In the call accompanying Morgan Stanley's results today, CFO Jonathan Pruzan said the bank has a good "brand" and people are queuing up to work there. With good reason: Morgan Stanley just turned in an excellent set of results, again.
Goldman Sachs, meanwhile, turned in a very poor set of results yesterday. Something seems to be going wrong in the house of Marty and Lloyd. If you work for Goldman, should you therefore aspire to work for James Gorman instead?
Once upon a time, Goldman's fixed income sales and trading division was enough to make other banks look on in wonder. Ten years ago, for example, revenues from Goldman's fixed income sales and trading business alone were $16bn, while revenues from Morgan Stanley's equities trading business and it's fixed income trading business were only $8bn. How, exactly, did we arrive at a situation where Morgan Stanley's fixed income division is bigger at Goldman's then?
As the chart below shows, this is a comparatively recent state of affairs. Back in the first quarter of 2016, Goldman Sachs' fixed income trading revenues were still 95% higher than Morgan Stanley's. However, after Goldman's revenues stagnated and Morgan Stanley's increased by 96% year-on-year in the first quarter, Morgan Stanley is now on top.
The facile explanation for Morgan Stanley's sudden supremacy is that its fixed income business was structured to thrive in recent market conditions and that Goldman's wasn't.
Repeatedly quizzed on Goldman's poor performance, new CFO Marty Chavez said yesterday that, "there were very low levels of volatility in the first quarter and subsequently low client activity," and that this impacted revenues. At Morgan Stanley on the other hand, Pruzan said variously that the bank's sales and trading business was assisted by, "constructive market conditions," that it "built on Q4 momentum," and was "aided by an active news cycle." What works for Morgan Stanley, doesn't seem to work for Goldman.
Product mix was part of the story. Goldman Sachs' fixed income sales and trading business is comparatively strong in commodities, rates and FX, whereas Morgan Stanley's is strongest in securitization, rates and municipal finance. Goldman's quarter was ruined by shrinking revenues in both FX and commodities, both of which Morgan Stanley is far less exposed to.
Morgan Stanley also seems to have replicated Bank of America's success in credit trading though. While Goldman's credit trading revenues floundered in Q1, Morgan Stanley said the credit [trading] environment was "favorable." Goldman's poor credit trading performance was down to its over-reliance on institutional clients like hedge funds which are less inclined to trade when volatility is low (other banks benefited from, "more significant corporate footprints as a result of larger lending books," according to Chavez). Morgan Stanley somehow seems to have dodged this bullet, despite its similar brokerage background.
Before dismissing Goldman's feeble fixed income quarter, however, it's worth bearing in mind that the firm has understated its fixed income sales and trading revenues since 2011. This was when Goldman concocted its investing and lending division, which - among other things - invests in publicly listed debt. Morgan Stanley doesn't have an equivalent. When Q1's $666m of debt-related investing and lending revenues are added back in, Goldman's fixed income trading division returns to its rightful place above Morgan Stanley's and achieves a more impressive 34% annual growth rate. - Even with I&L, Goldman's still trounced by Morgan Stanley but can at least point to its own double digit rate of expansion too.
There's more to an investment bank than just fixed income trading. In M&A, both Morgan Stanley and Goldman Sachs suffered from what threatens to become increased reticence to do deals. Pruzan described an, "unease about U.S. policy outcomes and geopolitical strains." By comparison, equity capital markets and debt capital markets revenues at both banks rose quickly as clients raised financing (possibly before geopolitical strains make this more challenging). But at Morgan Stanley they both rose more.
The real question for Goldman Sachs now is whether it needs to cut more costs in its fixed income business. Chavez dodged this bullet during yesterday's call, saying only that, "expenses are never perfect, and keeping a close eye on our expenses is just part of the ongoing discipline of running our businesses for the clients and our shareholders."
Goldman has cut costs. In the first half of 2016 it laid off 2,600 people across the firm - more than at any time since the financial crisis. There may be more cuts to come. Last July, Goldman announced a further $700m cost cutting plan which was subsequently upgraded to $900m. Although former CFO Harvey Schwartz gave the impression that these $900m cost cuts had already been achieved, Chavez suggested yesterday that $500m came out last year and a further $400m of "flexibility" will be removed from costs this year as deferred bonuses and severances pan out.
However, many people Goldman Sachs has cut from its fixed income sales and trading division in the past few years, though, it's cut fewer than Morgan Stanley. As Morgan Stanley CFO James Gorman likes to point out, the bank eliminated 25% of its fixed income salespeople and traders in late 2015, and its business is still thriving. Goldman Sachs has not done the same and compared to Morgan Stanley, its fixed income business is floundering.
There's good reason to think Goldman will pull this particular trigger soon. Former CFO Harvey Schwartz was very protective of Goldman's fixed income salespeople and traders, saying that the firm needed them to be there for clients in the long term. Chavez now holds Goldman's purse strings, however, and he's likely to be less sympathetic - especially as his vision is of a future where clients interact with computers driven by artificial intelligence rather than with human beings. If you're a fixed income trader, maybe Morgan Stanley is the better bet?