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Goldman Sachs Group (GS) |
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WIKI ANALYSIS
Goldman Sachs (NYSE: GS) is a U.S. bank holding company known for a strong investment bank division. Goldman Sachs advises corporations on mergers and acquisitions, offers trading services, and manages the assets of large institutions, governments, and wealthy individuals. Goldman Sachs also uses its own capital to engage in long-term (private equity) and short-term investments (propriety trading). For the fiscal year 2010, Goldman Sachs reported a total revenue of $39B[1] and a net income of $8.35B[2].
The passage of new regulation from the US government could have a large impact on Goldman Sachs' operations. In particular, its use of Proprietary trading, its investments and hedge and private equity funds, as well as fees from the Federal Reserve could force the company to alter its operations.
History and Business Overview
GS has frequently performed above the market despite worsening economic conditions. For the fiscal year 2010 ended in December, Goldman Sachs reported a total revenue of $39B[1] and a net income $8.35B.[2]
The company's operations can be broken down into four divisions:
Institutional Client Services (56% of revenue in 2010)[1]
This division facilitates trades on behalf of clients and invests Goldman's own capital using various debt and equity instruments. There are three subdivisions in the Trading & Principal Investments segment:
- Fixed Income, Currency, & Commodities facilitates trades of asset-backed securities, securitized loans, currencies, and commodities (ex: oil, corn, or chocolate futures). It seeks opportunities to profit through the movements of interest rates and credit products.
- Equities specializes in facilitating equity trades, and is considered to be a leader in electronic equities trading. Electronic trading is efficient because it eliminates the need people physically executing trades on stock exchange floors, and carries significantly smaller commissions than traditional trading. This segment is also heavily involved in proprietary trading and derivatives. [3]
- Commissions and Fees makes money by conducting transactions on stocks, options, and futures on behalf of institutional clients.
- Securities Services earns fees by providing financing, lending, as well as clearing and settlement of securities for clients.
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Investing & Lending (19% of revenue in 2010)[1]
This segment are generally long term investments and loans to large organizations. This portfolio consist of privately negotiated transactions such as acquisitions, equity and debt securities, buyouts and investments in external funds.
Investment Management (13% of revenue in 2010)[1]
Goldman's investment management division manages assets for large institutional investors such as pension plans, endowments, and trusts. This includes providing a range of investment strategies and advice to these organizations.
News Updates
The reputation in the public eye of Goldman Sachs has suffered considerably in recent years. In April 2011, the Senate Permanent Subcommittee published a report on the financial crisis concluding that the company had not been totally forthright in explaining to clients its expectations on the crisis This report further damages the company's reputation.[4] In addition, Goldman Sachs has managed to settle or win other lawsuits over whether Goldman misled investors. While this represents the avoidance of material costs, the publicity of the suits may have hurt the company's reputation.[5]
Trends & Forces
Financial regulation will impact Goldman's operations
Regulation can alter GS's proprietary trading, hedge fund and private equity investments, and charge the company money directly[6] Additional or increased regulation can cause the bank to alter its operation or cause it to pay fines directly.
All holding banks will be prevented from engaging in proprietary trading and in any trades where there is a "material conflict of interest". In addition, "material exposure to high-risk assets or high-risk trading strategies" will be banned. While it is unclear what will be outlawed in the second two clauses, proprietary trading makes up a substantial portion Goldman Sach's annual revenue. While the impact may be large, the true extent depends on the interpretation and implementation of the regulation.[7]
Other regulation may place limits on the extent to which banks may invest in hedge funds or in private equity funds. These regulations come in contrast to Goldman Sach's high investments in such organizations. Furthermore, regulation imposing a fee to financial institutions that keep their money in the Federal Reserve would increase the cost of operation for Goldman Sachs.[8][9]
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Benefit from low interest rates
Interest rates can be thought of as the cost of borrowing money. Though the impact of interest rates spans across the economy, businesses and lenders are particularly sensitive to fluctuations in interest rates. As the Federal Reserve cuts the interest rate at which it lends out money, banks are able to gain access to "cheaper" money. [10][11] Low rates can allow Goldman Sachs to borrow money with low interest and increase its profit margins, while the inverse is also true.
Subprime lending: large losses
Subprime lending refers to the practice of extending credit or loans to borrowers to who fail qualify for prime or market rates due to their less than optimal credit scores. The interest rates associated with subprime mortgages have been higher than those associated with prime loans. The rationale is that borrowers with lower credit scores carry a higher risk of default and must therefore pay a considerable risk premium. Subprime borrowers can be extremely sensitive to interest rates. As rates rise, these borrowers, many of whom have adjustable-rate mortgages, find themselves unable to meet their debt obligations. However, during periods of economic downturn, the subprime borrowers are the most likely to foreclose. [12][13]
Private equity bubble burst
Private equity firms have engaged in leveraged buyouts, and borrowed substantial amounts of debt to finance their acquisitions of target firms. Goldman is involved in the PE process at several different points, including sourcing deals, representing the company being purchased, and facilitating IPOs or any subsequent equity or debt offering. Additionally, Goldman itself has significant investments in private equity, exposing it to conditions in the PE market. As a result, a decrease in private equity activity would have a substantial impact on Goldman Sachs' performance.[14][15]
Legal Activity and Negative Press
Goldman Sachs has been sued by U.S. regulators in the past for fraud tied to collateralized debt obligations. The SEC's case against Goldman Sachs claimed that the firm created and sold a portfolio that it expected to fail so that a large client could bet against it.[16] While this lawsuit and others have ended in relatively low cost settlements, they do negatively impact the public perception of the firm. This makes client acquisition more difficult and also makes the company more vulnerable to regulation from the US government.
Competitive Landscape
Goldman, unlike many of its peers, has not maintained an extensive retail brokerage sales force, opting instead to focus on higher-margin businesses such as investment banking and private equity. Goldman also derives a large portion (around two-thirds) of its revenue from sales and trading, both proprietary and on behalf of clients. Trading, particularly proprietary trading, has also remained a focus for Goldman Sachs. Its main competitors are:
- Morgan Stanley (MS): Like Goldman Sachs, Morgan Stanley focuses on its investment banking arm. The two companies vie for the top position as the largest investment bank in the United States. Morgan Stanley is Goldman Sachs' most direct competitor on the investment banking .
- J P Morgan Chase (JPM): is a diversified financial holding company which competes with Goldman on the trading and asset management side.
- UBS AG (UBS): competes with Goldman Sachs on both the trading and asset management side and the investment banking side.
- Lazard (LAZ): competes with Goldman Sachs over clients on the financial advisory and the asset management side.
- Citigroup (C): While Citigroup is much more diversified then the other competitors, it retains an investment banking arm which competes directly with Goldman Sachs.
References
- ↑ 1.0 1.1 1.2 1.3 1.4 GS 10-K 2011 Item 1 "Business pg 2
- ↑ 2.0 2.1 GS 10-K 2011 Item 1 "Executive Overview" pg 37
- ↑ GS 10-K 2008 Item 1 "Equities" p.10
- ↑ NYTimes - Business Day "Goldman Sachs Group Inc."
- ↑ The Wall Street Journal "Mortgage Win for Goldman" July 22 2011
- ↑ The Washington Post "Financial regulation bill nears finish line with support from Snowe, Brown" 13 July 2010
- ↑ Market Watch "New regulations may cut big bank profit 13%, Goldman says" 28 June 2010 pg. 2
- ↑ The Boston Globe "Brown will back financial overhaul" 13 July 2010
- ↑ Market Watch "New regulations may cut big bank profit 13%, Goldman says" 28 June 2010 pg. 1
- ↑ Bloomberg.com, US Rates and Funds
- ↑ Federal Reserve Board "Open Market Operations" 16 Dec 2008
- ↑ The Wall Street Journal "Goldman Sachs Reports $2.1 Billion Quarterly Loss" 16 Dec 2008
- ↑ All American Patriots - Banking "Goldman Sachs Buys Back TARP Preferred Stock" 17 June 2009
- ↑ Goldman Goes All In on 'Secondary' Bet - WSJ.com
- ↑ The Guardian: Business "Private equity 'next bubble to burst,' unions warn" 3 Feb 2009
- ↑ New York Times - Business Day "Goldman Pays $550 Million to Settle Fraud Case" 15 July 2010
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