Even Mighty Goldman Is Pinching Pennies

by Dan Burrows | November 16, 2012 11:40 am

Goldman Sachs (NYSE:GS[1]), Wall Street’s most powerful investment bank, is pulling back its tentacles.

The reality of lower revenue and profits amid tough new regulations curbing everything from the use of leverage to proprietary trading is forcing the Great Vampire Squid to get leaner and meaner. Whether that can fuel the sort of profit and share-price growth investors have long come to expect remains very much to be seen.

How bad is it? Goldman Sachs this week named just 70 new partners — the smallest class of executives to get the nod since the bank went public in 1999.

It’s got to be a bitter pill for those who weren’t tapped for that elite honor. Goldman names new partners only once every two years, and that’s where the truly big money is made. A partner’s base salary is $900,000.

The firm typically names anywhere from 95 to 114 new partners when it opens the books, but the financial crisis, regulatory fallout and desultory capital markets are taking their toll throughout Wall Street. In the last go-round in 2010, Goldman Sachs named 110 new partners. Indeed, the firm hasn’t had a partner class this small in 10 years, when it tapped 78 partners in the wake of the dot-com implosion and Enron and Worldcom scandals.

Naming fewer to the partnership level is just part and parcel of cutting staff — and costs — throughout the firm. Yes, Goldman still has more than 33,000 employees, but that’s 8% less than it had as recently as the summer of 2011.

We’ve said it before, and we’ll say it again: Goldman Sachs’ money-minting days are over[2]. Net income peaked at $13.39 billion in fiscal 2009. Through the trailing 12 months ended Sept. 30, net income came to $5.6 billion. Goldman is forecast to hit $6.11 billion for the current fiscal year — or 54% below its 2009 peak.

Blame the usual suspects: A dearth of deal activity means Goldman garners less business from advising on mergers and acquisitions. The same goes for the precipitous drop in initial public offerings.

But perhaps the unkindest cut of all is that it’s now much more difficult to generate obscene profits trading your own book amid the brave if boring new world of impending financial regulations like Dodd-Frank and international requirements for bigger capital cushions.

No more excessive leverage to juice returns. No more proprietary hedge funds, proprietary private equity funds or, heck, even proprietary trading. All while being required to keep more cash in reserve, which is just sitting around earning nothing.

That has Goldman moving toward something that was once unthinkable. It’s relying more on technology and automation to bring down costs and fees. Crazy as it sounds, the firm is now focused on becoming a “low-cost” provider.

When even mighty Goldman Sachs is tightening its belt — it’s looking to eliminate nearly $2 billion in costs by the end of this year — you know it’s a whole new game on Wall Street.

As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.

  1. GS: http://studio-5.financialcontent.com/investplace/quote?Symbol=GS
  2. Goldman Sachs’ money-minting days are over: https://investorplace.com/2012/10/goldmans-money-minting-days-are-over/

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