Is Goldman Sachs Doomed?
No Franchise lasts forever. In the 1990's, the Chicago Bulls were considered the best basketball team ever. Today, the same sentiments do not exist. When the junk bond market was red hot in the 1980's, Donaldson, Lufkin & Jenrette was the premier investment bank on Wall Street. Before DLJ, the big dog was Drexel Burnham Lambert.
Goldman Sachs (NYSE: GS) has an historic legacy, being part of some of the most exclusive deals on Wall Street, and having many alumni in powerful positions in government and corporate America. If history truly repeats itself, Goldman Sachs may one day be considered as a second-rate bank, or may even become defunct.
Goldman Sachs has always been unique amongst investment banks, with 14 principles that it claims to strictly adhere. For a long time, it was the only firm that refused to partake in hostile takeovers, indicating its vested concern for its clients' best interests. Given recent developments in global finance, is the house of Goldman in the same position?
There are several reasons why Goldman may fall victim to the American people. The most obvious reason is a function of bad press. Starting in 2010, the public became increasingly aware that Goldman Sachs played a large role in the housing collapse. The problem is, GS may not have been a huge factor in the collapse, but the government wanted to use one firm as a scapegoat. Goldman was the perfect option; widely recognizable and widely despised.
After the first lawsuit, which alleged that Goldman Sachs' management was aware of mismanaging counterparty risk in transactions involving the 2007-ABACUS CDO, Goldman Sachs paid $550 million dollars in damages. Since then, Goldman Sachs has been the target of various mortgage-related lawsuits. The city of Cleveland, Allstate Insurance, and other entities have been suing Goldman Sachs; the company stated in its most recent 10-K filing that a reasonable estimate of losses is approximately $3.4 billion.
Apart from damage to its books, Goldman has faced severe public backlash. Although some could argue that the government wanted to use GS as a scapegoat for the banks' roles in the financial crisis, the fact remains that Goldman Sachs has been the prime target. Along with the masses, investors have not been investing themselves with Goldman as much as they used to before the financial crisis.
Trading and market making revenues have been declining rapidly. Since the government imposed financial regulations, GS disbanded proprietary trading operations. For instance, Goldman Sachs sent one of its elite prop desks, the Principal Strategies Group, to Kohlberg, Kravis & Roberts (NYSE: KKR). Market making revenues also declined after financial regulations became stricter and influenced the back to decrease leverage and risk-taking. A decline in investor volume may have also caused a decline in Goldman's market-making revenues.
Investment banking fees have been steadily declining over the last few years as well. In 2011, when AT&T (NYSE: T) announced its acquisition of T-Mobile, the main adviser/underwriter was JP Morgan (NYSE: JPM). Goldman Sachs has been widely considered as the best underwriter in the technology, media, and telecommunications sectors. Is it possible that neither AT&T nor T-Mobile wanted Goldman's business?
Investment banking fees have been slumping for the firm as well. In terms of North American investment banking fees, GS ranks under JP Morgan, Morgan Stanley (NYSE: MS), and Credit Suisse (NYSE: CS). Goldman is not number one in global rankings either, JP Morgan is.
Public perception has a strong effect on business' performance. While Goldman Sachs has been under scrutiny for questionable activities, JP Morgan and its CEO, Jamie Dimon, have been praised consistently for being more forthcoming. Dimon's firm has been thriving in an otherwise rough economic environment.
Benzinga tried to reach out to some analysts that made bearish remarks about Goldman Sachs, but calls were not returned.
Goldman Sachs has been a Wall Street powerhouse for years, but events in recent years may not treat it well going forward. Public sentiment has been increasingly negative, and GS investors may be following suit. Declining revenues due to financial regulations may be the final nail in the coffin for the firm. In ten years from now, the American financial landscape could be very different. Merrill Lynch may be its own company, Evercore (NYSE: EVR) may be a bulge-bracket investment bank, and Goldman Sachs may not even exist.
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