"This does not, in our view, alter the fact that Goldman remains the class of the class of investment banks, public or private. So, when everyone else is selling equities, what should the best equity house on Wall Street do? Buy, of course. We believe that, while John Mack's weakened Morgan Stanley runs for cover at a large, mediocre commercial bank, Lloyd Blankenfein and his management team will, in conjunction with selected private equity investors, tender to take Goldman Sachs private again.It makes sense. Goldman's risk management has held up well while all their publicly-held competitors are finally driven from the field. Why should the best managers in investment banking cast their very desirable pearl before the....ah....well, you know....sell to a commercial bank and work for its probably-dimmer CEO?
That's my- our- prediction. It just seems too obvious that when Goldman's price has been unrealistically depressed, due to near-term market conditions, far below its long-term intrinsic value, those who know it best- Goldman's managers- will do a leveraged buyout.You read it here, if not first, early."
Instead of my expected solution, Goldman instead filed to become a commercial bank. Perhaps Lloyd Blankenfein felt that more immediate action was required than that necessary for a tender to take the firm private.
Then again, just what is the firm that is applying for a commercial bank charter? Is it the Goldman Sachs we know, post-Whitehead? The swashbuckling, client-beating, private trading and hedge fund-gone-public?
Remember, Goldman was the last private investment bank partnership to go public. And, as the Street's premier equity underwriter, you had to bet that, if they were selling, it was a market top.
So, why would Blankenfein take his much-feared crew off the field of relatively-unfettered trading and, in a minor way, investment banking, to compete in the stuffy, restrictive, unimaginative world of commercial banking?
Maybe it's this. Goldman, the public entity, will become a commercial bank. But what of its talented, highly-paid, innovative staff? Do you think the guy who was trading exotic swaps yesterday will be sitting opposite you to discuss your application for a home equity loan tomorrow?
Doubtful.
No, I think Blankenfein piloted his firm into a safe harbor- commercial banking- in order to let all hands leave the stranded ship for a safer shore, to begin life anew. With their substantial equity stakes in the firm as grubstakes.
Plan on seeing many, if not most, of Goldman's brightest people migrate to existing private equity, asset management and hedge fund firms, and/or start new ones. As I wrote later in the prior post,
"And that will be the finish of the 30+ year-long cycle of Wall Street going public, shearing its clients, then selling the wreckage either to other investment banks, commercial banks, or back to itself. Investment banking will have ceased to be an independent, publicly-held market function.
I'll even predict that, with time, the private investment banks will out-maneuver and -compete the commercial banks which bought the remnants of the poorly-run, remaining publicly-held investment banks. And we'll be back to a de facto version of Glass-Steagal, with a few commercial banks half-heartedly trying to compete with their sharper, better-paid privately-held competitors."
I still believe what I wrote in those two paragraphs. And that Goldman's employees will lead in this remaking of investment banking in the image of the old, legendary days of JP Morgan, the man- not the firm.
It's remotely possible that Goldman's best would hang around to merge with, then takeover and run a larger commercial bank. But I'm just not sure that sort of mind-numbing activity and straitjacketed operation style will be attractive to the best Goldman alums. No matter how large the commercial bank, it's simply not as nimble, nor interesting, as a private equity firm or hedge fund.
And what of Warren Buffett's $5B investment in the firm? Well, as usual, Warren got an exceptionally sweet and unique deal which neither you, nor I could extract. He has locked in a 10% return on $5B. It's really not an equity deal. It's a high-priced private equity loan.
I'm not sure if Buffett feels the firm will be a good equity investment. Sure, he's got warrants, in case it is. But if not, 10% is a good coupon rate for whatever will be left, legally, that Goldman can still do under a commercial banking charter.
But the Goldman we knew is gone forever. There just isn't sufficient wiggle room in a commercial bank charter for the firm to ever return to its heyday of being a publicly-held hedge fund/private equity shop with a few pieces of old investment banking attached- underwriting, asset management and M&A.
However, in truth, the branchless bank model of the old JP Morgan commercial bank and Bankers Trust failed in the 1990s. And they failed, in part, because of a lack of a stable deposit base. So, how will a newly-commercialized Goldman Sachs bank escape that fate?
It's even reasonable, given the excess capacity in the financial system, that, once a sufficient number of top-tier, old Goldman Sachs employees depart for greener pastures, the remaining second-tier staff will merge with some always-commercial bank, e.g., Wells Fargo, Wachovia, or BONY-Mellon.
I doubt the new Goldman will remain unmerged or unacquired for long after its best and brightest have departed.
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