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this is probably cliche by the audience (to quote the wsj) but methinks it worth the risk of (further) embarrasment - newbies an all that ;)
Goldman Bankers, Ascendant Again
In Rules Revamp, Investment Staff Is Set to Gain Ground on Traders Tied to Firm's Recent Troubles
By LIZ RAPPAPORT
In the pecking order at Goldman Sachs Group Inc., traders trounced investment bankers for most of the past decade. Now, the Wall Street firm's army of investment bankers is making a comeback.
The 63-page internal report released by the New York company on Tuesday showed how Goldman is trying to reassert the traditional primacy of deal making while playing down the firm's recent reliance on trading. One of the biggest reasons why: Trading caused most of the turmoil, suspicion and reputational damage suffered by Goldman since the financial crisis erupted.
Goldman officials say forthcoming changes detailed in the report aren't punishment for traders. But an overhaul in how the company discloses financial results, starting with fourth-quarter figures due Jan. 19, will wind up slicing how much what the firm defines as trading contributes to Goldman's overall revenue.
In a securities filing Tuesday, Goldman detailed its plan to report trading revenue generated on behalf of clients separately from revenue that comes from trades and investments made by the firm.
If the change had occurred in 2010's third quarter, Goldman would have reported net trading-related revenue of $4.67 billion, or 52% of the company's overall net revenue of $8.9 billion. The percentage is down from the 63% of total revenue Goldman originally said resulted from trading.
Under another change, traders will suffer if the market for collateralized debt obligations and other complicated deals backed by mortgages or other loans rebounds. Goldman's Business Standards Committee yanked the power to underwrite such deals away from traders at the firm, handing it to the investment-banking unit.
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Bloomberg News Goldman's Michael Evans had an influential role in shaping the changes.
Even a ban on traders and brokers writing anything "expressing a view" about a deal Goldman underwrote for 30 days following the deal's execution is a reminder of the embarrassment and financial risk suffered by the company, partly because of emails written by traders.
In one email, Fabrice Tourre, a Goldman trader who helped create the Abacus 2007-AC1 deal that led to last year's fraud lawsuit by the Securities and Exchange Commission, wrote shortly before the bonds were sold that the "whole building is about to collapse anytime now."
Goldman executives insist trading isn't being given a backseat to investment banking despite the recent controversy or a downturn in trading profits.
As part of a broader probe into the financial crisis last year, a Senate subcommittee investigated Goldman's packaging of mortgage-related investments and the firm's treatment of customers who bought them. The subcommittee is working on a report but hasn't set a date for release. A congressional blue-ribbon panel, the Financial Crisis Inquiry Commission, also investigated Goldman, among a range of other topics. Its report is near completion and is expected to be released by the end of the month.
"I've always felt the kind of man- or woman-in-the-street point of view that...the securities side was dominating the firm was an overstatement," E. Gerald Corrigan, a Goldman managing director and co-chairman of the 17-person business-standards committee, said in an interview.
While the company's growth prospects may be higher in investment banking than trading, much of the difference comes from the economic rebound, which could fuel more deal-making, he added.
"Goldman is an economic animal," said Keith Horowitz, an analyst at Citigroup Inc. "When they see opportunity, they are quickly able to redeploy capital in that direction." Goldman's powerhouse fixed-income trading business raked in at least half the company's total net revenues for six straight quarters, but then declined to 30% in the third quarter of 2010. In the same quarter, investment banking brought in 12% of companywide net revenue, representing a 24% jump from a year earlier.
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Trading revenue is being pressured partly by regulatory changes that limit how much Goldman can buy and sell for its own profit. Goldman recently wound down one of its proprietary equities-trading desks in response to the Dodd-Frank financial-reform law passed last year. In addition, Goldman and other securities firms are selling fewer mortgage bonds, corporate bonds and interest-rate derivatives to companies, according to analysts.
The resurgence of investment banking includes work on some of the world's largest initial public offerings. Goldman was the lead underwriter of last year's stock-market debut by Agricultural Bank of China Ltd., which raised $22.1 billion. Goldman scored an even bigger coup with its unusual deal to help wealthy clients invest along with the firm in social-networking site Facebook Inc.
Some outsiders and insiders say the investment bank's victories are likely to benefit Michael Evans, the longtime Goldman banker who runs the firm's Asia business and was a co-chairman of the internal committee.
Mr. Evans's influential role in the changes is fueling speculation he is being groomed for a more powerful job—and could eventually succeed Goldman Chairman and Chief Executive Lloyd C. Blankfein. Mr. Blankfein rose through Goldman's trading ranks. When asked about his future in an interview with The Wall Street Journal on Monday, Mr. Evans said he will remain in his current position and oversee the implementation of the standards committee's changes.
The report released Tuesday includes 39 changes that will be implemented during the next 15 to 18 months.
James Angel, an associate business professor at Georgetown University, said it is hard "to determine how much of this is a real shift, how much is a regulatory shift and how much is just optics."
J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc. said they aren't planning to follow Goldman's lead by breaking out their proprietary trading revenues, people familiar with those firms said. "We are always reviewing our disclosure procedures to help provide better clarity in our financial results," Citigroup said in a statement. A person familiar with the thinking of Morgan Stanley executives said the firm intends to study what Goldman does differently when reporting fourth-quarter earnings next week. Morgan Stanley isn't expected to make any changes in its disclosures.
In July, Goldman reached a $550 million settlement with the SEC. The eight-month introspection that resulted in Tuesday's report was announced by Mr. Blankfein at Goldman's annual meeting last May. In New York Stock Exchange composite trading Tuesday, Goldman shares slipped 40 cents, or 0.2%, to $169.36.
—Aaron Lucchetti, Brett Philbin and Randall Smith
contributed to this article.
Goldman Bankers, Ascendant Again
In Rules Revamp, Investment Staff Is Set to Gain Ground on Traders Tied to Firm's Recent Troubles
By LIZ RAPPAPORT
In the pecking order at Goldman Sachs Group Inc., traders trounced investment bankers for most of the past decade. Now, the Wall Street firm's army of investment bankers is making a comeback.
The 63-page internal report released by the New York company on Tuesday showed how Goldman is trying to reassert the traditional primacy of deal making while playing down the firm's recent reliance on trading. One of the biggest reasons why: Trading caused most of the turmoil, suspicion and reputational damage suffered by Goldman since the financial crisis erupted.
Goldman officials say forthcoming changes detailed in the report aren't punishment for traders. But an overhaul in how the company discloses financial results, starting with fourth-quarter figures due Jan. 19, will wind up slicing how much what the firm defines as trading contributes to Goldman's overall revenue.
In a securities filing Tuesday, Goldman detailed its plan to report trading revenue generated on behalf of clients separately from revenue that comes from trades and investments made by the firm.
If the change had occurred in 2010's third quarter, Goldman would have reported net trading-related revenue of $4.67 billion, or 52% of the company's overall net revenue of $8.9 billion. The percentage is down from the 63% of total revenue Goldman originally said resulted from trading.
Under another change, traders will suffer if the market for collateralized debt obligations and other complicated deals backed by mortgages or other loans rebounds. Goldman's Business Standards Committee yanked the power to underwrite such deals away from traders at the firm, handing it to the investment-banking unit.
View Full Image
Bloomberg News Goldman's Michael Evans had an influential role in shaping the changes.
Even a ban on traders and brokers writing anything "expressing a view" about a deal Goldman underwrote for 30 days following the deal's execution is a reminder of the embarrassment and financial risk suffered by the company, partly because of emails written by traders.
In one email, Fabrice Tourre, a Goldman trader who helped create the Abacus 2007-AC1 deal that led to last year's fraud lawsuit by the Securities and Exchange Commission, wrote shortly before the bonds were sold that the "whole building is about to collapse anytime now."
Goldman executives insist trading isn't being given a backseat to investment banking despite the recent controversy or a downturn in trading profits.
As part of a broader probe into the financial crisis last year, a Senate subcommittee investigated Goldman's packaging of mortgage-related investments and the firm's treatment of customers who bought them. The subcommittee is working on a report but hasn't set a date for release. A congressional blue-ribbon panel, the Financial Crisis Inquiry Commission, also investigated Goldman, among a range of other topics. Its report is near completion and is expected to be released by the end of the month.
"I've always felt the kind of man- or woman-in-the-street point of view that...the securities side was dominating the firm was an overstatement," E. Gerald Corrigan, a Goldman managing director and co-chairman of the 17-person business-standards committee, said in an interview.
While the company's growth prospects may be higher in investment banking than trading, much of the difference comes from the economic rebound, which could fuel more deal-making, he added.
"Goldman is an economic animal," said Keith Horowitz, an analyst at Citigroup Inc. "When they see opportunity, they are quickly able to redeploy capital in that direction." Goldman's powerhouse fixed-income trading business raked in at least half the company's total net revenues for six straight quarters, but then declined to 30% in the third quarter of 2010. In the same quarter, investment banking brought in 12% of companywide net revenue, representing a 24% jump from a year earlier.
Read More
Trading revenue is being pressured partly by regulatory changes that limit how much Goldman can buy and sell for its own profit. Goldman recently wound down one of its proprietary equities-trading desks in response to the Dodd-Frank financial-reform law passed last year. In addition, Goldman and other securities firms are selling fewer mortgage bonds, corporate bonds and interest-rate derivatives to companies, according to analysts.
The resurgence of investment banking includes work on some of the world's largest initial public offerings. Goldman was the lead underwriter of last year's stock-market debut by Agricultural Bank of China Ltd., which raised $22.1 billion. Goldman scored an even bigger coup with its unusual deal to help wealthy clients invest along with the firm in social-networking site Facebook Inc.
Some outsiders and insiders say the investment bank's victories are likely to benefit Michael Evans, the longtime Goldman banker who runs the firm's Asia business and was a co-chairman of the internal committee.
Mr. Evans's influential role in the changes is fueling speculation he is being groomed for a more powerful job—and could eventually succeed Goldman Chairman and Chief Executive Lloyd C. Blankfein. Mr. Blankfein rose through Goldman's trading ranks. When asked about his future in an interview with The Wall Street Journal on Monday, Mr. Evans said he will remain in his current position and oversee the implementation of the standards committee's changes.
The report released Tuesday includes 39 changes that will be implemented during the next 15 to 18 months.
James Angel, an associate business professor at Georgetown University, said it is hard "to determine how much of this is a real shift, how much is a regulatory shift and how much is just optics."
J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc. said they aren't planning to follow Goldman's lead by breaking out their proprietary trading revenues, people familiar with those firms said. "We are always reviewing our disclosure procedures to help provide better clarity in our financial results," Citigroup said in a statement. A person familiar with the thinking of Morgan Stanley executives said the firm intends to study what Goldman does differently when reporting fourth-quarter earnings next week. Morgan Stanley isn't expected to make any changes in its disclosures.
In July, Goldman reached a $550 million settlement with the SEC. The eight-month introspection that resulted in Tuesday's report was announced by Mr. Blankfein at Goldman's annual meeting last May. In New York Stock Exchange composite trading Tuesday, Goldman shares slipped 40 cents, or 0.2%, to $169.36.
—Aaron Lucchetti, Brett Philbin and Randall Smith
contributed to this article.
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