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Paul Gambles

Recognized as a regional financial expert, Paul is a regular speaker at industry events on market forecasting, financial planning, investing and legal issues for foreigners living or doing business in Asia.  Besides Paul’s blog, Paul previously distributed his ‘almost-daily’ email – “Daily Updates”, where he gave his views on timely issues affecting financial markets, macro economics, micro economics and everything in-between.

Born in South Yorkshire, England, Paul graduated from the University of Warwick with an Honours degree in English and European Studies.  He began his financial career in the early 1980s as a technical inspector at HMIT with Inland Revenue.  Following a successful career change to the Bank of Scotland in 1987, Paul moved to Bangkok in 1994 to help set-up an investment counseling practice, which today is known as MBMG International.

www.mbmg-international.com

  

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Understanding Goldman Sachs

16 November 2009

A day after claiming God was on its side, Goldman Sachs CEO, Lloyd Blankfein, gave another baffling defense of his firm's practices, telling a banking conference that over the years, "we have pretty much stuck to our investment-banking knitting."  He was defending the trading business, making the point that Goldman is focused on the investment side, which was fundamentally where the company’s strengths were built and remained.  Like most defenses of the megabank culture, this would be a good argument...if it were true.

Let’s take a look at Goldman's recent quarterly results to get the truth:

Segment                                              Q3 2009 Revenue
Investment Banking                                 $899 million

Trading and Principal Investments         $10 billion

Asset Management                                   $1.4 billion

If you're wondering how investment banking – proud contributor of 7% of revenue – qualifies as Goldman's "knitting," while trading, where 81% of revenue is derived, doesn't even get a mention?

To compare, here’s what the same units looked like at Goldman in 1998:

Segment                                              Q3 1998 Revenue
Investment Banking                                 $3.4 billion

Trading and Principal Investments        $2.4 billion

Asset Management                                  $2.8 billion

In 1998, 40% of revenue came from investment banking and now it’s only 7%...wouldn’t call that “sticking to investment-banking knitting”.  Annualized out, investment banking revenue has stayed fairly flat over the past 11 years, while trading and principal investments revenue has grown seventeen-fold.

Investment banking in the past was basically a consulting business, very boring with much lower margins.  Today it’s all about trading and risk taking, preferably while backstopped by taxpayers. That's where the real money is.

Goldman Sachs isn’t the only mega-bank abusing the situation – Morgan Stanley, JPMorgan Chase, Bank of America and Citigroup all rely on trading operations to either rake it in or cover up loan losses.

This situation is heating up and fierce national debate is about to begin over what to do about this "too big to fail” situation.  I’m sure the banks above will be quick to tell you that status quo is cool and no changes are necessary.

First of all, let’s call a spade a spade, most of these aren’t even banks – or at least that’s a small percentage of what they really do. They're trading companies  – backed by the US taxpayers, which ensures that Goldman can give bonuses this year that average more than $500,000 per employee.

This issue is just heating up, but sure to get much hotter before it’s done.