It wasn't long ago that Goldman Sachs was painted as an outsize villain of the financial crisis, and its future seemed hazy. Today, however, Goldman Sachs has retained its clients and its dominance. And recent missteps by its competitors are putting the investment bank in pole position to profit when a recovery comes.
It's not here yet. The investment banking business is in a miserable state. According to Dealogic, worldwide revenue for the investment banking industry was down 26 percent in the first half of 2012 from the same period a year ago.
Goldman, too, is suffering in this downturn, but it has held its investment banking pre-eminence. In the first half of 2012, according to Dealogic, Goldman Sachs ranked third among banks in domestic and global equity capital markets rankings. In the league tables for global advice on mergers and acquisitions, Goldman was No. 1 worldwide and in the United States.
Over all, according to Dealogic, the firm had $1.7 b illion in investment banking revenue for the first half of 2012 and was third in the global rankings. This is a feat since the firm doesn't have the lending capability of JPMorgan Chase, No. 1 in the global rankings, or Bank of America Merrill Lynch, No. 2.
As for sales and trading, traditionally the heart of the banks' revenue, Goldman's institutional client services segment had $9.6 billion in net revenue in the first half of this year - down about 5 percent from the previous year. But compare this with Morgan Stanley, where sales and trading revenue was $4.4 billion, down more than 32 percent.
The numbers show that despite contentions that Goldman had traded against its clients by shorting the housing markets, clients have not fled. And some of Goldman's competitors have changed or made missteps in ways that will help the bank in the future.
JPMorgan, for one, has been hurt by the billions in trading losses out of its chief investment office unit. The ba nk's chief executive, Jamie Dimon, has to confront the likelihood of significantly increased oversight by regulators.
Another big competitor, Barclays, has been bogged down by an interest rate manipulation scandal that forced an upheaval in its executive ranks. It, too, will also face increased regulatory oversight, not to mention litigation.
Citigroup is sorting out whether it wants to be a consumer bank or an investment bank or something in between as it tries to achieve a turnaround. But the bank clearly no longer has aspirations to be the global supermarket that its former chief executive, Sanford I. Weill, hoped for it to be. Where Citigroup's investment banking division fits in this puzzle is still unknown, probably even to the bank's executives.
The vision in the late 1990s was that a bank could offer both commercial and investment banking services and that it could leverage its ability to lend billions of dollars to gain investment banking business. The recent troubles of the big banks suggest that this dream is over.
Any benefits from being both a commercial lender and an investment bank are outweighed by huge regulatory hurdles. The army of regulators and compliance officers required to oversee the operations of these banks is an increasing drain on their ability to make money.
Goldman has taken steps to heal itself from self-inflicted wounds. In the uproar after the financial crisis, Goldman Sachs formed a business standards committee to examine practices and recommend change. The committee put forth 39 recommendations to improve governance and client relations. In response, the firm has fundamentally realigned its business segments. Goldman has also overhauled its board, revised its public relations strategy and put in place stronger clawback policies.
The firm has also made every effort to move past financial crisis allegations. It paid $550 million to settle Securities and Exchange Commission ac cusations that it misled investors in a mortgage-related security. Recently the Justice Department announced that it would not pursue charges related to accusations that Goldman shorted the housing market while selling products to clients betting the opposite.
The financial crisis has also forced Morgan Stanley - long Goldman's main rival in investment banking - to change its business model substantially. Morgan Stanley has struggled with its smaller capital base and an undiversified business. To solve this problem, it recently reached an agreement to acquire the entire Smith Barney brokerage operations. But that means that Morgan Stanley may become more of an asset manager than an investment bank. And the controversy over the Facebook initial public offering is not likely to have helped Morgan Stanley, which led the offering and has been vying with Goldman to underwrite other hot technology I.P.O.'s.
As a result, Goldman is becoming the last pure-play, big inves tment bank. In a world where business consultants preach that a focus on your best business lines is necessary to success, Goldman is likely to have an advantage over the banking conglomerates.
And instead of diversifying, Goldman is taking steps to retain its focus. Goldman did not spin off its private equity arm, GS Capital Partners, to comply with the Volcker Rule. Instead, it kept the operation in-house by financing it through outside money rather than Goldman's. Other banks have also retained their private equity arms, but Goldman's was always the biggest and it faced the most pressure to divest. Keeping GS Capital Partners will maintain the firms' edge in playing a part in takeover deals.
Still, it's not going to be an easy ride for the bank. Goldman will continue to be a flash point and a target as a symbol for the financial crisis and greed in general. Moreover, Greg Smith, the former Goldman employee who publicly resigned through an opinion article in Th e New York Times, has a memoir coming out this fall called “Why I Left Goldman Sachs.â€
It may again send Goldman into damage control mode. But if the firm's clients haven't left already, why would they now? Goldman is more regulated now than before the financial crisis, but it seems as if it will not face prosecution for any of its activities, and its competitors are having more problems with regulators. Mr. Smith's book is unlikely to change anything.
The stock market agrees. Goldman's stock price is up about 25 percent this year, beating out JPMorgan, Morgan Stanley and Citigroup.
Investment banking may be down, but it will eventually return. And the remarkable story will be that Goldman, despite the controversies it has faced, has put itself in a position to not only profit but continue its dominance. It's a case study in business survival and reputational repair. The protesters at Occupy Wall Street will not be happy. But neither will Goldman's comp etitors.
Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions.
