Goldman Sachs’ chairman and CEO made a presentation at the Bank of America Merrill Lynch Banking Conference yesterday. You can see this presentation in its entirety here. Blankfein reiterated that Goldman is a desirable employer: ninety percent of people who are offered a job there accept. He also reiterated that Goldman has long tenure (the average member of its management committee has worked for the firm for 22 years), that its people and culture are important, and reflected on whether the current gloomy environment is going to endure.
These are the key things that you need to know.
1. Lloyd Blankfein says this is merely a downturn: it is not the new normal
Banks have a history of cutting too many people in downturns and hiring too many people in upturns, said Blankfein. “Extrapolating off the current environment would be as wrong as extrapolating off the [booming] environment in 2006 and 2007,” he added.
The implication is that banks that dramatically re-size their businesses in the expectation that today’s low revenue levels will persist indefinitely are wrong. “To support the upturn, we need to invest during the downturn,” said Blankfein.
However, he also pointed out that cycles can go on for a very long time and that the world which emerges at the end of a cycle can be very different. Adaption is necessary even if rash cost cutting isn’t appropriate.
2. Most of Goldman’s hiring isn’t for London or New York. It’s for cheaper alternative locations
We’ve been here before. Last May, Gary Cohn said that most of Goldman’s hiring is happening in four ‘high value’ locations, namely Salt Lake City, Bangalore, Dallas and Singapore. Blankfein reiterated this yesterday. While overall headcount is being reduced, headcount in these four places is increasing, he said. This was illustrated by way of the chart below.
Source: Goldman Sachs
3. The future is about doing more, more cheaply
Electronic trading and central clearing mean trading volumes are rising, market share is consolidating, and the costs associated with trading are falling. “We are much more focused today on operations and technology and being a low-cost provider than we would have articulated about ourselves 10 or 15 years ago,” Blankfein said – prompting the Wall Street Journal to suggest Goldman is on the way to becoming the Wal-Mart of banking.
Blankfein pointed out that more trades are being executed electronically and cleared centrally. This is especially the case in fixed income, which has lagged equities in terms of automation. 30% of the rates and credit cash market are already trading electronically, said Blankfein. 10% to 60% of fixed income derivatives are.
Goldman’s focus on mass market trading cheapness was predicted six months ago by analysts at Sanford Bernstein who said Goldman was in a state of transformational change as it adjusted to the new electronic trading environment.
Blankfein didn’t say so, but the shift to volume-driven electronic trading is likely to make some expensive and influential fixed income traders and salespeople superfluous. The future is more about cheap staff in cheap locations. Suddenly Goldman’s smaller partnership pool takes on a whole new meaning.
4. Goldman has no intention of retrenching to its core markets
While banks like Nomura have been pulling back and focusing on their core markets, Goldman has no intention of doing the same suggested Blankfein.
“Having a strong global footprint is vital,” he said. Globalisation is a “secular” trend: new economies are becoming integrated into the financial system and the BRIC countries are increasingly important anchors for the global economy. BRIC’s financial systems will evolve and become more sophisticated, he predicted.
5. Now’s a good time to get into corporate bond trading and issuance
Both Blankfein and Gary Cohn, Goldman’s COO, have been cheerleaders for disintermediation – the idea that instead of borrowing from lending banks, companies will turn to investment banks for help issuing bonds so that they can raise money through the markets.
Blankfein reiterated this idea yesterday. “The future is less bank lending and more bond issuance,” he said. This will also drive secondary bond trading activity, Blankfein predicted.
6. A dramatic collapse of the financial system could still happen
New regulations and central clearing will make the system more stable, said Blankfein: the new lows will be higher and the new highs will be lower.
However, central clearing focuses risk in one place and collapse can’t be ruled out altogether. A crash could still happen and would be more dramatic when it did, Blankfein said. “We have learnt is that whatever can happen will happen,” he added.