Lloyd’s Voyage

By Roy C. Smith

Friday's news that Lloyd Blankfein would retire from Goldman Sachs at year end was a surprise to almost everyone. He will have served 12-years as Goldman’s CEO, longer than anyone else except Sidney Weinberg (who retired in 1966), and is one of the longest serving CEOs among today’s major banks. Blankfein replaced Hank Paulson as CEO in 2006, having transformed the firm’s Fixed Income, Currency and Commodities division into a trading powerhouse that was arguably Wall Street’s most dominant player.

Indeed, trading accounted for 68% of firm-wide revenues in 2006, and 73% of profits. Goldman Sachs’ return on equity was 33% and its price-to-book ratio was about 2.0. The stock was trading at $170 per share then, more than three times its IPO price in 1999. Blankfein, originally hired by the J. Aron division as a gold trader, took over the FICC division in 2002 and initiated a massive change in the orientation of the firm from traditional investment banking to a wide-ranging trading colossus that operated around the world and around the clock in hundreds of different instruments. 

Extraordinarily for the securities industry, this enormous growth and transition was accomplished without any major acquisitions, or dilution of ownership that such acquisitions cause. The expansion was accomplished entirely in house, working with that wonderful Goldman Sachs DNA that is both feared and revered throughout Wall Street and the City.

Blankfein, however, had little time to enjoy his and the firm’s achievements. Soon after taking over from Paulson, he and other analysts noticed that rising housing prices, upon which a boom in mortgages and mortgage-backed securities was built, had ceased and indeed, reversed direction. Realizing that this could mean an end to the boom (or worse) he ordered a reduction in Goldman’s trading inventory, a reduction that was strongly opposed by some of his trading barons. He prevailed in the struggle that ensued, however, which some his counterparts (at Citigroup, Merrill Lynch, and Morgan Stanley) did not, and steered Goldman Sachs through the financial crisis that followed with barely a scratch. Later, however, he had trouble explaining to Congress why the firm periodically adjusts its own exposures to its future outlook, without consulting its trading counterparties that were simultaneously adjusting their own positions. In the end, Goldman Sachs agreed to a $550 million settlement with the Justice Department for infractions of this sort.

After the financial crisis of 2007-2008, Goldman Sachs went through a number of regulatory changes that permanently altered its business. After the Lehman failure, the Federal Reserve required Goldman to became a bank holding company, which provided some advantages but many costs and disadvantages as well. Basel III and Dodd-Frank, and their myriad parts and pieces, came into effect imposing vastly increased regulatory compliance costs and greatly limiting the firm’s freedom of maneuver. There was no escaping this – Goldman had about $1 trillion of assets and was clearly a “systemically important financial institution,” so it had to change its business model to accommodate the new limitations.

Twelve years after Blankfein’s succession, Goldman’s total revenues are less than they were in 2006, and for 2017 trading represented only 37% of revenues, nearly half of what they were then. The stock price is about $100 per share higher, but the price-to-book ratio is only 1.46 (after a 20% increase in the stock price in the last six months), and return on equity was 10.8%.  Indeed, most of Blankfein’s tenure as CEO has been spent surviving the crisis and reengineering the firm for a duller, less expansive future. If he is feeling some regulatory fatigue, we can forgive him for looking for something else to do at 63.

It is curious that Blankfein’s retirement announcement should come so close to Gary Cohn’s, his former deputy who left last year to join the Trump team. There may be some wondering whether there will be a job switch, in which Blankfein would follow his Goldman CEO predecessors John Whitehead, Bob Rubin, Steve Friedman and Jon Corzine to Washington, and Cohn would come back to pick up where he left off but enriched and fortified by his White House experience. Don’t count on it – these things are rarely so simple – Blankfein has been more politically active as a Democrat than Cohn was, and in any case may be fearful of losing reputation by association with Mr. Trump’s team. And, though Cohn has had a full-career at the firm, as every Goldman Sachs CEO has before him, the water filled in behind him when he left and others are in waiting.

So maybe, now having been a king, Lloyd Bankfein, will be content to lay back and be a philosopher, author and philanthropist, as his predecessor, Hank Paulson, and friend Michael Bloomberg have done. Why not? He’s earned a good rest and some peace and quiet.

from Financial News,  Match 12, 2018