Saturday, November 15, 2008

Lloyd Blankfein's Goldman Sachs: Same As It Ever Was?

In this post two weeks ago, I wrote about how merely obtaining a Federal commercial bank charter hardly makes Goldman Sachs and Morgan Stanley real, functioning commercial banks.

This past week, two articles in the Wall Street Journal demonstrated how these two former investment banks are already parting ways.

Goldman CEO Lloyd Blankfein was quoted as saying,

"We're going to consider everything," but won't do "something rash."

The article further noted, regarding Goldman Sachs developing a consumer banking business,

"Mr. Blankfein seemed to knock down that idea, stressing that Goldman has little, or no exposure to credit cards, auto loans, home-equity loans or other consumer loans, all of which could suffer if the U.S. falls into a significant recession."

On the subject of a merger, Blankfein remarked that he'd consider one,

"only if the deals keep Goldman's focus and culture intact."

Understanding that Goldman Sachs currently looks a lot like a hedge fund, it's difficult for me to see how Blankfein expects his firm to be able to simply exist unchanged.

If, as most observers expect, the FDIC and Federal Reserve mandate that the firm reduces its leverage and business mix to more closely resemble those of commercial banks, Goldman will have a very hard time finding non-consumer banking business volumes sufficient to retain its current size, expense and infrastructure bases.

If, on the other hand, it tries to merge with a commercial bank, there's just no way the vaunted Goldman culture will remain intact. Apparently, Blankfein's bid to outs Pandit at Citigroup and merge with that money center bank, came to naught.

Maybe, with the rumors of Citi's board's split over Pandit, Blankfein may have another shot at that merger. Maybe not.

Either way, it's just hard to see how Goldman can tread water and remain as profitable as it has been in the past, with a similar business mix.

Morgan Stanley, on the other hand, was written up on Thursday's Journal as cutting more than 2,000 employees while hiring two outside commercial bankers; Cece Sutton and Jonathan Witter, both formerly of Wachovia.

The two Wachovians are to become Morgan Stanley heads of retail banking and CEO of the retail banking group, respectively.

While in obvious contrast to Goldman Sachs, Morgan Stanley's more aggressive move to build a consumer business calls into question just what it can ever hope to add in an already-consolidating market.

Note that Mack hired two executives from a bank that essentially failed, due to its retail-oriented mortgage banking strategy. And Morgan Stanley took its own licks from mortgage finance, too.

As a consumer, would you have much reason to suddenly drop your current bank and take new credit cards, a mortgage, and open checking accounts with the former investment bank?

New entrants in a product market typically offer some new or unique value proposition. Morgan Stanley's seems to be something like,

'Hi. We used to be a highly-leveraged investment bank-cum-hedge fund. But that didn't turn out so well.

Now, we've decided to try to be a commercial bank, because we might survive that way.

Won't you please do business with us?'

Hardly compelling, is it? Somehow, the former loss-making investment bank is hardly in a position to cross-sell it's asset management/high net worth business skills anymore.

Which brings me to the point I made in that prior, linked post,

"Either way, if Goldman and Morgan Stanley don't soon sell themselves to some decent-sized banks, or buy various consumer loan and deposit-taking operations, they will lose their independence as federally-chartered entities the harder way, in forced marriages arranged for them."

Growing its own consumer banking from scratch is unlikely to do much for Morgan Stanley. Eschewing the segment totally probably won't help Goldman Sachs, either. Right now, based on existing information, I'd say neither is in particularly good, long term shape.

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