By William D. Cohan
No one would expect Lloyd Blankfein, the chairman and chief executive officer of Goldman Sachs Group. Inc., to start making wholesale strategic changes to his firm based on his lousy third-quarter results.
Yet, with the firm reporting only its second quarterly loss in a dozen years, he does have to face the reality that Goldman’s trading-driven business model may no longer have enough of the right stuff to compete effectively in the new regulatory world against the too-big-too-fail universal banks, like JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp. and Deutsche Bank AG.
For the first nine months of 2011 -- admittedly as tough a business environment as there has been for a while (or at least since the fourth quarter of 2008) -- Goldman’s return on equity has been an anemic 3.7 percent. Once upon a time, when Goldman was a private partnership, it was not uncommon for the firm to have an return in excess of 30 percent. Even as a public company, during the free-for-all casino days before the financial crisis, Goldman was able to post some impressive numbers: In the first quarter of 2006, the firm’s return on equity was 40 percent.
Those days appear to over, for a variety of reasons. First, with around $70 billion in equity capital, it is simply more difficult for Goldman to earn hefty returns on that capital, especially in a post-Dodd-Frank environment that restricts the kind of freewheeling bets Goldman has often been so good at it in the past. Second, the business environment for Goldman’s main businesses -- trading, investment banking, asset management and private equity investing -- stinks.
While it is true that occasionally Goldman will be able to hit the kind of four-bagger it did in the Kinder Morgan/El Paso deal yesterday -- where it helped advise El Paso Corp. and was one of the largest investors in Kinder Morgan Inc., where two if its partners sit on the board -- the truth is that the investment banking business is really tough these days and the trading business is even worse. The bottom line is that for the first nine months of 2011, Goldman’s revenue has fallen 25 percent compared to the first nine months of 2010.
What should Goldman do? Think about the unthinkable: Merge with a good, old-fashioned bank, something along the lines of, say, Bank of New York Mellon Corp. -- which has $26.3 trillion in assets under custody and $1.2 trillion in assets under management. Doing so would help Goldman broaden its business plan and its earnings base and help it to better compete in an age when regulators want banks to be less like casinos and more like utilities. Goldman considered buying Mellon Bank once before, in 1998, and it helped cost then co-chief executive officer Jon Corzine his job. Nowadays, a merger with BNYMellon might just help Blankfein keep his.
(William D. Cohan, a former investment banker and the author of “Money and Power: How Goldman Sachs Came to Rule theWorld,” is a Bloomberg View columnist. )
-0- Oct/18/2011 16:11 GMT