These are the last days of Goldman Sachs.
On Friday, the Wall Street Journal reported that Goldman is preparing to be hit with subpoenas soon from U.S. prosecutors looking into the firm’s mortgage operations. How big was the news? Not very. Dealbook, the New York Times blog about all things Wall Street, didn’t even cover it. And that might be a bigger problem for Goldman than the subpoenas.
A year ago, news that Goldman was under investigation would have been huge, shocking news. These days, it seems, the notion that Goldman broke the law, possibly cheating clients, is almost taken as a given. At its core, a Wall Street firm is an advisory business. It tells companies when to raise money and when to make transactions. It tells clients what investment are good and what ones should be avoided. If Goldman has lost its ability to be trusted, it’s going to be very tough for the firm to continue. What about trading, where Goldman has always been known to make the bulk of its money? Well, Dodd-Frank may mean that much of that business is going away as well.
In fact, there are already signs that Goldman is in decline. The firm, once a persistent leader on Wall Street, now is all of a sudden an also-ran. Goldman’s shares are one of the worse performing among financial firms this year. Their only rival in that category – ward of the state insurance firm AIG. Goldman also seemed to at least initially stumble this year in the investment banking business, dropping as low as fourth at one point in the ranking of top advisers to companies doing mergers & acquisitions. It recently climbed back to the No. 1, according to research firm Dealogic, but the fact that it had to stage a come back was unusual. What’s more, Goldman’s profits were down in the first quarter of 2011. Worse, it was the fourth quarter in a row that profits fell. And those profits may not rebound anytime soon. Earlier this week, the New York Times reported that Goldman is considering culling its ranks of partners. The fact that firm is planning on cutting back its top ranking employees signals that management believes the firm no longer has the profits needed to support the salaries of those senior deal makers.
To be sure, Goldman, at least in name, is unlikely to disappear from Wall Street or off the face of the earth anytime soon. The company stock, despite being a laggard, still trades for $138 a share, meaning that investors believe the firm is worth as much as $71 billion. So there will be a firm named Goldman that sticks around, and that firm is likely to continue to have thousands of employees, who are paid well, and also continue to make tons of money by the standards of most any other business. It may also be a firm that is once again respected and trusted more than any other on Wall Street. Yet, something has changed. The Goldman of the future will be vastly different and more humbled than the swashbuckling firm run by traders that rushed into the burning building that was the financial crisis and made off with as much money as it could. And that’s probably true for all of Wall Street. The new financial regulation Dodd-Frank raises capital requirements and limits some of Wall Street’s riskiest, but also most profitable businesses. Yes, there will always be some individual or firm cashing in on the latest bull market, but it probably won’t be the big firms like Goldman, J.P. Morgan or Morgan Stanley. In 2009, Goldman made $13 billion on $52 billion, for a profit margin of 26%. Last year, the firm’s profits fell to $8 billion, and that’s only the beginning of the profit drop. The Goldman printing press has been turned off, most likely for good.