Rival bankers, often filled with a certain amount of envy, often describe Goldman as a prop shop, affecting admiration at its ability to continue taking principal risk, regardless of regulatory disapproval.
Management has taken note. The second quarter earnings call featured the familiar homilies about client focus and service, and not much on big directional punts or strategic investments.
But the “prop shop” reputation isn’t a secret, it’s right there in Goldman’s numbers. The firm breaks out its principal activities as “investing and lending”, a division which delivered $1.94bn of revenues last quarter, more than the bank’s traditional debt, currency and commodity market-making.
Investing and lending takes in the firm’s special situations group, its merchant banking arm, and other funds raised by the group. Notable successes include the recent sale of syndicate software provider Ipreo to IHS Markit, for a punchy $1.85bn.
This isn’t incidental to Goldman’s success, it’s right at the heart. CFO Marty Chavez said on this quarter’s earnings call that it was “franchise-adjacent”, and that the firm’s investment banking division would “participate in the harvesting” of revenues associated with the investing and lending business.
Goldman’s investment bankers win plenty of business in their own right but the principal finance arm means more dealflow, better market intelligence, and more angles for extracting revenue.
And there’s nothing necessarily wrong with that. Sometimes, taking a view is the right thing for a bank to do. Goldman’s competitors, however, shut or shrank these business lines long ago, meaning this particular squid will still be served in its special sauce under Solomon.