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As Goldman glister fades restoring brilliance is tough

Goldman Sachs remained a partnership long after its rivals went public. When it finally took the plunge, in 1999, it revealed almost absurd levels of profitability: returns on equity of more than 40 per cent in some years, twice as high as its rivals. A decade later, under chief executive Lloyd Blankfein, Goldman avoided the fate of Lehman Brothers, Merrill Lynch and Bear Stearns. Call it superior risk management. Credit the “big short” that Goldman placed on the mortgage market. Or lay it on Goldman’s unofficial motto to be “long-term greedy”.

Surviving the crisis and then immediately thriving was the crowning glory of an investment bank that has inspired more respect, envy, fear and loathing than any other. But over the past few quarters something strange has happened: Goldman is starting to look unexceptional. Reporting first-quarter results last week, chief financial officer Harvey Schwartz was able to boast of a “pretty dominant performance in investment banking,” a “quite solid performance in fixed income” and a return on equity that was “the highest in our peer group”. All true. But this is hardly setting investors’ hearts racing or leaving rivals quaking in their boots. Goldman had its best quarter in investment banking since 2007. But there were notes of caution even here. It missed out on big deals, sometimes by backing the wrong horse, such as on the Time Warner-Comcast merger. This is an occupational hazard. But it is also ceding ground to rivals. Goldman still has great investment bankers. It’s just that others have closed the gap. In the much bigger business of fixed income trading, Goldman’s performance was “quite solid” only by much reduced expectations. Four years ago Goldman made twice as much money trading bonds, currencies and commodities and was the top earner on Wall Street. This year it was beaten by three of its four US competitors. On profitability, the return on equity was certainly better than the rest. But 10.9 per cent would have caused paroxysms of anguish among Goldman executives a few years ago. There are perfectly reasonable excuses. Goldman like other large banks has been forced to take on more, loss-absorbent equity. This bulwark against catastrophe is also a barrier to outsized profits. But people hire, work for and invest in Goldman because it can swim against a strong tide. On a media call last week – one welcome sign of an end to exceptionalism is that Goldman publicly answered questions from reporters after several quarters of being the only bank not to do so – Mr Schwartz suggested Goldman would win a war of attrition. Take commodities, where Barclays, JPMorgan Chase and Morgan Stanley are retreating because of new regulations. Goldman can hope to stay the course and exploit the situation. But it is hard to believe that these pockets of capitulation will free enough revenues for Goldman to return to its heyday – apart from the fact that repricing by a handful of winners might provoke regulators or prompt clients to find other means of transacting business. Meanwhile, Goldman has regulatory headaches that it cannot escape. Its big direct investing arm has been hemmed in by regulations including the Volcker rule, which bans proprietary trading and limits ownership of private equity funds. There are advantages to being less distinctive. One is removing the target on your back. In 2010 Goldman was pushed into paying $550m by the Securities and Exchange Commission to settle allegations it provided incomplete information to investors in a complex mortgage-based security. It took regulators longer to tackle the much more flagrant abuses by banks that actually originated defective mortgages, which Goldman did not do, and package them into securities, in which Goldman was a smaller player. But this must be a minor consolation for the loss of exceptionalism. On a 10-year basis, compared with all its US peers, and the big Europeans – Barclays, Deutsche Bank, Credit Suisse and UBS – Goldman is the best-performing stock. Take the same peer group this year and it is the worst. On other measures where Goldman used to be dominant, such as price-to-book value, it is now merely near the top. Investors are no longer paying for Goldman as if it is exceptional. Restoring the brilliance premium is going to be a tough ask for the remainder of Mr Blankfein’s reign.