GS Goldman Sachs Group Inc

By Liz Hoffman 

Goldman Sachs Group Inc.'s trading whizzes have lost their touch.

In 2009, $1 billion represented 2 1/2 weeks' work on Goldman's fixed-income desk, a dingy floor downtown that was once Wall Street's most reliable profit machine. Now, as fourth-quarter results rolled in Wednesday, that amount is the fruits of an entire quarter.

The decline reflects problems unique to Goldman, whose struggles have been acute, but also a wider malaise settling over Wall Street's securities operations. New regulations have cast banks as mere toll-takers. Today's market realities reward simple, cheap service delivered digitally over pricey, complex products. Better, more transparent trading data has eroded the informational edge that banks once held over their clients.

The biggest quakes have hit fixed-income trading, a diverse area that spans everything from sovereign debt to precious metals to products tied to global interest rates. Revenue at the four biggest trading banks in 2017 fell between 6% and 30% from 2016, and remains orders of magnitude below peak earning years during the precrisis boom.

In Goldman's fourth-quarter results, its debt and commodities traders posted their worst three-month stretch since the end of 2008. A 50% decline in revenue for the business sent the firm's shares lower and raises pressure on Chief Executive Lloyd Blankfein to fix the business that vaulted him to the top of the firm.

For the first time on record, Goldman's investment bankers, corporate consiglieres who broker mergers and underwrite securities offerings, outearned its fixed-income traders.

Goldman's traders struggled all year, losing money on oil and gas trades and holdings of low-rated corporate debt. Nothing clicked in the most-recent quarter, when a continued lack of price volatility kept clients on the sidelines. Goldman cited declines in all four of its main fixed-income businesses.

The result: 2017 revenue for the fixed-income business of $5.3 billion was little more than a fifth of what it was in 2009.

Goldman executives have acknowledged they were too slow to recognize the lasting effects of the financial crisis. Over the past two years, the firm has cut traders, trimmed bonuses, revamped its sales network, and embraced the type of low-margin, high-volume trades it once deemed too trivial to bother with.

Another objective is to win more trading business from corporate clients that already hire Goldman for boardroom advice but use rivals to manage their market risks.

For too long, Goldman has relied on hedge funds, whose trading business is lucrative but runs hot and cold, and too little on companies and large asset managers, which have more predictable, simpler needs.

"We absolutely acknowledge that the business footprint and mix we have is a consequence of choices that we made over time," Mr. Chavez said on an analyst call Wednesday. "We know that we need to do better." He said it would take "an order of months" to see changes produce new profit.

Yet some tweaks, such as a 2015 reorganization of the firm's corporate sales force, have been in place for longer, with little to show.

"It just seems like progress should have been a lot faster than it's been," Mike Mayo, a Wells Fargo analyst, said Wednesday.

The most recent poor quarter is likely to intensify calls for more dramatic changes, including a shake-up of the division's leadership. That is an idea that has gained steam among top executives in recent months, according to people familiar with the discussions.

Overall, Goldman's quarterly earnings, like those of other big banks, were muddied by the new tax law. A $4.4 billion one-time charge wiped out the firm's entire quarterly profit, producing its first loss since 2011.

Excluding the charge, Goldman's net income of $2.3 billion was better than analysts had predicted. But shares dropped 3% on the trading declines and news that Goldman would dial back its stock-buyback plans to plow earnings into areas where it thinks it can grow.

Those include steadier businesses like consumer banking and asset management. Both gained ground in 2017, helping to boost Goldman's full-year revenue 5%, the best showing among big banks so far. But those efforts will take years to fill the roughly $10 billion revenue hole opened by Goldman's trading woes -- if they ever do.

For the lack of noticeable progress in Goldman's trading turnaround, another firmwide effort is bearing fruit. A few years ago, executives decided to make a play for debt-underwriting business. That business has historically been dominated by big commercial banks, which can write large checks and tap trillions of dollars in cheap deposits to fund them. Debt-underwriting revenue hit a record $2.5 billion for the year and in the fourth quarter surpassed that of JPMorgan, Bank of America and Citigroup.

The firm has made inroads on the back of its merger bankers, who are more often offering debt, in addition to advice, when putting together deals.

Write to Liz Hoffman at liz.hoffman@wsj.com

(END) Dow Jones Newswires

January 17, 2018 15:22 ET (20:22 GMT)

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