Goldman caught between calm markets and a stormy White House
If the picture is reversed it will help Wall St but could prove unsettling for Main St
William Cohan
Martin Chavez, Goldman’s chief financial officer, said that three of the group’s four business segments had logged ‘stellar’ performances © Bloomberg
One of the great ironies of the moment — unlikely to last much longer — is that we find ourselves living through a time in which a most volatile, unpredictable and seemingly unstable US president is presiding over some of the most quiescent capital markets ever.
Instead of Donald Trump’s juvenile and needlessly provocative tweets about the relative size of his “nuclear button” sending stock markets reeling in fear of a thermonuclear showdown with Kim Jong Un, they are continuing to hit all-time highs. On Wednesday the S&P 500 Index crossed 2,800 for the first time, up 34 per cent since Mr Trump’s election.
Instead of long-term interest rates rising in reaction to the president’s new tax law that is predicted to add $1.5tn to the $21tn national debt over the next 10 years, they have remained at nearly historical lows, despite five Federal Reserve interest-rate increases in the past two years. Where there should be volatility, there is calm. Where there should be fear, there is greed. What gives?
Take the curious case of Goldman Sachs, long viewed as one of the savviest risk managers and profit makers on the planet. It should have been able to make money hand over fist in the past year, given the soaring markets, its dominant and nearly unassailable position as the longtime world leader in providing bespoke advice on mergers and acquisitions and its historical prowess in securities trading, both for its clients and its own account. Instead, the media is filled with stories wondering if the mighty Goldman has somehow lost its magical touch.
Make no mistake, Goldman still had a fine year: at $32.1bn net revenue was 5 per cent higher than in 2016; net income of $8.7bn was up 17 per cent. Nearly $12bn will be paid out in compensation and benefits to its roughly 36,600 employees. Its stock has been trading at or near its all-time high. Martin Chavez, Goldman’s chief financial officer, said in announcing the company’s latest earnings that three of the group’s four business segments had logged “stellar” performances.
Yet there is much hand-wringing both inside and outside the bank about its seeming inability to make money in its core fixed-income, currency and commodity operations — FICC in the Goldman lexicon. Once upon a time this was an extraordinary revenue and profit machine; now it has fallen on harder times. FICC revenue in 2017 was 30 per cent below the previous year; in the past quarter it was down 50 per cent from the fourth quarter of 2016. Mr Chavez said that one-third of the decline in FICC revenue last year was attributable to the commodities’ business’ “inventory challenges” and “muted client activities”.
Mr Chavez made his name at Goldman in commodities, and is highly attuned to its problems and its opportunities, as are the other top executives. Lloyd Blankfein, the bank’s longtime chief executive; Harvey Schwartz, co-president and co-chief operating officer; and Gary Cohn, its former president and now Mr Trump’s chief economic adviser, all started at J. Aron, the commodity business Goldman bought in 1981.
A big source of Goldman’s woes is coming from markets being way calmer than anyone could have predicted after a year of living with a high-beta US president. The commodity business “begins and ends with clients”, Mr Chavez said. “The clients want to buy, we sell; they want to sell, we buy. It’s intermediating all along the value chain from producers to refiners to consumers in all kinds of different product formats, which could be physical, futures, systematic trading strategies, derivatives.” The problem has been, according to Mr Chavez, that too many of Goldman’s FICC clients have not wanted to buy or to sell.
Despite the pessimistic headlines about its 2017 performance (“Weak Results for Goldman Show Depth of its Fall” was the New York Times take), there is no need to fret about Goldman’s future. It will be just fine, as it mostly has been for the past 149 years. It has benefited — and will continue to benefit — from a growing worldwide economy, from cheap money, from a lower corporate tax rate, from fewer genuine competitors since the financial crisis, and from its ability to innovate and to hire and the best and brightest people. Unlike its few remaining peers, it has made huge investments in technology. Some 30 per cent of its employees are engineers. It has an unparalleled line-up of future leaders and has connections to powerful people nearly everywhere.
And market volatility will soon increase, that’s for sure. The new tax law has already forced many of Goldman’s best clients — corporate executives, hedge funds managers and private-equity moguls — into scrambling to figure out how best to grapple with its many changes. They look to Goldman for advice and new trading strategies.
The bigger concern is for the rest of us. Volatility may be good for a Wall Street trading desk, but it is more than a little unsettling for Main Street. Unless and until Mr Trump curtails his bombast, which is unlikely, his unpredictability, his inconsistency and his inarticulacy pose a threat to world peace and to world markets, which will inevitably fall the moment fear replaces greed as investors’ main emotion. We have been more than a little lucky with Mr Trump so far. I fear it may soon be running out.
The writer, a former Wall Street investment banker, is the author of ‘Money and Power: How Goldman Sachs Came to Rule the World’
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