In the wake of the 2008 financial crisis, the U.S. bank boldly snapped up bonds and other assets at distressed prices and the following year racked up $23 billion of trading gains - roughly equivalent to McDonald's Corp.'s annual revenue.
How things have changed. In 2017, Goldman's fixed-income division generated a comparatively minuscule $5.3 billion of revenue, down 30% from a year earlier. The performance was also worst-in-class among the largest U.S. banks, with JPMorgan Chase & Co. (JPM) , Bank of America Corp. (BAC) , Citigroup Inc. (C) and Morgan Stanley (MS) all posting smaller declines and stealing market share.
Making things worse, Goldman's stock-trading division, known as equities, is showing signs of deterioration. The unit's revenue slipped by 4.5% on the year, also more than peers experienced.
The hard comedown is making investors jittery and already taking its toll on shareholder returns. Not only has the underperformance stalled increases in Goldman's stock price, but the firm disclosed Wednesday that it will limit share buybacks - a key means of returning capital to shareholders - due to the paltry earnings. For full-year 2017, profit fell 42% to $4.29 billion, the lowest since 2011, and included a big charge in the fourth quarter tied to the U.S. tax law passed in December.
Now, CEO Lloyd Blankfein, who has run the firm mostly unchallenged for 12 years, is under increasing scrutiny as he tries to restore faith in the strength of the franchise. Dick Bove, a five-decade analyst now at Vertical Group, says the 64-year-old Blankfein already has overstayed his welcome and should be replaced.
"Goldman is no longer at the top of the trading heap, and that's a departure from where they've been over the past couple decades," said Mike Mayo, an analyst at Wells Fargo Securities. "The pressure is on management."
By all accounts 2017 was a lousy year for traders at U.S. banks. On average, the biggest Wall Street firms saw total fixed-income and stock trading revenue tumble by 7.7% from 2016 levels.
Bankers' explanation of the disappointing results mainly center on the unusually small price swings witnessed in markets, the result of the trillions of dollars of new money pumped into the global financial system by the Federal Reserve and other central banks since the financial crisis. Such low price volatility kept investors on the sidelines and left few opportunities for traders at banks to score gains on daily market moves.
Yet Goldman's total trading revenue was down 18% on the year, more than double the average decline. On Wednesday, after the firm reported its fourth-quarter and full-year results, the shares tumbled 2.7% to $251.52.
Goldman CFO Marty Chavez said on a conference call Wednesday that the underperformance was partly explained by the firm's heavy presence in commodities trading, which faced a "challenging operating environment."
The business had such a rough start to the year that the company had to make "risk mitigation efforts" to improve performance in the fourth quarter. More than a third of the decline in total fixed-income trading revenue was attributable to commodities, Chavez said, which faced "inventory challenges" - typically shorthand for money-losing trading positions.
But trading in government bonds, corporate bonds and currencies also had "significantly" worse results, he said. In the fourth quarter, fixed-income trading revenue tumbled by 50%. By contrast, JPMorgan, the next-worst performer, posted a decline in that business of just 34%.
"Following a 50% decline in fixed income and macro trading products, we believe 2018 is uncertain," said Ken Leon, an analyst at the research firm CFRA.
Goldman's drop in equities revenue was partly explained by the firm's exit late last year from the business of trading options on exchanges, according to Chavez.
It was "clearly not a strong quarter," the CFO said on the call. "However, quarterly performance will fluctuate."
Neither Blankfein nor Chavez were available for interviews on Wednesday, according to a spokeswoman.
Last year, Goldman won permission from federal banking regulators to proceed with some $8.7 billion in stock buybacks, Reuters reported in October. Companies use such buybacks to reduce the number of shares outstanding, and thus to boost earnings per share. But Chavez disclosed on the call that the firm "in the medium term" would probably buy back stock at pace of just $5 billion to $6 billion a year, down from $6.7 billion in 2017.
In September, Goldman executives announced a plan to boost firmwide revenue by $5 billion in three years, partly by making more loans to corporations, while also winning more of the companies' trading and hedging business.
Goldman still has a best-in-class investment-banking franchise, with executives who regularly globe-trot to sell CEOs on big mergers and initial public offerings. Theoretically those relationships should be strong enough to win more mandates for the trading business.
But it's not that simple. Getting the investment bankers who get big bonuses for arranging industry-transforming deals might find it awkward broaching a conversation about the corporate treasurer using Goldman to trade government bonds or hedge, Mayo said.
And Chavez acknowledged that company CEOs aren't always the ones making the decisions on smaller transactions.
"The different parts of our corporate clients are accountable for different parts of the business," Chavez said. "It can go all the way from CFO to treasurer to assistant treasurer, or sometimes it's on the procurement side."
The firm's push is starting to pay off with new mandates arising from the deeper integration between the traders and investment bankers, Chavez said. And on a brighter note, he said, trading markets so far in 2018 are showing signs of picking up - at least compared with last year's tepid environment.
Goldman's senior executives have set up "extensive dashboards" to track progress on the firm's three-year transformation plan, Chavez said. The firm recently held internal discussions with global managing directors - top business leaders -- where it was emphasized that "we're holding them accountable," according to the CFO.
"Accountability matrices everywhere," he quipped.
A key indicator will be whether Goldman recovers a market-leading position once the trading environment improves. In the meantime, according to Mayo, investors are starting to build their own accountability matrix on Blankfein.
"The heat is on," Mayo said. "It's up to Lloyd Blankfein to make sure they're breaking down artificial barriers to complete the task at hand."
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