Summary
- Goldman Sachs did not change its business model until later on in the current economic recovery, retaining the one that had done it so well previously, even through the Great Recession.
- But the turnaround has been "slow and expensive"as Goldman continues to pour money into the changes being made, changes that do not appear appropriate for the new economic climate.
- Management is now faced with the dilemma of completing the restructuring while preparing for the uncertain world now evolving, not the situation one would want.
Goldman Sachs Group Inc. (NYSE:GS) is paying for lagging behind.
Competing against the standard setting JPMorgan Chase (NYSE:JPM), and Citigroup (NYSE:C), who changed its business model earlier on, Goldman seems to be suffering from its failure to move early enough in the current economic recovery to move to a more relevant business model.
Goldman came out of the Great Recession feeling pretty smug about how it came through the economic and financial distress of the downturn.
Management did not see any reason to change its approach to business.
The bank is now facing the consequences of that decision. The delay seemingly is costing the bank dearly.
How Jamie Dimon, CEO of JPMorgan, has managed his organization through this recovery has been amazing, and he now has the bank "setting the bar" for the industry with third quarter earnings reports showing a 15 percent return on shareholders' equity.
Michael Corbat, CEO of Citigroup, has done a commendable job transforming Citi to meet the new financial environment and has progressively grown Citi’s return on shareholders' equity to more than 12 percent.
James Gorman has also transformed Morgan Stanley (NYSE:MS) during the current period of economic recovery and has moved the bank’s ROE above 11 percent in the second quarter of 2019.
Chief Executive David Solomon has only just begun to make changes in the business model used by Goldman, and he may be facing the reality that the bank is moving into a new market situation, not in line with the changes Mr. Solomon has overseen.
In the third quarter, Goldman Sachs earned only a 9 percent return on equity as its profits for the quarter fell 26 percent from a year ago.
According to the Wall Street Journal,
“Its turnaround is slow and expensive. Goldman said it has spent $450 million this year on growing online consumer bank Marcus, launching the Apple card, and integrating a wealth-management firm that it bought this summer. Non-compensation costs rose 16% in the quarter, which the bank balanced out by cutting the money it sets aside for year-end bonuses.”
“The bank on Tuesday reported $1.88 billion in net earnings on $8.32 billion in revenue, roughly in line with what analysts had expected.”
But the bank performance continues to lag as it pours “money into new initiatives such as consumer banking, corporate cash management and ultrafast trading systems.”
And, now, the economic picture is changing.
