One of the premier investment banking companies in the world, Goldman Sachs, may not be so popular anymore among career seekers. Brad Hintz, a senior analyst at Bernstein Research and longtime promoter of Goldman Sachs’ stock is no longer spreading the word that Goldman is the top investment company in the business. He claims that Goldman is “currently hobbled.” Details unfold as to why the business may not be doing as well as once thought.
1. Recently the COO of Goldman, Gary Cohn, mentioned that the fixed income business is struggling due to low volatility and interest rates that have remained steady over time. This inactivity in the market is resulting in a slow market environment with lower client transactions. The trading volume of bonds is what accounts for sales and trading revenues at Goldman Sachs.
2. Whereas the market could eventually recover, there are also some long-term issues that may affect the business, specifically Basil III and the Volcker Rule. Large amounts of money are to be withheld by the banks under Basel III requirements. This obstructs the amount of return on equity, and particularly affects structured credit trading. On another note, the Volcker Rule denies them the ability to trade on their own behalf, a once profitable practice.
3. The competition is setting in for Goldman Sachs. Other major banks are quickly limiting their fixed income business, whereas Goldman Sachs is still in the business wholeheartedly. Fixed income trading is largely based on the capital market. They can wait for a recovery, but for now, the company is going to be placed in a tight spot.
4. Not all of Goldman Sachs business is on a downward trend. In fact, it’s mergers and acquisitions (M&A), equity capital markets (ECM), and debt capital markets (DCM) remain in good standing. However, research indicates that it will not be enough for the revenues and profits produced by the investment banking division to compensate for the amounts produced from sales and trading. They have also tried to cut costs in trading, but despite their efforts, estimates show their return on equity (ROE) is standing only at 7 percent. Increased regulation has accounted for the money they tried to save by cutting costs.
5. Hintz claims that even if the company wanted to limit its involvement in fixed income sales and trades, it would not be able to. The reason being, if it were to cut the amount of capital used for sales and trading, it would need to seek the Federal Reserve’s approval before returning shareholder’s capital or making a large purchase unrelated to sales and trading. Although Goldman claims to be getting ahead with fixed income sales and trading market share, Hintz says that is not the truth. The profitability of sales falls short of the amount of revenue brought in. Hintz believes that things may get better at Goldman Sachs in years to come, but that is only for time to tell.