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Goldman Sachs Losing Edge in Fixed-Income Trading as Risk Falls
2010-10-31 23:00:07.1 GMT
By Michael J. Moore and Christine Harper
Nov. 1 (Bloomberg) -- Goldman Sachs Group Inc. is losing
its edge in fixed-income trading, the firm's biggest business
and the one that led to record earnings last year.
The company's share of fixed-income trading revenue at
eight of the largest U.S. and European banks slipped to 19
percent in the third quarter from a peak of 29 percent in the
last three months of 2009, according to data compiled by
Bloomberg. The gap between industry leader Goldman Sachs and its
nearest rival narrowed to $239 million in the quarter, the
smallest amount since confidence in credit markets collapsed.
Chief Executive Officer Lloyd C. Blankfein, 56, who once
ran the fixed-income unit, hasn't made any public statement
indicating concern that Goldman Sachs's dominance slipped as
client trading fell and the bank cut the risk it's taking while
competitors ramped up their efforts. The company benefited
during and immediately after the financial crisis by being in a
stronger position than rivals, said Roger Freeman, an analyst at
Barclays Capital in New York.
"They gained a ton of market share," Freeman said. "As
firms that made it got back on their feet over the course of
last year, the competitive environment picked up and that took
some of that advantage away."
Goldman Sachs generated $3.77 billion from trading bonds,
currencies, commodities, interest-rate products and credit
derivatives in the third quarter, the lowest amount since 2008.
That was $1.46 billion more than the average of the other seven
banks, the smallest lead since the second quarter of 2007.
Value-at-Risk
Fixed-income trading accounted for 52 percent of the New
York-based company's $45.2 billion in net revenue last year.
This year, it has comprised 51 percent. That compares with 25
percent at Morgan Stanley, 23 percent at Zurich-based Credit
Suisse Group AG and 13 percent at Bank of America Corp., the
largest U.S. bank by assets. Goldman Sachs's revenue for the
first nine months of the year was $30.5 billion, down 14 percent
from the same period in 2009.
The bank's value-at-risk, or VaR, a measure of how much it
could lose in the markets on a single day, slid to $121 million
in the third quarter, the lowest since 2006, falling 42 percent
from a year earlier. It reached record levels in the first half
of 2009, hitting $245 million in the second quarter.
VaR at Credit Suisse, whose CEO said he expects client
trading to pick up in coming quarters, climbed 31 percent to 118
million Swiss francs ($119.3 million) over the last 12 months.
It increased 4 percent to $142 million at New York-based Morgan
Stanley, which has hired about 400 people in its sales and
trading unit over the past 15 months.
'Intrusive Regulators'
"As they pull VaR down, their relative performance has
come in, and similarly as you pulled leverage down," Brad
Hintz, an analyst at Sanford C. Bernstein & Co. in New York said
of Goldman Sachs. "You have intrusive regulators who are all
over them. I'm not certain that it's in your best interest to be
taking risk up at this point."
David Viniar, 55, Goldman Sachs's chief financial officer,
told analysts on a conference call last month that the firm had
lowered its VaR because it didn't see opportunities to take risk
as client trading dropped.
"The world is still not a very safe place," he said.
Goldman Sachs's lead peaked in the fourth quarter of 2009,
when it had 45 percent more fixed-income trading revenue than
its closest competitor, New York-based JPMorgan Chase & Co.,
which remained profitable throughout the credit crisis.
Dwindling Lead
Since then, its advantage over the second-place bank and
over the average of the seven firms has dwindled in each of the
last three quarters. In the third quarter, the bank had a 6.8
percent advantage over its nearest competitor, Charlotte, North
Carolina-based Bank of America, which reported fixed-income
trading revenue of $3.53 billion.
The data include fixed-income revenue at Bank of America,
Citigroup Inc., Credit Suisse, Deutsche Bank AG, Goldman Sachs,
JPMorgan, Morgan Stanley and UBS AG. The Citigroup figures for
2008 and the first quarter of 2009 were those reported at the
time, before the New York-based bank, which took $45 billion in
government aid, restated its revenue after splitting its
operations into Citicorp and Citi Holdings.
Goldman Sachs's sales and trading division, which includes
the fixed-income unit, is run by David Heller, 43; Edward
Eisler, 41; Pablo Salame, 44; and Harvey Schwartz, 46. They have
led the group since February 2008.
Michael DuVally, a spokesman for the bank in New York,
declined to comment.
Proprietary Trading
Goldman Sachs shares fell 1.3 percent to $161.13 on Oct. 29
in New York Stock Exchange composite trading. The shares are
down 4.6 percent this year. That's a smaller drop than at five
of the competitors, while shares of Citigroup and UBS,
Switzerland's largest bank, are up. Goldman Sachs shares are
down 35 percent from their high of $247.92 in 2007.
New restrictions on how much of their own money banks can
trade may also be affecting the company's fixed-income revenue,
even though the rules haven't taken effect yet, some analysts
said. Goldman Sachs already shut down an equity proprietary-
trading group, Goldman Sachs Principal Strategies, to comply
with the Volcker rule that President Barack Obama signed into
law in July as part of the U.S. financial overhaul.
"They're trying to wind down their prop trading -- they
don't want their revenue to drop off a cliff the day they
suddenly wind it down," said Christopher Wheeler, an analyst at
Mediobanca SpA in London who has a "neutral" rating on Goldman
Sachs. "We've always known that they couldn't have the kind of
numbers they had purely on the strength of client business."
'Pretty Supportive'
Goldman Sachs's eroding market share coincides with the
firm's efforts to repair damage to its reputation stemming from
a Securities and Exchange Commission fraud lawsuit settled in
July. Goldman Sachs agreed to pay $550 million and acknowledged
it made a "mistake" in providing "incomplete information" in
marketing materials for a 2007 mortgage-linked security. The
bank's executives, including Blankfein and Viniar, were also
questioned by a Senate panel whose members criticized the
company for offering investments to clients even as its traders
were betting they would decline in value.
Goldman Sachs executives, including Viniar, have said most
of the company's clients have remained loyal.
"I would say by and large across the board our clients
were pretty supportive of us," Viniar told analysts on a July
20 conference call.
Better Position
Goldman Sachs's smaller market share reflects a strategy of
taking less risk and isn't a sign that its losing business to
competitors, said Sanford Bernstein's Hintz.
Even with a decline in market share, Goldman Sachs may be
in a better position than before the crisis. The bank's share of
fixed-income trading revenue among its competitors -- which, at
the time, included Bear Stearns Cos., Merrill Lynch & Co. and
Lehman Brothers Holdings Inc. -- was 15 percent in the first
quarter of 2007. It climbed to 29 percent in the fourth quarter
of 2009, after Lehman filed for bankruptcy and Bear Stearns and
Merrill were taken over by competitors.
"Their outperformance has declined, but my guess is there
still is a decent pickup in market share that's been
sustained," Freeman of Barclays Capital said.
For Related News and Information:
On bank earnings: TNI BNK ERN <GO>
Top finance news: FTOP <GO>
Writedowns and credit losses: WDCI <GO>
Day's best/worst financial stocks: S15FINL <Index> MRR1 <GO>
--Editors: Robert Friedman, David Scheer
To contact the reporters on this story:
Michael J. Moore in New York at +1-212-617-6919 or
mmoore55@bloomberg.net;
Christine Harper in New York at +1-212-617-5983 or
charper@bloomberg.net.
To contact the editor responsible for this story:
David Scheer at +1-212-617-2358 or
dscheer@bloomberg.net.
