Goldman Loses Muscle in Corporate Finance as Bond Share Shrinks
Goldman Sachs Group Inc., the bank with the biggest trading profits on Wall Street, is losing market share underwriting corporate bonds as it seeks to boost its image as a company adviser rather than a $900 billion hedge fund.
The most profitable firm in Wall Street history has slipped to 10th in helping the world’s companies raise debt, down from ninth last year and as high as third place in 2003, according to data compiled by Bloomberg. Its share of this year’s $1.9 trillion in global offerings dipped to 3.7 percent, from an average 4.8 percent in the previous 10 years.
Chief Executive Officer Lloyd Blankfein is working to restore the New York-based firm’s reputation as an advocate for its customers after agreeing last month to pay a record fine to settle U.S. allegations it misled clients over sales of a mortgage-linked security. Goldman Sachs’s 35,000 employees help governments finance schools and roads and provide advice and capital to companies “to invest in their growth,” Blankfein, 55, said before Congress in April.
“Goldman is struggling a little bit here,” said Richard Bove, an analyst at Rochdale Securities in Lutz, Florida. “It has to overcome some pretty sizable public relations issues, which are related to the way it does business and the products it creates. The company is good enough to overcome all of this stuff, but it would be hard for me to imagine that there’s no impact as a result of what we’ve seen over the last 12 to 18 months.”
Taking ‘a Hit’
Blankfein has said the firm’s clients have stuck with it after agreeing to pay a $550 million fine to the U.S. Securities and Exchange Commission in connection with allegations that it misled investors in securities that bet on subprime mortgages. While not acknowledging or refuting improper conduct, Goldman Sachs said it made a “mistake” by failing to disclose a hedge fund that helped construct the investment was also planning to bet against it.
“Definitely Goldman Sachs’s reputation took a hit,” Blankfein said in a Bloomberg Television interview in May. “And that’s certainly reflected in people’s attitudes to the firm now. And that’s something that we have to work on.”
Goldman Sachs has retained its top spot in advising companies on mergers and acquisitions, with 165 deals this year and is second in equity offerings, with a 9.5 percent market share of the $258 billion raised. Equity offerings amount to 13 percent of the total raised through corporate bonds this year.
“When you think of Goldman Sachs and you think of our investment-banking and our market-making across the board and our money-management, we have one of the biggest client franchises out there, maybe the biggest,” Blankfein said. “This is a tough, competitive market with clients that can sometimes border on the cynical in terms of their expectations.”
Michael DuVally, a spokesman for Goldman Sachs in New York, declined to comment on the firm’s bond underwriting business.
Deposit-rich lenders JPMorgan Chase & Co. and Deutsche Bank AG have climbed in the league tables at the expense of Goldman Sachs as companies tap the bond market for some of the lowest yields on record. The banks began to dominate the market more than a decade ago after the repeal of Depression-era laws that separated investment and commercial banking. They won business in part by using their bigger balance sheets to lend directly to companies.
JPMorgan, the second-biggest U.S. bank, is leading global underwriting for the third straight year while Deutsche Bank, Germany’s biggest lender, is ranked second, up from an average rank of 4.6, Bloomberg data show. New York-based JPMorgan has a 6.8 percent share of the market, down from an average 7.3 percent, while Frankfurt-based Deutsche Bank has 5.9 percent, up from an average 5.5 percent.
Goldman Sachs also has dropped in U.S. corporate bond underwriting, where it holds a bigger share. The bank is sixth this year, down from as high as third in 2005, Bloomberg data show. Its U.S. share has dwindled to 7.3 percent from as high as 9 percent in 2005 and an average of 7.9 percent the previous 10 years.
Borrowers want an underwriter that has “the balance-sheet strength of a real commercial bank with investment banking capabilities as opposed to an investment bank with these nominal commercial banking facilities like Goldman Sachs,” said Charles Geisst, a finance professor at Manhattan College in Riverdale, New York, who has written about Wall Street’s history.
JPMorgan had quarterly average assets of $1.99 trillion last year, including $112.8 billion in commercial and industrial loans, Federal Reserve filings show. It held $548.2 billion of core deposits. Goldman Sachs’s quarterly average assets of $880.3 billion included $1.5 billion of commercial and industrial loans. It had core deposits of $19.4 billion.
JPMorgan is “generally bullish on opportunities across markets,” Therese Esperdy, the global head of debt capital markets at the bank in New York, said in a statement. Spokespeople for Deutsche Bank and Barclays didn’t comment.
Goldman Sachs is holding steady in businesses where profit margins are highest. It’s second in global equity underwritings, in line with an average rank of 1.7 the previous 10 years, Bloomberg data show. The average fee in that market this year has been 3.3 percent, compared with 0.5 percent in corporate bond underwriting.
It also has advised on more mergers and acquisitions than any other firm, with $289.7 billion in deals this year. M&A advisory generates about 40 percent of the investment-banking industry’s revenue, according to a Sanford C. Bernstein & Co. report reviewing the industry’s performance from 2000 to 2007.
Trading of fixed-income securities and derivatives, currencies and commodities generated an unprecedented $7.39 billion of revenue in the first quarter for Goldman Sachs, following overall record net earnings of $13.4 billion in 2009.
Goldman Sachs averaged $348.5 million a quarter in revenue from debt underwriting the last 20 quarters. That’s less than 10 percent of the average $3.68 billion a quarter during the same period from trading in fixed income, currency and commodity markets, data compiled by Bloomberg from earnings presentations show.
“It’s a little early to tell that there’s been major reputational damage,” said Ricardo Kleinbaum, a credit analyst at BNP Paribas in New York. “In periods of lower economic growth, there tends to be less financing needs and less M&A and advisory business, and therefore it is a negative for investment banking in general.”
Part of the erosion may be at the expense of all underwriters as competition intensifies. The average amount of deals for the top 10 underwriters has shrunk to $93.4 billion this year from $118.7 billion in the corresponding period of 2007.
New bond issues earned bankers $18.8 billion in fees in 2009 from debt underwriting, a 31 percent increase over 2008 and equal to the record set in 2007, Bloomberg data show.
Securities firms haven’t dominated debt underwriting league tables since 1999 when Congress repealed the Glass-Steagall Act. For more than 60 years, the law separated investment and commercial banking by prohibiting federally insured banks from underwriting securities and other investment banking activities.
Merrill Lynch & Co., which was bought in 2009 by Bank of America Corp., Morgan Stanley and Goldman Sachs were ranked first, third and fourth in global bond underwriting in 1999, with a combined market share of 19.4 percent.
“Historically, they were 1, 2 or 3,” Geisst, 63, the author of “Wall Street: A History,” said of Goldman Sachs before the repeal of Glass-Steagall.
From 2000 to 2009, Goldman Sachs’s average rank in global corporate bond underwriting was 6.7. Morgan Stanley, which slipped to seventh the past two years, averaged 5.4 percent. Its share this year is 4 percent, down from an average 5.3 percent.
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