Last May, analysts at Bernstein Research stuck their heads above the parapet and suggested a period of ‘transformational change’ was underfoot at Goldman Sachs. They said that the change might not be immediately apparent to Goldman staff, because vested interests made it difficult to articulate what was happening internally. Instead, things were moving covertly behind the scenes.
Now, two things have transpired. In the first, the Sunday Times said 100 out of Goldman’s 483 partners will be leaving. The departures were flagged at the time of Goldman’s Q2 results in July, but are at the top end of forecasts, suggesting Goldman is both cutting costs and sweeping vested interests aside. In the second, CreditSights analysts have spoken to Craig Broderick, Goldman’s chief risk officer, and Steven Scopelite, Goldman’s chief information officer. Broderick and Scopelite have helped clarify the changes at the firm.
Information is king
The overwhelming message from Creditsights’ encounter is the importance of information: Goldman Sachs is in the business of information gathering and of information distribution internally. “The company indicated that the new regulatory developments and the fluid business environment have all created the need to make informed decisions,” write CreditSights analysts.”These decisions range from capital allocation, to compliance, to regulatory reporting.”
New rules, like Title VII of the Dodd Frank Act are making information gathering more important than ever, Broderick and Scopelite told CreditSights. Title VII requires that every swap transaction is captured and reported on a real time basis, an endeavour which could be a “significant expense.”
Avoid banks which have been through mergers and are trying to cobble together various legacy systems
Goldman argues that it has an “informational advantage” because it has never undergone “transformational change” (AKA a merger with a large rival) and therefore relies only on its own custom-built systems. These are fully integrated and fully consolidated. Goldman says this allows for a more “robust information flow” and better decision making.
The implication is that banks like Barclays, Bank of America and JPMorgan – all of which have been through mergers – have a less robust information flow and are therefore at a competitive disadvantage.
Money is shifting to the information providers
Unfortunately for those in the ‘business’, Broderick and Scopelite also suggested that the need to keep investing heavily in the information infrastructure will contribute to the erosion of Goldman’s profits.
“Goldman Sachs has built or is building systems to comply with known [information] requirements and laying the foundation for expected requirements,” write the analysts at CreditSights. “However, complying with the new rules is a costly endeavour and could further curtail profits already impacted by challenging market conditions.”
Try data management roles or ‘platform marketing’
As we’ve said before, one of the big growth areas for investment banking jobs in the future therefore looks like data management and everything related to it.
By comparison, corporate finance and ‘high-touch’ sales and trading roles look risky – and not just at Goldman.
Various banks are already cutting costly M&A staff. And fixed income trading is undergoing ‘electronification.’
Broderick and Scopelite told CreditSights that following the launch of ‘G-Sessions’, Goldman’s online bond trading platform, the bank expects the trend towards low-touch, low-commission fixed income trading to continue. Although G-Sessions is currently only used for cash-like credit products, its scope could be broadened in future.
As electronic trading preponderates and commissions in sales and trading fall, both in equities and fixed income, pay and job numbers will fall too.
Financial News points out that Deutsche intends to move two thirds of its over the counter trading business onto electronic systems, with traditional voice broking accounting for the remaining third. At the moment, voice broking accounts for two thirds of OTC trading at Deutsche. A lot of Deutsche Bank OTC salespeople are surely going to lose their jobs.
“The size and shape of our sales force will move accordingly towards a platform marketing and e-sales role,” said Colin Fan, co-head of Deutsche’s corporate and investment bank at the bank’s recent strategy day. This will ” require [lower] headcount than now,” Fan admitted.
By 2015, banking could look very different. You may want to start positioning yourself now.