Morgan Stanley has its detractors. According to financial research company Coalition, Morgan Stanley had no top tier banking businesses at the start of this year and the bank’s own staff have been known to complain that it’s trading on past glories which no longer shine true. Is the same thing happening to Goldman Sachs?
Yesterday’s dire results from Goldman have left the firm’s sales and trading business trailing far behind its rivals’. As Bloomberg points out, sales and trading revenues at Goldman were $2.94bn in the third quarter, compared to $3.49bn at Citigroup and $4.69bn at JPMorgan. Goldman looks like a bit-player – much like Morgan Stanley.
Goldman also looks at risk of following Morgan Stanley down the dubious route of ever-decreasing pay. It took the unusual move of cutting pay heavily in the last quarter (down 35% year-on-year). Morgan Stanley analyst Betsy Grasek points out that Goldman’s compensation ratio is typically steady in the first three quarters of the year and is trued-up in Q4. The unseasonal cut means Goldman’s compensation ratio is likely to be less than 38% this year, says Grasek. Not so long ago, it was 45%+.
This risks becoming self-perpetuating. The lower the pay, the less attractive the bank. The less attractive the bank, the less talented the staff. The less talented the staff, the lower the revenues. The lower the revenues, the lower the pay….
During yesterday’s conference call, Harvey Schwartz, Goldman’s CFO was full of excuses about why Goldman’s fixed income sales and trading (FICC) results were so bad last quarter. Schwartz’s excuses included claims that:
-Goldman’s FICC business is particularly weighted towards institutional asset managers and institutional asset managers are very ‘data-centric’ – in other words, they like data and there hasn’t been as much data about what with the government shutdown.
-Goldman’s FX business didn’t do well because the bank pulled back considerably from risk taking.
-Goldman’s equities business didn’t do well because the third quarter of 2012 was bolstered by transactions related to the unwinding of Knight Trading’s accidental purchase of $440m of stocks. The comparators weren’t great.
-The firm “didn’t execute” as well as it would have liked.
Behind the excuses for the bad third quarter
Beyond Schwartz’s excuses, however, there may be other unmentioned reasons why the third quarter wasn’t great for Goldman. They include the facts that:
-Goldman accidentally sent orders for a large number of options trades in late August. This could have depressed equity results, although at the time, a spokesman said the loss wouldn’t “be material” for the firm.
-As Goldman adjusts to Basel III, it has less capital to put behind its fixed income business, making it harder to make markets for clients.
Overall, Goldman Sachs has been slow to adapt, argues Fortune. It’s still heavily reliant on proprietary trading, which will be banned in the U.S. under the Volcker Rule and is recorded under its ‘investing and lending’ division. Poor results in its client-facing business in the last quarter suggest it hasn’t done enough to build the client relationships that will sustain revenues in a tougher environment.
True or not, Morgan Stanley’s investment bank stands accused of losing its luster and living in the past. Is the same thing applicable to Goldman Sachs?