company’s $53 billion market capitalization.

That means Goldman’s Institutional Client Services arm, which generated 53 percent of revenue in the first half of 2011, comes for free. This business houses one of the industry’s top prime brokerages servicing hedge funds, as well as desks dealing in equities, fixed income, currency and commodities around the globe.

This business has its problems. In the six months ended in June, revenue declined 25 percent from the same period in 2010 partly as a result of new rules that prohibit banks making market bets with their own money. And there may be more bad news to come as the business further adjusts to new regulations. And while Goldman is a bank holding company with access to Federal Reserve lending, investors might balk at funding a standalone trading business in a crisis.

Nonetheless, it’s hard to see how Wall Street’s most profitable trading business over the last decade can have no value at all to shareholders. Breaking up Goldman may not be the legacy Blankfein hoped to carve out of his tenure. But if clients regularly take the firm’s advice to break up, it would be hypocritical of him not to consider the possibility himself.

Published on Sept. 7, 2011

 


ABOUT US

 

Reuters Breakingviews is the world’s leading source of agenda-setting financial insight. Every day, Breakingviews comments on the big financial stories as they happen in the United States, Europe and Asia. Expert analysis is provided by a global team of 30 correspondents based in London, New York, Washington, Hong Kong, Madrid, Moscow, Dubai and Mumbai.

 

Our columns reach financial professionals, including asset managers, senior corporate executives, investment bankers, lawyers, traders and private equity partners, by way of 500,000 Thomson Reuters desktops and on Breakingviews.com, a subscription website. Selected content is also syndicated to Reuters.com and over a dozen influential publications including The New York Times, The International Herald Tribune, The Globe & Mail and Le Monde. Founded in 1999, Breakingviews.com was acquired by Thomson Reuters in 2009 and is now Reuters’ brand for financial commentary.

 

CONTRIBUTORS

 

Breakingviews wishes to acknowledge the following individuals for their valuable contributions producing this book:

 

Clive George

 

Nicola O’Hara

 

Van Tsui

 

Nita Webb

 

And a special thanks to Alexandra Spychalsky for all her hard work

 

 

 

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