Goldman Struggles

Is the king dead? Doth the emperor wear no clothes? I hardly doubt anybody will be holding a wake for Goldman Sachs any time soon, but it is an indisputable reality that the (perhaps soon to be ex) King of Wall Street is reeling and on the ropes.

The news of Lansdowne Partners sale of its entire $850 million Goldman stake may even be an unofficial industry acknowledgement of Goldman's fall from grace. Though the sales figure represents the tiniest fraction of Goldman's actual worth it does indicate a great deal about where some insiders think the bulge bracket power is headed. Lansdowne is, after all, Europe's biggest hedge fund and in many ways can be looked to as a point of reference along the lines of a rating agency.

Though the rationale given in the article is usual no more prop trading simplification, one has to wonder what else lies beyond the following words:

Part of Lansdowne's decision-making process is understood to have focused on the reduction in the value of Goldman's proprietary trading operations as a result of regulatory changes in the US.

Under the so-called Volcker rules – named after former US Treasury secretary Paul Volcker – enshrined within the recent Dodd-Frank legislation, Goldman has seen its lucrative proprietary investing curtailed. It has also suffered as a result of industry reductions in the use of leverage, or gearing, following the financial crisis, which was one of the ways it used to make money when trading from its own book. In addition, Goldman, like other banks, is also making the transition towards much more onerous global capital requirements under the new Basel III requirements.

As a result of these changes, Goldman's return on equity has reduced from a traditional 24pc to 30pc range to approximately 15pc.

With Goldman now struggling to reach profit forecasts, what will Lloyd and Gary's boys turn to for a revenue boost? Do I dare make some sort of joke about chickens coming home to roost?

A few years back we all sat back and laughed at the government's inability to effectually police and punish Goldman Sachs, in tomorrow's post I will speculate on precisely why we were dead wrong. In the meanwhile, I would like to solicit some opinions on Goldman and where you guys think their gilded ship is headed. Obviously, the industry as a whole is taking some lumps right now and Goldman is still very, very far from being in any sort of tangible danger. Still, when you've been the baddest man on the planet for so long, it just takes one Buster Douglas to send your world spinning upside down.

Goldman's not dead by a long shot, but I can't say that I am not a bit tickled to see them knocked off the perch a few notches. How about yourself?

Comments (10)

Aug 4, 2011 - 1:15pm

I don't believe this is the end of them reigning king. All of the big banks are taking similar hits, a lot of it has to do with the past few months of idiots on Capitol Hill. Every firm has their highs & lows I suppose.

I didn't say it was your fault, I said I was blaming you.
Aug 4, 2011 - 1:30pm

I guess their name will still hold some weight for a while but you wonder for how long. I think alot of it just depends on the way this entire industry will go. I don't think a struggling market with weary risk averse consumers is gonna be good for Goldman, but then again it won't be great for any bank.

Aug 4, 2011 - 2:15pm

In Program Trading MS surpassed GS.

GS ----- GS Cayman Holdings---- Prop Groups operating outside US, Cayman-based ------> Gained Income will be invested in Bonds -------> transferred back from the Caymans to US, without being regarded as "proprietary trading income"

Why didnt GS tried this ?

Aug 4, 2011 - 5:59pm

I think they'll eventually find a way to get around all of the regulations; they always do. Amazon has been frustrating the state tax authorities for years and still gets away with it. Why can't Goldman? Also, Goldman went through a very rough patch in the late 90's with a weak IPO and heavy losses from its investments--and this was in a time when the economy was roaring.

It's a funny thing--I definitely wouldn't count Goldman out by a long shot when they have some of the smartest people in the industry working for them.

Metal. Music. Life.
Aug 5, 2011 - 1:49am

GS is still the top dog.

Prop was a tiny part of the firm.

It still has the best talent among banks.

GS was down 4.5% today while competitors MS and CS were down 8.5% and 6.5%.

You cant argue with Market Cap and other factors.

Prop Trading wasnt that tiny part of GS, it was simply bullshit what Blankfein said, that Prop Trading generated only 10% of Revenue.

To your part of the competitors, I dont think that MS or CS arent that equal or strong, Barcap is the real competitor of Goldman Sachs.

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