Catching up with Goldman Sachs Group Inc. is a traditional Wall Street pursuit. It’s also often futile—and dangerous to one’s career. Just ask ousted executives such as former Merrill Lynch and Co. Inc. boss Stan O’Neal or Morgan Stanley’s old second in command Zoe Cruz, who both benchmarked performance to their more successful rival. But yet another decent quarter leaves Goldman looking even further ahead than ever.
It’s now the only major investment bank that hasn’t stumbled badly in the credit crisis. Goldman still took some hits—almost $800 million (Rs3,432 crore) on leveraged loans, much of that as hedges failed. But its $2.1 billion of second-quarter income beat analysts’ expectations by a third (at $4.58 a share, its earnings beat consensus estimates by 34%) even as it sold off some $100 billion of assets—almost as much as Lehman Brothers Holdings Inc. offloaded.
Goldman’s model is pretty simple: run a set of businesses broad enough to cover pain in individual areas—something Lehman, for one, isn’t yet doing—and avoid losses as much as possible.
Yet rivals seem to have a tough job emulating it. That’s in part because in chasing Goldman’s earnings, they often throw caution to the wind. Merrill and Citigroup Inc. let their mortgage businesses get too big without hedging the risks, while Morgan Stanley got too greedy on a mortgage-related trade.
Others’ recent woes make Goldman look even more alluring than before. Shareholders must feel more comfortable owning the firm’s stock over its rivals’. And clients may be even more willing to entrust the firm with their business, as the choice they aren’t going to be blamed for. Other financial institutions are certainly doing so: selling banks’ rights issues helped Goldman’s equity underwriting revenue last quarter to quadruple.
Still, Goldman’s invincible aura could suffer from one poor quarter—and its relative strength so far means it hasn’t had to disclose as much about risky parts of its business as others have.
Meanwhile the company’s earnings, like others’, will be crimped if regulators force investment banks to carry more capital and hold leverage down. What’s more, clients hate a monopoly, so they will always spread business round. For now, though keeping up with Goldman just became even harder for its rivals.