Goldman's Longshot Vow: Beat Odds, Go It Alone
Goldman Sachs is sending a message to the outside world: It intends to remain an independent investment bank, even if that means being the last of the breed left standing on Wall Street.
Today, Goldman's Chief Financial Officer David Viniar told industry analysts that the investment house was not interested in acquiring a commercial bank. Moreover, Viniar asserted Goldman was strong enough to fly solo, effectively shooting down any speculation it could be acquired by a bank.
Skeptics may brand such talk as another example of out-of-touch Wall Street hubris. Indeed, the odds are against Goldman going it alone especially within an industry that's being dramatically and rapidly reconfigured by the recent shotgun marriage of Bear Stearns to JP Morgan Chase and yesterday's acquisition of Merrill Lynch by Bank of America. Adding even more angst is Lehman Brothers' massive bankruptcy and uncertainty over the fate of insurer American International Group.
Still, Goldman deserves the benefit of the doubt. The New York-based firm is solvent and profitable, even after reporting a 70 percent drop in quarterly earnings today, its worst earnings slump since becoming a publicly-traded company in 1999.
On the plus side, however, Goldman's earnings did beat analysts estimates. More important, Goldman is solvent, possessing a respectable capital base to sustain it through a protracted downturn -- a boast that fallen investment banking rivals couldn't make.
Still, Goldman is flying in the face of conventional wisdom that massive change is coming to Wall Street.
Financial industry experts contend the age of the independent investment house is at an end and they expect many of those firms to be absorbed into commercial banks. In need of funding and running out of places to get it, investment bankers will have to tap into commercial-bank deposits for the capital required to support and finance client transactions such as M&A and other deals.
But bank funds comes with strings attached. Since it's depositor money, insured by the federal government, bank-backed investment houses will be constrained from the type of wheeling and dealing that marked the past decade. Moreover, they will have to shore up their balance sheets and "de-leverage" by selling or writing down assets and keeping more money in the vault. Under this arrangement, investment fees will also tumble.
Life as an independent promises to be a tough slough for Goldman. In discussing today's earnings report, Goldman brass conceded there's been a huge global decline in demand for all investment banking services.
"The business is just not happening," says Dick Bove, financial services and bank analyst with Ladenburg Thalmann.
That's not the type of life Goldman envisions for itself. With its head down -- some may say buried in the sand -- the investment giant intends to ride out the current storm and continue doing business as an independent force.
At least, that's the plan.