Goldman Sachs, prima donna among investment banks and once the darling of investors, is today a laggard in stock performance, the Economist says. A dollar invested in Goldman in 2010 would today be worth just $1.60; the same dollar invested in the S& 500 would be worth $3.60.
Investment banks produced higher returns in the past than commercial banks. Today, J P Morgan Chase earns a return on equity of 19 per cent whereas Goldman earns only 11 per cent.
Well, one should not get carried away by the example of J P Morgan; banks in Europe and many in the US produce a return on equity of less than 10 per cent. Goldman's performance is still good but it's not the star it used to be.
One reason, as the Economist points out, is that trading, which typically produced the lion's share of profit for investment banks, today requires far more capital than before, thanks to tighter regulations. It isn't just that. One imagines Goldman would be subject to restrictions on proprietary trading under the Dodd Frank Act. Proprietary trading is where Goldman used to make enormous profit. Moreover, a bank with a strong retail franchise, such as JP Morgan Chase, would have greater access to lower cost funding the form of retail deposits than Goldman.
Goldman is trying to boost returns by trying to expand its consumer finance arm with the help of technology. This is useful but it has its limits: you need a solid branch network to reach out to retail customers, digital alone won't be enough. Another response could be to reduce dependence on trading profit and to try to boost fee income through more debt and equity placements, advisory services, etc.
A fundamental problem for firms such as Goldman is the culture of high pay and bonuses. Despite falling returns, investment banks have been loath to cut back on pay. Until this changes, it may be difficult for them to boost shareholder returns significantly.
Investment banks produced higher returns in the past than commercial banks. Today, J P Morgan Chase earns a return on equity of 19 per cent whereas Goldman earns only 11 per cent.
Well, one should not get carried away by the example of J P Morgan; banks in Europe and many in the US produce a return on equity of less than 10 per cent. Goldman's performance is still good but it's not the star it used to be.
One reason, as the Economist points out, is that trading, which typically produced the lion's share of profit for investment banks, today requires far more capital than before, thanks to tighter regulations. It isn't just that. One imagines Goldman would be subject to restrictions on proprietary trading under the Dodd Frank Act. Proprietary trading is where Goldman used to make enormous profit. Moreover, a bank with a strong retail franchise, such as JP Morgan Chase, would have greater access to lower cost funding the form of retail deposits than Goldman.
Goldman is trying to boost returns by trying to expand its consumer finance arm with the help of technology. This is useful but it has its limits: you need a solid branch network to reach out to retail customers, digital alone won't be enough. Another response could be to reduce dependence on trading profit and to try to boost fee income through more debt and equity placements, advisory services, etc.
A fundamental problem for firms such as Goldman is the culture of high pay and bonuses. Despite falling returns, investment banks have been loath to cut back on pay. Until this changes, it may be difficult for them to boost shareholder returns significantly.
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