Goldman Earned More Than You Expected, Less Than You Wanted

Goldman Sachs earnings -- a beat, but one that drove the stock down 2 percent or so -- always provide a good excuse to Assess the Future Of Investment Banking1 in a way that oh, say, Citi earnings don't. So I guess let's? 

Goldman Sachs earnings -- a beat, but one that drove the stock down 2 percent or so -- always provide a good excuse to Assess the Future Of Investment Banking 1 in a way that oh, say, Citi earnings don't. So I guess let's? I think traditionally one starts with comp. From the earnings release:

"Compensation and benefits expenses (including salaries, discretionary compensation, amortization of equity awards and other items such as benefits) were $12.61 billion for 2013, 3% lower than 2012. The ratio of compensation and benefits to net revenues for 2013 was 36.9% compared with 37.9% for 2012. Total staff increased 2% compared with the end of 2012."

That's 500 more people at Goldman, 300 of them added in the fourth quarter. 2 Each of whom got paid, on average, about 4 percent less in 2013 than in 2012. 3 Against revenues that were basically unchanged (down 0.13 percent). So there you go: Goldman is employing more people to do the same amount of work (er, revenue, anyway), and paying them less. The transition to lazy underpaid banking is real!

Or there is the fact that trading revenues accounted for only 46 percent of Goldman's revenues, the lowest percentage since 2002. Trading is dead! Investment banking is in! And it's all driven by regulation:

To be sure, some of the drop in trading and other revenue at big Wall Street banks reflects a slower economy and less risk-taking by corporate clients. But it also reflects the fact that under Dodd-Frank, the Volcker rule and new capital requirements instituted by the Federal Reserve and other regulators, Wall Street banks cannot trade for their own accounts the way they once did, must maintain much less risky balance sheets and for the most part can no longer sell exotic and high-return products such as collateralized debt or loan obligations.

Erm, maybe. 4 I mean, Goldman beat revenue estimates by about a billion dollars this quarter, and more than half of that came from Investing & Lending, with much of it from "company-specific events, including initial public offerings, and net gains in public equities." That is, trading for Goldman's own account in risky equity securities. More broadly, here is where Goldman's revenue came from in 2013 versus 2012 versus 2006: 5


That does show a bit of a shift from sexy trading businesses to dull advisory businesses. (Though it also suggests that economic factors are a bigger driver: Client risk appetite in debt trading and M&A advisory may be down, but client appetite to issue debt and do IPOs is way up.) But it's, y'know, a 5 to 10 percent shift. If your view of the world is that the new regulatory environment has fundamentally changed how Goldman Sachs does business, it's hard to explain how little of that change shows up in its revenues.

Its return on equity is another story. Return on common equity was 32.8 percent in 2006; it was 11 percent in 2013. Harvey Schwartz assured analysts that Goldman is focused on return on equity but still refused to give a target number. Presumably 11 percent is not aspirational, but 32.8 percent doesn't seem particularly realistic either. Regulators may not have changed all that much about the investment banking business, but they sure have changed how it's funded.

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  1. Also a good excuse for Goldman lifestyle stories, which are legion today. Here is one about how great it is to work at Goldman Sachs, because of "the opportunity to work with, and count yourself among, an ultra-elite group," plus there's like a gym in the building that offers classes like "Flex Zumba and Jukari Fit, an accessible twist on Cirque du Soleil-style acrobatics." Ask me sometime and I'll show off my sweet sweet trapeze moves. Here is one about Marty Chavez, Goldman's chief information officer, who came (back) to Goldman "after some soul-searching at a silent monastery in New Mexico." "It's the only time in my life that I would say there was a clear message from the universe," he says; perhaps the message was "you should take up Flex Zumba."

    But the best is the story of Steve Graham, a 55-year-old private equity investor who breakdances under the name "B-boy Silverback." "Graham got his start in the breaking scene while working as an analyst at Goldman Sachs during the early 1980s." OF COURSE HE DID. He had to take company cars to the South Bronx to learn how to breakdance, but I bet now you can just take classes at the Goldman gym.

  2. See page 11 of the earnings release. 32,400 total staff at the end of 2012, 32,600 at the end of 3Q2013, and 32,900 now.

  3. I mean, not really, since a lot of them started in Q4, but you get the idea. Average pay in 2012 was about $399,500 ($12.9 billion in total comp divided by 32,400 workers); in 2013 it was about $383,000 ($12.6 billion divided by 32,900).

    Also, by the way:

    The fourth quarter of 2013 also included $196 million of impairment charges, principally related to consolidated investments, and a $155 million charitable contribution to Goldman Sachs Gives. Compensation was reduced to fund this charitable contribution to Goldman Sachs Gives.

    So Goldman gave to charity but took it out of its workers' paychecks -- about $4,700 apiece -- rather than its shareholders' profits. Okay!

  4. That block quote is from this Politico piece, which quotes Better Markets chief executive Dennis Kelleher extensively. And here is Kelleher's rebuttal, so.

  5. Here are the 2013, 2012 and 2006 (it's a November fiscal year-end) earnings releases. Businesses were broken down differently in 2006 -- a lot of principal investing was in FICC and Equities, and "Principal Investments" was therefore smaller than "Investing and Lending."

To contact the author on this story:
Matthew S Levine at

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