Goldman Wants to Be More Boring

The traditional deal, for the shareholders of an investment bank, was that the earnings were risky, but they were high. In boom years, the bank made a lot of money on mergers-and-acquisition and underwriting fees, doing trades for clients in active markets, and perhaps doing a few trades for itself. In bad years, the bank … ideally made a lot of money on restructuring and rescue-financing fees, doing trades for clients in volatile markets, and perhaps doing a few clever short trades for itself. But all of this required good timing and market judgment, and occasionally the bank would mess it up and have a bad year for itself. And the bank ran on a lot of leverage, with a relatively thin cushion of equity capital, so a bad year could be very spicy indeed.

The modern deal, for the shareholders of a big investment bank, is that the earnings are lower but less risky. In the boom years, you still get the M&A and underwriting fees, and you still do trades for clients, but you take much less trading risk, and your balance sheet has much more equity, so your return on equity is lower. Proprietary trading — the bank doing trades for its own account based on its own market judgment — is frowned upon. In bad years, the lack of proprietary trading, the restrained risk-taking and the thicker equity cushion means that the risk of disaster is smaller. Also the bank pays a lot of fines every year for, like, using cell phones, which creates a drag on returns.