Goldman Sachs shareholders can at least console themselves that the firm’s third-quarter showing could have been worse. The Wall Street titan’s fixed-income traders brought in almost half as much lucre in the three months to September as they did last year – worse than at rivals. That’s Goldman’s worst showing in years. But the firm sharply cut pay in a sign its executives are trying to keep the bank’s owners happy.
Two factors appear to have driven Goldman’s poor trading performance. First, it managed its inventory badly in currency trading when making markets got tricky. Effectively, that means Goldman got stuck with some bad trading positions.
Second, the Lloyd Blankfein-led firm’s fixed-income, currency and commodities trading business concentrates on big, often customized, trades for large money managers. That leaves Goldman exposed to tepid volumes and more risk. Universal banks like JPMorgan, Citigroup and Bank of America benefit from the flow from other businesses in the bank, like wealth and retail asset management and transaction services.
Equities didn’t help much, either. While no embarrassment, revenue was essentially flat, after adjusting for units that had been sold and the gain Goldman made helping to bail out Knight Trading last year. An options glitch revealed in August dented performance, too.
The dismal fixed-income trading results convinced Mr. Blankfein and his team to take the unusual step of slashing pay last quarter. While revenue slid by a fifth, at $2.4-billion (U.S.) compensation was targeted more than a third lower than last year. That equates to 35 per cent of the firm’s top line, down from the 40 per cent-plus Goldman usually socks away.
That allowed the bank to beat consensus estimates for net income and prevented the annualized return on equity languishing at the 6 per cent mark, which is where it would have been had the comp ratio stayed at the same level as the first half of the year. Even so, a return of 8.1 per cent is pretty drab and below Goldman’s cost of capital – though for the first nine months of the year the return is a more respectable 10.4 per cent.
Mr. Blankfein’s timely cost management is welcome. Investors who own Goldman for its superior trading nous, though, will be hoping it won’t be needed again any time soon.