Goldman Sachs Group faces a grim milestone. The Wall Street firm needs to fall only a further 10% to get back to the closing share price on its first day of trading as a public company in 1999.
That is perfectly feasible, given how the firm’s stock has underperformed even during recent market rallies — despite Goldman being strengthened by a government guarantee on debt issuances and around $20 billion of new capital.
As Goldman probably heads for its first quarterly loss as a public company, investors appear more worried about the bank’s ability to make a decent return on its capital than liquidity fears. It now trades 10% below its tangible net worth, including recent capital raisings.
If Goldman believes the pessimism will pass, it may decide to soldier on with its new hoard of capital as an independent firm. Indeed, it still trades at a far richer multiple than rival Morgan Stanley, which trades at 54% of tangible book.
But the risk is that the business environment gets even worse and the share price falls still further. Just as Goldman might advise clients, it also needs to consider more radical options.
What might they be?
One idea being floated is to take the firm private. While that has a certain symmetry, given the share-price performance, it would be almost impossible because of the difficulty in funding a buyout and the ongoing business in today’s environment.
Another option would be a breakup, separating the highly regarded advisory business from more volatile trading operations and hedge-fund businesses. However, unlike two years ago, such businesses hardly command attractive valuations. And there would be no easy or cheap way to support the ‘black box’ trading operations once they were split off.
The final option is a merger or big strategic partnership.
Buying a bank might help Goldman acquire deposits to provide more stable funding. The trouble is, most banks nowadays also come with a dodgy loan book. And, given the size of Goldman’s balance sheet, it would need a lot of deposits to make a difference. If it wanted to fund, say, 40% of its $363 billion of financial assets that aren’t in collateralized arrangements, it would need more than $140 billion of deposits.
A merger with a big securities business, like State Street, meanwhile, might add stability. But its superior valuation multiple to Goldman would make it tough to do.
That leaves Goldman putting itself up for sale. Again, there are few banks with the stomach and cash to pay $30 billion or more for Goldman right now. At a lower price they may bite. But, they would need to be pretty sure that they wouldn’t destroy Goldman’s powerful culture.
For now Goldman is likely to try soldiering on alone. But the firm needs to map out plan B.
Peter Eavis / Liam Denning