Inside Goldman Sachs Struggle To Climb Out Of Last Place In Trading
A 40% second-quarter decline in fixed-income activity sparks charm offensive designed to showcase a more customer-friendly Goldman.
By Liz Hoffman
The Wall Street Journal
August 2, 2017
After catching a tennis match at Wimbledon in July, Goldman Sachs Group Inc. GS 0.74% trading chief Pablo Salame paid a visit to the London offices of bond-fund giant Pacific Investment Management Co.
His message to the Goldman client: “How can we do better?” according to people briefed on the July meeting.
The next day, Goldman reported quarterly trading numbers that were the worst on Wall Street. Those followed a disappointing first quarter in which Goldman failed to catch an upswing in debt trading reported by rivals.
A 40% second-quarter decline in fixed-income activity, which includes bonds traded by Pimco and its ilk, left Goldman with first-half trading revenue that trailed its major banking rivals—a first since Goldman went public in 1999.
The slump has rattled executives, sparking a charm offensive designed to showcase a more customer-friendly Goldman, focused on solving clients’ problems rather than steering them into trades that benefit the firm’s bottom line.
It has also tipped the scales in favor of more immediate action at the firm, despite a yearslong debate around whether changing market conditions were temporary or deep-rooted and how aggressively Goldman should respond to them.
“It could be secular, it could be cyclical, doesn’t matter, who knows?” finance chief R. Martin Chavez said last month on the bank’s earnings call. The bottom line: the firm has to go where its clients want to go.
Chief Executive Lloyd Blankfein, himself a former trader, has scheduled one-on-one meetings with some of the firm’s top traders, according to people familiar with the matter.
Senior executives and salespeople have fanned out to top clients, pitching trade ideas and talking down the bad quarter, according to people on both sides of the outreach.
The firm also is leaning on its investment bankers to pitch their corporate clients on hiring Goldman’s traders for products that protect against swings in currency values and interest rates.
Meanwhile, Goldman is working with a financial-data company to better understand what percent of each client’s trading business it is getting, and how it can sell more products to existing clients, according to people familiar with the matter.
Trading is the engine that has historically powered Goldman. The firm led the development of the institutional stock-trading market in the 1960s and dominated it for decades. In the 2000s, it was at the forefront of an explosion of complex debt instruments that ushered in a golden age of Wall Street profits.
Even after post-crisis declines, trading still accounts for almost half of Goldman’s revenue.
Big banks make fees by arranging trades for clients, ranging from simple corporate bonds to complex derivatives tied to interest rates or currency prices.
The more complex instruments, which are often used by active investors like hedge funds, command higher fees. Plain-vanilla products are a low-margin, high-volume game.
Market and regulatory changes since the financial crisis have hit Goldman especially hard. Regulations closed its proprietary desks, which once made billions of dollars betting with the firm’s own money.
A steadily rising stock market has also pushed investors away from risky investments and toward simpler products where giant banks such as J.P. Morgan Chase & Co. dominate.
Goldman’s trading desk, by contrast, has been more geared toward hedge funds—which have been less active as they face outflows and more trading moves to exchanges.
“The business changed around them,” said James Mitchell, an analyst with Buckingham Research Group. “If you’re a hedge fund and you’re worried about investors pulling money next quarter, are you really going to be asking Goldman to build you a five-year yen swap?”
The shifting ground caused consternation within Goldman. In March 2016, a fixed-income sales executive, Tom Cornacchia, spoke publicly of an internal split between those who believed the business had changed for good and those betting on a return to the past.
Mr. Cornacchia cast himself in the former camp, which felt the firm needed to adapt. The executive—who left the firm last September—said he had urged salespeople to be more patient and more client-focused, not to expect to land a trade with every phone call.
‘If you’re a hedge fund and you’re worried about investors pulling money next quarter, are you really going to be asking Goldman to build you a five-year yen swap?’—Buckingham Research Group analyst James Mitchell
After catching a tennis match at Wimbledon in July, Goldman Sachs Group Inc. GS 0.74% trading chief Pablo Salame paid a visit to the London offices of bond-fund giant Pacific Investment Management Co.
His message to the Goldman client: “How can we do better?” according to people briefed on the July meeting.
The next day, Goldman reported quarterly trading numbers that were the worst on Wall Street. Those followed a disappointing first quarter in which Goldman failed to catch an upswing in debt trading reported by rivals.
A 40% second-quarter decline in fixed-income activity, which includes bonds traded by Pimco and its ilk, left Goldman with first-half trading revenue that trailed its major banking rivals—a first since Goldman went public in 1999.
The slump has rattled executives, sparking a charm offensive designed to showcase a more customer-friendly Goldman, focused on solving clients’ problems rather than steering them into trades that benefit the firm’s bottom line.
It has also tipped the scales in favor of more immediate action at the firm, despite a yearslong debate around whether changing market conditions were temporary or deep-rooted and how aggressively Goldman should respond to them.
“It could be secular, it could be cyclical, doesn’t matter, who knows?” finance chief R. Martin Chavez said last month on the bank’s earnings call. The bottom line: the firm has to go where its clients want to go.
Chief Executive Lloyd Blankfein, himself a former trader, has scheduled one-on-one meetings with some of the firm’s top traders, according to people familiar with the matter.
Senior executives and salespeople have fanned out to top clients, pitching trade ideas and talking down the bad quarter, according to people on both sides of the outreach.
The firm also is leaning on its investment bankers to pitch their corporate clients on hiring Goldman’s traders for products that protect against swings in currency values and interest rates.
Meanwhile, Goldman is working with a financial-data company to better understand what percent of each client’s trading business it is getting, and how it can sell more products to existing clients, according to people familiar with the matter.
Trading is the engine that has historically powered Goldman. The firm led the development of the institutional stock-trading market in the 1960s and dominated it for decades. In the 2000s, it was at the forefront of an explosion of complex debt instruments that ushered in a golden age of Wall Street profits.
Even after post-crisis declines, trading still accounts for almost half of Goldman’s revenue.
Big banks make fees by arranging trades for clients, ranging from simple corporate bonds to complex derivatives tied to interest rates or currency prices.
The more complex instruments, which are often used by active investors like hedge funds, command higher fees. Plain-vanilla products are a low-margin, high-volume game.
Market and regulatory changes since the financial crisis have hit Goldman especially hard. Regulations closed its proprietary desks, which once made billions of dollars betting with the firm’s own money.
A steadily rising stock market has also pushed investors away from risky investments and toward simpler products where giant banks such as J.P. Morgan Chase & Co. dominate.
Goldman’s trading desk, by contrast, has been more geared toward hedge funds—which have been less active as they face outflows and more trading moves to exchanges.
“The business changed around them,” said James Mitchell, an analyst with Buckingham Research Group. “If you’re a hedge fund and you’re worried about investors pulling money next quarter, are you really going to be asking Goldman to build you a five-year yen swap?”
The shifting ground caused consternation within Goldman. In March 2016, a fixed-income sales executive, Tom Cornacchia, spoke publicly of an internal split between those who believed the business had changed for good and those betting on a return to the past.
Mr. Cornacchia cast himself in the former camp, which felt the firm needed to adapt. The executive—who left the firm last September—said he had urged salespeople to be more patient and more client-focused, not to expect to land a trade with every phone call.
‘If you’re a hedge fund and you’re worried about investors pulling money next quarter, are you really going to be asking Goldman to build you a five-year yen swap?’—Buckingham Research Group analyst James Mitchell
For a firm that has long hunted big game—and where bonuses are set by “gross credits” that correspond to an employee’s revenue generation—that was uncomfortable for some, Mr. Cornacchia said. “There’s a lot of denial,” he said at the time.
Meanwhile, Goldman ceded ground to rivals. Among top U.S. trading shops, Goldman has lost 10 percentage points of fixed-income market share by revenue since 2010 to J.P. Morgan Chase and Citigroup Inc., according to regulatory filings.
In the first quarter, Goldman’s fixed-income revenue was essentially flat from a year earlier, compared with double-digit percentage gains at J.P. Morgan, Bank of America Corp. and Citigroup.
The firm had wrong-sided the “Trump trade,” stockpiling products it expected clients would desire as long-term interest rates rose and the dollar gained in value, according to people familiar with the matter. Instead, long-term rates fell relative to short-term ones, and the dollar slid in March.
In the second quarter, the culprit was the commodities unit, which posted its worst three-month stretch in Goldman’s 18 years as a public company. The business ended the quarter in the black, but barely, as the bank struggled to adequately hedge its inventory, according to people familiar with the results.
Goldman has responded by turbocharging a push—begun about two years ago—to court mutual funds, asset managers and other so-called “real money accounts.” These investors typically have long-term horizons and are less prone to flameouts than hedge funds, which can close their doors after a few bad quarters.
It has bolstered a sales group started in 2014 under partner Stacy Bash-Polley that aims Goldman’s sales firepower at its biggest and most profitable clients.
Besides his visit to Pimco in July, Mr. Salame, the Goldman trading executive, also recently visited J.P. Morgan’s asset-management division.
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