New CEO, new competitors, new regulatory environment—Goldman Sachs is a very different company than it was 10 years ago. As it navigates this unfamiliar terrain, here’s what you should know about the firm that has, for decades, defined the pinnacle of Wall Street.
For Goldman to survive for another 150 years and compete effectively against the likes of JPMorganChase, Bank of America, Morgan Stanley, and Citigroup, it will have to transform itself into a commercial bank that also has an investment bank. Newly appointed CEO David Solomon knows this, and it has already started the transformation.
Essentially, Goldman is in a box. Its ability to trade for its own account has been greatly curtailed, as has its ability to engage in “market making”—the buying and selling of large blocks of securities—on behalf of its clients. Goldman’s trading business, once its cash cow, has fallen on hard times. Revenue in the firm’s bond-trading business was $5.3 billion in 2017, down from nearly $10 billion in 2012.
JPMorganChase, for one, has been raking it in. It has averaged a net income of around $8.5 billion per quarter, close to $32 billion in profit per year. It has a market capitalization of around $330 billion. Bank of America, which bought Merrill Lynch ten years ago to round out its commercial banking and investment banking product suite, has a market capitalization of around $250 billion. No one is going to feel sorry for Goldman Sachs or its 37,000 employees, but there is little question anymore that, with a quarter to a fifth of those banks’ market capitalizations, the company is in need of a strategic fix.
Goldman remains an industry leader in the prestigious role of advising corporate executives on mergers and acquisitions—it is the perennial king—and in the underwriting of corporate debt and equity, where it also can be found among the most successful on Wall Street.
The easiest way for Goldman to better compete would be through a major merger or acquisition. Among the firms that Goldman might consider buying to get a bigger balance sheet are PNC Financial (market cap $56 billion), State Street Corporation (market cap $25 billion), Key Bank ($16 billion), or Bank of New York Mellon ($48 billion).