Market Overview

Is Goldman Sachs About To Fade into Oblivion?


Morgan Stanley (NYSE: MS), JP Morgan (NYSE: JPM), and Bank of America (NYSE: BAC) all beat their earnings expectations, yet the house of Goldman did not. What differences were apparent between the bulge-bracket banks?

The relative perceptions between the banks has increased significantly over the last several months. JP Morgan, primarily due to Jamie Dimon, has been viewed as one of the last few honest financial institutions. This is a completely relative view, however, as the public does not fully trust any large commercial or investment bank. Morgan Stanley has been considered a strong force in the investment banking community, but fears were rampant as rumors propagated in the financial community regarding its exposure to European financial institutions. Bank of America, which surprisingly beat its earnings estimates, has been considered a weak institution. Its securities division, formerly Merrill Lynch, is its last venerable asset, and many people on the street are wary of Bank of America's future.

But what about Goldman Sachs? It is still extremely respected in corporate finance, regularly being a part of the largest corporate deals. Many of its high net-worth clients remain loyal as well, but why did revenues decline? While its franchise is still fairly strong, Goldman's perception across the United States has deteriorated significantly. In the summer of 2010, the US Department of Justice, potentially in a move to make Goldman a scapegoat, sued the bank for its dealings in collateralized debt obligations to various clients.

While the Abacus CDO case was the landmark securities case of its time, Goldman was hardly the only investment bank to actually pursue conflicts of interests. Eventually, other banks including JP Morgan, Deutsche Bank (NYSE: DB), and Citigroup (NYSE: C) were investigated. Regardless, Goldman Sachs was singled out initially and may have destroyed its reputation with some investors.

Goldman Sachs was also on the wrong side of the fence earlier in 2011, when its client Sprint was not picked to be acquired by AT&T. Rumor has it that JP Morgan represented T-Mobile, and was able to convince AT&T (NYSE: T) that it was the best option. Goldman was also unable to advise in the largest health care merger in 2011, in which Express Scripts (NASDAQ: ESRX) acquired MedCo; coincidentally, JP Morgan was involved with the sell-side analysis.

Financial institutions never last forever. Some of the greats, including Drexel, Burnham, Lambert and Donaldson, Lufkin, and Jenrette eventually met their demise, despite being at the top of the food chain. Is now that time for Goldman Sachs? Goldman is over 40% down for the year, barely trading over $100.

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