If Goldman Sachs is suffering, the investment banking business cannot be in prime condition. Goldman’s profits for the first quarter of the year more than halved, it announced this week, bringing to a sorry end the results season for Wall Street banks. The problems facing the industry’s bellwether make clear the broader challenges, long after the 2008 crisis.
Goldman is not alone in its pain. This has been a difficult and treacherous year across financial services, not just for investment banks that have traditionally formed its core. Many firms have been affected by prolonged low interest rates - with long-term rates in effect turning negative in some countries - depressed commodity prices and economic volatility.
Hedge funds suffered a $15bn outflow in the first quarter, as investors balked at their high charges and patchy performance - the value of the main European fund run by Crispin Odey, the UK fund manager, fell by 31 per cent to the middle of April. Money has steadily been diverted from actively managed mutual funds and put into cheaper passive funds.
Large institutions still face a regulatory crackdown following the crisis. US federal regulators this week proposed new pay rules intended to limit excessive risk-taking. Banks would defer payment of at least half of executives’ bonuses for four years and be able to claw them back for up to seven years if something later goes wrong.
This follows a series of regulatory judgments and fines against large financial institutions for market abuses before and after 2008. Goldman paid $5.1bn earlier this month to settle claims that it had misled mortgage bond investors before the crisis.
Those bankers who remain employed after prolonged retrenchment across the industry can still earn more than other professionals. Even in a bad quarter, Goldman set aside $2.7bn for compensation, or 42 per cent of its net revenues. But Goldman is also substituting junior employees for more senior ones, and trying to automate as much as possible.
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Goldman’s results matter not just because it is the best known (and in some circles the most infamous) bank. It took a long-term bet after the 2008 crisis that it should stick with what it did best - including the bond and currency trading division that brought in big profits in the mid-2000s - rather than cut back too soon. It thought the cycle would turn.
Despite everything, Goldman’s leaders are sticking to their stance. “We don’t see how a world of zero or negative interest rates could possibly be the ‘new normal’,” wrote Lloyd Blankfein and Gary Cohn, its chief executive and president respectively, in their most recent letter to shareholders. Despite the challenges, “we also see plenty of reasons for optimism”. They could yet turn out to be right, but the bet is taking a very long time to pay off. The other, equally plausible, view is that the decades before the crash were anomalous, an era of exceptional growth for banks encouraged by globalisation and lax regulation. Whether or not negative interest rates are now normal, less profitable investment banks are.
That need not be a terrible problem for economies or society more generally. If commercial banks have too little capital to lend freely, this can limit economic growth - a potential issue in some European countries. But investment banks can perform their functions of raising capital for companies and selling securities to investors without having to be super-profitable. If these are leaner times, so be it. Even bankers can economise.
