The Twilight of the Goldman Sachs Trading Gods
Senior Editor, CNBC.com
Goldman Sachs was once legendary for its trading prowess.
The traders were so admired and envied on Wall Street that people were convinced they had some kind of edge over their counterparts at other firms.
The theories varied, depending on who you asked. They were front-running hedge fund clients, manipulating markets, or using government connections to game policy. Other folks just thought the Goldman traders were smarter than every one else. People said that Goldman was a hedge fund disguised as an investment bank.
That all changed after the financial crisis.
Lawmakers passed rules to clamp down on proprietary trading by regulated banks. Goldman reorganized itself to be, or appear to be, more client oriented, shutting down some internal hedge funds and eliminating proprietary trading desks. Trading at Goldman was no longer supposed to be about Goldman betting its own money, but about Goldman servicing client orders.
Whatever it was that once made Goldman the envy of Wall Street traders seems to have taken flight.
This was a rough quarter for traders working at the market-making desks all across Wall Street. Everyone is reporting lower revenues, in part because clients were so freaked out by market volatility that many decided to park assets in cash or Treasurys and just sit out 2011.
Goldman’s bond traders seemed to have been tamed. They actually did slightly worse than the bond guys at JPMorgan Chase. Goldman's stock trading revenues didn’t outshine JPMorgan either.
It can be difficult to figure out what happened, because as part of its post-crisis makeover Goldman stopped reporting any trading revenues at all. To find how its traders did, you have to look at a section called "Institutional Client Services." The guys trading stocks and derivatives now work in “Equities,” while the guys trading bonds, swaps, and currencies work in “Fixed Income, Currency, and Commodities Client Execution.”
Revenues from Goldman's equities “client execution” desks were $526 million for the fourth quarter of 2011, 32 percent lower than the fourth quarter of 2010. That’s right in line with the decline seen at JPMorgan, where revenues were just $779 million, down 31 percent from the fourth quarter of 2010.
Goldman’s bond performance was not exactly stellar, either. Net revenues in fixed income, currency, and commodities client execution were $1.36 billion for the fourth quarter of 2011, 17 percent lower than the fourth quarter of 2010. At JPMorgan, fixed income markets revenue was $2.5 billion, down 13 percent from the prior year.
These aren’t necessarily apples-to-apples comparisons. None of the banks on Wall Street do a very good job of explaining exactly what is counted in each line of its earnings reports. For instance, Goldman breaks out “client execution” into one line, “commissions and fees” into another, and “securities services” into yet another.
If you combine all these fees, commissions, and services with the market-making profits, it’s possible that Goldman did much better than JPMorgan. The combined equities market business at Goldman declined by only 15 percent, which is less than half of the JP Morgan decline.
Should these things be combined? Your guess is as good as mine. It’s not clear from the reports which numbers are apples and which ones are oranges. To be honest, a lot of the revenue lines this quarter just seem to be lemons.
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