ebook essays pieces of the puzzle
Tuesday, September 6th, 2011
long-term something

Goldman Sachs (GS) has been the preeminent investment bank in the world, but it is under attack from all sides.  Regulation is tougher, legal issues won’t go away, the competitive environment is more challenging, the firm’s businesses don’t offer much opportunity for growth, and, most importantly, clients are more wary and less forgiving.

In the chart, the top panel shows growth rates in revenues and earnings.  (The growth in earnings went stratospheric for a time because of the skimpy results during the crisis; I clipped it so that the chart was not distorted.)  The middle panel shows the revenue per employee (including interest income).  Nothing to sneeze at even now, but certainly lower than planned.  In the bottom panel is the relative performance of the stock.

It would be tough to bet against Goldman.  It has been too good for too long.  But dramatic changes are needed to make the businesses more profitable.  More importantly, the culture needs to be remade into one that is client focused.

In the past, I’ve taken Goldman to task for its practices, once warning about playing in the street (in a posting that was published in modified form in the Financial Times), which picked up on another piece which noted that the firm wasted no time getting back at it (business as usual) as soon as it could after the crisis.  Of the famous Goldman “way,” I was bold enough to say, “It’s not long-term greedy, it’s long-term stupid.”

As for the stock, it’s trading below book value and it would seem a safe bet to be long-term bullish.  But cheap won’t be enough.  A slick new website won’t be enough.  Real changes are needed, and since compensation expense is the key variable, you can expect employee counts and bonuses to come down.  But simply moving those levers isn’t enough.  A broader rethinking is in order.  (Chart:  Bloomberg terminal.)

forty years

Saturday’s StarTribune included a story I wrote about Mike Patrick, who was paralyzed forty years ago in a football accident.  What he has done since then is simply amazing.