Naysayers, emboldened by a second consecutive quarter of pain, bemoan the
bank’s inflexible approach and lack of transparency Something is amiss at Goldman Sachs.
The US investment bank and sales and trading powerhouse is flailing in its prized fixed income, currency, and commodities business, having reported a 40% year-over-year drop in revenues in that area for the three months to June 30. That left it bottom of the class among its Wall Street peers - for the second quarter in a row.
At the group level, Goldman managed to post positive earnings, helped by its lending and investment management businesses. The news is unlikely to comfort chief executive Lloyd Blankfein, who came up as fixed income trader with the firm and places great importance on that business.
The firm’s official line on the rough streak is that a multitude of problems reached their apex all at once. Marty Chavez, who recently took over as CFO, chalked it up to a combination of low volatility, less dispersion among stocks, reduced opportunities and less client activity.
Chavez also highlighted the weight Goldman places on commodities, which performed poorly across the Street. Commodities was a "story of challenges on all fronts,” the CFO said on a call following the release of the second-quarter results, adding, "We didn't navigate the market as well as we aspire to, or as well as we have in the past.”
Analysts agree with that assessment, though some are growing frustrated with the bank’s leadership, and its penchant for keeping its cards close to its chest.
Richard Bove of Rafferty Capital Markets has been calling for Blankfein’s resignation for about a year. In his view — one of the more extreme on the matter — Goldman’s decision not to fundamentally change the business after the financial crisis was a mistake. For example, while Morgan Stanley turned its focus to wealth management and more recently cut its fixed income trading staff by 25%, and Citigroup got rid of $1tn in assets in an effort to revise its business model, Goldman executives have opted to double down on the traditional businesses of trading and investment banking.
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Other observers are increasingly vexed by the lack of transparency into the fixed income business. On the earnings call, Chavez declined to answer several analyst questions about the size of the loss in commodities. The sector has been in a multi-year slump, and predictions that crude oil and copper would rebound strongly have not come true. Goldman’s own strategists were forced in a June research note to admit defeat, questioning how they could have gotten the market “so wrong”, though they remain relatively bullish.
But as in other areas, the bank is not known for retreating when it comes under pressure. Goldman is the only one of the big US banks that has held onto its physical commodities trading franchise, a business that has been under pressure from US and international regulators since the financial crisis — and one that other big players including JPMorgan and Morgan Stanley eventually exited. Its intransigence is widely seen as a bold bet that the US administration will repeal, or soften, Wall Street regulations like the Volcker Rule.
Choosing to stay the course through the commodities downturn carries echoes of the decision made in 2009 not to cut back in fixed income following the mortgage crisis, even as many of the bank’s competitors did. After lenders took a hit when the mortgage trading business imploded in 2008, many began exiting the fixed income business and laying off sales and trading staff.
"It was a bloodbath," said UBS banks analyst Brennan Hawken, "and Goldman just kept steady. They kept the desk staffed, they kept capital committed to the desks, they kept the lights on … and that served them extremely well." That year, Goldman earned $23.32bn in revenue from the fixed income business.
So far, Goldman’s refusal to deviate from its course has not paid off. But if it does, Hawken said, “They are going to crush it.”
Musical chairs
A shifting talent pool may have contributed to the slump. In the first quarter, commodities, currencies, and credit all posted lower revenues, while one of the only fixed income products to be singled out as a strong performer was rates. That division was helmed for almost a decade by Kostas Pantazopoulos, a 15-year veteran of the firm known for running a tight ship, with a good risk strategy — and for always making money — according to a person close to Goldman's fixed income unit.
In April, Pantazopoulos was moved to a new role as head of risk management strategies for the securities division. He was replaced by Hidehiro Imatsu, Nirubhan Pathmanabhan and Scott Rofey, who in the second quarter led the business toward what the firm described in a statement as "significantly lower net revenues in interest rate products.” Also since the first quarter, Paula Madoff, who was head of North American rates and mortgage sales, has decided to retire, while Thalia Chryssikou, who was head of Europe, Middle East and Africa rates sales, has become co-head of global sales strats.
