Power Lunch

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Power Lunch

Goldman Sachs: Investment Bank Or Big Hedge Fund?


Goldman Sachs is the world’s largest – and most successful – investment bank. But it has seen a growing reliance on income generated from trading in recent years as the market has moved ever upward. Some Wall Street analysts are saying this makes the firm actually more like a hedge fund, and therefore more vulnerable to implosion. So--is Goldman just a giant hedge fund disguised as an investment bank? Ben White of the Financial Times, and Neil Weinberg of Forbes debated it on “Power Lunch.”

Weinberg noted that nearly 70% of Goldman’s revenue comes from trading and principle investments. To be fair, he says, its asset management business is doing quite well – but since the bank went public in 1999 it has seen its most growth from trading. Because of this, Weinberg says, the stock actually trades at a lower multiple of earnings than both Merrill Lynch and Morgan Stanley .

But Ben White says that if anyone has proven itself adept at managing risk – it’s Goldman Sachs. And for Goldman - as well as the other investment giants - the current trading environment has created nothing short of a perfect storm for generating huge amounts of revenue. Can that dependence on trading come back to hurt them? Weinberg says no – because Goldman depends more on volume than the actual direction of market, although obviously any investment firm is subject to at least some of the ebb and flow of the stock market.

The strong trading environment has also translated into growth in the private equity and venture capital sectors of the company. And because Goldman manages so many private equity deals – and invests so much of its own money in them – it could be more likely to get tripped up in some of the same conflicts that have engulfed hedge funds in the past. White doesn’t see the likelihood in this – again, because Goldman Sachs has such strong talent and management. The only time a conflict might arise, White says, is if a deal goes south. And the way Goldman’s been performing as of late, that sure doesn’t seem likely. Weinberg agrees: Goldman is indeed an “animal of its own.” The way they put their own capital on the line is actually beneficial for their business. If they didn’t, he says, their advice to investors wouldn’t be worth anything.

So then is Goldman Sachs nothing but a huge hedge fund dressed up in an investment bank’s clothing? Ben White had the final word and said probably not: either way, there’s no reason for them to be changing what they’re doing, he said, “which is making a great deal of money.”

A quick note - In 2006, Goldman Sachs’ revenue looked like this:
17% from Asset Management
15% from Investment Banking
68% from Trading and Principle Investments

In 1999, when the company went public, it’s revenue looked like this:
24% from Asset Management
33% from Investment Banking
43% from Trading and Principle Investments