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Morning Coffee: Goldman Sachs accused of secret restructuring. Candidates cruelly disappointed by top hedge fund

Goldman Sachs restructuring

Is Goldman quietly rebuilding its business model?

Is something afoot at Goldman Sachs? All will become clearer when the firm reveals its second quarter results today. For the moment, there is simply speculation – speculation that whatever’s going on in fixed income is more dramatic than it looks.

Brennan Hawken, banking analyst at UBS, called Goldman out a few months ago. In May, Hawken reportedly questioned Goldman’s insistence that it will be committed to its fixed income business come what may. “Why would Goldman want to signal clearly to competitors how it was shifting its business?” he asked. In Hawken’s opinion, Goldman’s covertly reorienting its sales and trading business towards equities whilst doing its utmost to throw rivals off the scent by proclaiming fixed income’s enduring importance.

How right is he? As we’ve reported here, Goldman has certainly shown some enthusiasm for culling senior fixed income staff. Bloomberg points out that the firm has made four successive rounds of cuts this year and trimmed fixed income salespeople and traders by 10% – twice the usual rate. Bloomberg also notes that Goldman’s share of fixed income sales and trading revenues now stands at just 14% of the total generated by the five biggest Wall Street banks, compared to 30% at J.P. Morgan and 27% at Citigroup. Citi and J.P. Morgan have benefited from strong demand for simple products like rates swaps and FX hedges from corporate clients, suggests Bloomberg – something confirmed by Citi CEO Michael Corbat during last week’s investor call. By comparison, it thinks Goldman has missed out by focusing on the fancier structured end of the fixed income market.

If Goldman is to beat Citi and J.P. Morgan in the second quarter and to dispel notions of a quiet shift away from fixed income sales and trading, it will need to increase its fixed income revenues by 13.8% and 35% respectively. Can this be done? Even if it can’t, it’s worth bearing in mind that Goldman’s trading shakeup isn’t exactly secret: the firm hired Raj Mahajan in 2015 to look at its outdated trading technology. It also appointed Jim Esposito in February 2016 to help look at the strategy pursued by its trading business. Together, Esposito and Mahajan are tasked with upgrading Goldman’s creaking sales and trading operation.

Mahajan offered an indication of his thinking at an industry conference in May: market leaders of the future will need excellent technology, excellent relationships and an excellent prime brokerage arm (to befriend all those hedge funds). He omitted to say whether this vision will entail hundreds – or thousands – more trading redundancies at Goldman this year and next, If it does, it won’t be the first time: in 2000, Goldman had 600 traders making markets in U.S. equities in New York City; today it has 10.

Separately, hedge fund Bridgewater is said to be dashing the hopes of some who want to work there, including those who’ve actually been through interviews and actually received offers. ‘In recent weeks, dozens of interviews were canceled and advanced negotiations with prospective employees were cut short by the firm,’ claims the New York Times. Those candidates are undoubtedly disappointed, but maybe they had a lucky escape? In the past, staff turnover at Bridgewater was said to be as high as 30%. 

Meanwhile:

Morgan Stanley just combined the cash equity sales desks looking after voice, program trading, and electronic trading under the name of One Delta One. (Business Insider)

“It’s becoming more and more difficult to make money in prime brokerage. There is cost compression everywhere.” (Bloomberg)

“I saw people fired because their boss took a dislike to them even though they were top producers.” (New York Times) 

SoftBank’s £24bn purchase of ARM wasn’t directly related to the UK referendum. At Friday’s close, ARM’s stock was 17% more expensive than on referendum day. That more than offset the roughly 13% drop of the pound against the yen since then. That means SoftBank probably would have paid less for ARM if it had clinched the deal before the June 23 vote. (WSJ)

SoftBank might simply have wanted to get in quickly before the UK’s new government puts in place a national interest test for foreign takeovers. (Guardian)

Theresa May’s vision of shareholder representation might not work in banking, where the senior managers’ regime places responsibility on executive directors. (Guardian)

Donald Trump wants to restore Glass Steagall. (American Banker) 

UBS has got a new facility for training bankers in Shanghai. (Hubbis) 

Deutsche Bank wants to grow in Asia: “When we see Europe, we see it having less opportunities than when we think about Asia.” (The Australian) 

J.P. Morgan studied moving bankers out of the UK in 2011, after the introduction of the banking levy, but it wasn’t cost effective. (WSJ)

Bank of America cut 2,667 jobs last quarter. 900 of the cuts were in a unit that dealt with soured mortgages inherited from Countrywide. (Charlotte Observer) 

The hottest male bankers in Switzerland. (FiNews)

Photo credit: Lego #5 by Antonio is licensed under CC BY 2.0.b

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