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Wall Street Revamp Will Eventually Benefit Goldman

Stocks in this article: GS MS JPM BAC C

NEW YORK ( TheStreet) -- Goldman Sachs (GS) is uniquely positioned to benefit from the post-crisis retooling of the investment banking industry and recent underperformance is unlikely to last.

Goldman shares lost 0.82% last week, while Morgan Stanley (MS ) shares rose 6.23% and JPMorgan Chase (JPM), Citigroup (C) and Back of America (BAC) each gained more than 3%.

While Goldman third-quarter earnings beat expectations, the bank was "disappointing on nearly every major revenue item," according to Sanford Bernstein analyst Brad Hintz.

Still, Hintz expects the company to rebound and continues to recommend Goldman shares.

"Goldman's management team is in the process of significantly reengineering trading by optimizing the balance sheet, triaging underperforming activities, and cutting costs," Hintz writes. "The firm is constraining balance sheet usage in anticipation of new regulation, while attempting to increase the turnover of its trading assets. The composition of assets is also changing, as the firm emphasizes less capital intense government securities inventory, and deemphasizes more capital intensive corporate bond and mortgage backed securities inventories. Credit correlation and mortgage securitization units are being scaled back, with the expectation that these steps will reduce risk-weighted assets by roughly 17% over the next three years."

What this boils down to is that Goldman is figuring a way around sweeping new regulations aimed at reducing risk-taking at what are deemed "too big to fail" institutions. Over time, however, Goldman will find new ways to take risk. What's more, regulators are likely to be more forgiving of risk-taking at Goldman than they are at institutions like Bank of America, JPMorgan and Citigroup, which fund their risk-taking with retail deposits.

There was a time, shortly after the crisis, when Goldman had a target on its back. They were the company regulators were determined to nail. That target has clearly shifted to JPMorgan, which lately can't seem to go a week without forking over another multi-billion dollar settlement.

JPMorgan is trying to get out of the way. It has already said, for example, it will exit the physical commodities business, while Goldman continues to quietly resist taking that step.

Morgan Stanley, meanwhile, is significantly cutting back on risk-taking as it focuses more on brokerage and wealth management businesses. Other former rivals, like Salomon Brothers, Merrill Lynch, Lehman Brothers and Bear Stearns, have disappeared or seen their cultures severely diluted as the result of mergers.

Goldman is, in some respects, all that remains of Wall Street. Wall Street isn't going out of business, it's just going into hiding. When it resurfaces, in whatever new form it takes, Goldman will still be on top.

-- Written by Dan Freed in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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