Daily Management Review

Bankers At Goldman Sachs Could Encounter An Uncertain Q1 In 2019


The FICC may not find as much patience with Goldman if it fails to match its “cost of capital”.

The three months period between the “winter solstice in the northern hemisphere” and the spring equinox could be an uncertain time for the Goldman Sachs’ bankers causing trepidation.
The review of the said bank that began in October 2018 under the chief executive, David Solomon and Stephen Scherr, the chief financial officer, is at the root of the presiding worry, as in November, Scherr informed that the results of the review are to be disclosed in the spring of 2019. According to a senior banker at Goldman, the review is not a necessary one, as he was quoted saying:
“Trust me, this is just the same thing that happens every year. It's an annual exercise to make sure that those who are dragging down the return on equity are prepared for a bad bonus, irrespective of how well the firm performed. - And that they work harder next year.”
For him the review forms part of the bank’s “optimistically paranoid” approached, as he added:
“There's just more hype around it this year because of the new CEO”.
Scherr described the review as “coming to an assessment very clinically on whether that business is meeting its cost of capital”. Although, he did not mentioned clearly but there could be an “implicit threat” that the businesses that fails to match “their cost of capital” might get closed down in March 2019.
Even though, Goldman did not reply to any request for comments on the matter, one can guess that “fixed income currencies and commodities (FICC) professionals” hold a strong chance of standing in the line of direct fire. Even though, FICC recovered “its mojo in the first quarter of 2018”, following the horrifying 2017, the third quarter of the year turned weak once again. The former chief executive, Lloyd Blankfein and the former chief finance officer, Harvey Schwartz, shielded the “fixed income business”, while the latter assured of supporting FICC despite a poor year, as they recognised the “value of having a diversified set of global businesses” as well as the “value of being a leader in these businesses”.
However, four years’ down the lanes to the present times the scenarios have changed as Scherr and Solomon may not show equal patience to FICC franchise. According to Sarah Butcher of efinancial careers:
“Under Goldman's current strategic plan - set out by Schwartz in September 2017, the firm is pursuing an additional $1bn in FICC revenues by 2020. Scherr's November presentation suggests that the firm is less than a third of the way towards this goal and that FICC is further behind its target than any other GS division”.
However, Goldman has not shown any indication at the moment of sharing in the same scepticism, while in November, Scherr has stated that Goldman is monitoring “ahead of its targets for the business”. Explaining a chart “based upon Schwartz's presentation in September 2017 and Scherr's in 2018”, Butcher writes:
“Goldman has made no progress at all in increasing the share of its FICC business that comes from corporate clients. This - together with increasing interaction with asset management and banking/brokerage clients - was a key aim of Schwartz's strategy, which portrayed Goldman as over-reliant on fickle hedge fund clients who don't trade in difficult markets. By shifting the business towards corporate clients who trade no matter what, the hope was that revenues in Goldman's FICC franchise would become more stable. Instead, the share of business does with corporates has fallen”.