Paint me skeptical but I’m not feeling the love that the Treasury has for Goldman Sachs…
Where in this description of Goldman’s business in Bloomberg does one find any suggestion of it being a “systemically important” financial institution… the whole Bloomberg article sings of the interconnectedness of GS to the Treasury and it’s role servicing the needs of the global wealthy… in fact GS has shunned any business that is retail focused…
Goldman Sachs Tower, Jersey City
Question – Do we really need another institution that just intermediates credit and acts as a matchmaker for the global M&A dance party?
If GS collaborated with Bloomberg on this article to make their case they have failed… to the GS marketing department >> try spinning the media again… there are numerous media outlets easier to spin than the FT, BBG, NYT… you can probably guess who I’m referring to…
~~~~ ” … As CEO, Blankfein drove further into trading and principal investing, which accounted for 75 percent of its pretax profits by 2007.
Like other Wall Street banks, Goldman used leverage to generate bigger returns.
The year before Blankfein became CEO, Goldman’s gross leverage ratio, a measure of assets compared with shareholder equity, was 18.7 to 1. By the end of 2007, it had ballooned to 26.2 to 1.
Assets more than doubled in that period to $1.1 trillion.
The strategy of buying assets with borrowed money worked wonders when the values of everything from U.S. real estate to Chinese bank shares were soaring.
About 65 percent of the jump in Goldman’s ROE from 2003 to ’06 can be traced to an increase in leverage, more than its competitors, Merrill Lynch analyst Guy Moszkowski calculated in an Oct. 7 report.
Now with losses spreading beyond mortgages to a wider range of assets including stocks, corporate debt, commodities, emerging markets and real estate, Goldman’s leverage amplifies the risk to the firm of those falling prices.
At a leverage ratio of 26 to 1, a 4 percent decline in the value of the firm’s assets will wipe out shareholder equity. As of mid-October, the firm had cut its leverage ratio to 19 to 1.
With investors and regulators demanding that banks cut risk, Goldman may beef up a business that doesn’t require the company’s own money: asset management. Even after a decline in the third quarter, the business was on track for another record year, with revenue up 8 percent from last year’s record.
One part that has flourished is so-called alternative investments, such as private equity funds and hedge funds. They’re lucrative because they reap higher fees than traditional money market or stock funds. More than 17 percent of the company’s funds under management were in alternative investments at the end of 2007.
`Marquee Business’
Investors may have more appetite for conservative choices such as money markets as they emphasize safety over high returns, says Peter Sorrentino, a senior portfolio manager at Cincinnati-based Huntington Asset Advisors.
“They will continue to do private equity and things like that, but it will be a sideline business as opposed to the marquee business,” he says. “The less risky the business, the greater the dollar volume they can garner and the more consistent the returns.”
Some analysts say Goldman’s asset management business could grow to as much as $5 trillion under management. By comparison, BlackRock Inc., the fund management company run by Larry Fink and part owned by Merrill Lynch, had $1.4 trillion under management at the end of June.
“I wouldn’t be surprised if the scale of the asset management business dramatically increased,” Weinberg says, “which may finally provide the recurring earnings stream so sought after by public equity investors.”…
… A month after that fateful September weekend, Blankfein’s rescue plan was still a work in progress. His challenge is to find revenue as the global economy veers into recession and markets gyrate in a way not seen since the Great Depression.
He has support from the likes of Buffett and the U.S. government– although at a cost.
Berkshire’s $5 billion investment pays a 10 percent dividend, an annual expense for Goldman of $500 million. The Treasury’s $10 billion pays a 5 percent dividend, or another $500 million.
That’s $1 billion in new expenses Goldman has to cover.” ~~~~
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