Is Goldman Sachs All Washed Up?


Goldman Sachs (NYS: GS) has been really been getting kicked around lately, as setbacks outnumber victories at the venerable investment bank.

The recent news that the Department of Justice and Securities and Exchange Commission dropped investigations of the bank for crisis-era shenanigans almost pales against the plethora of lawsuits being filed against Goldman on an almost daily basis. Add to that the fact that the company is bleeding talent, and that Q2 results were less than stellar, and you may start to wonder whether Goldman Sachs' days at the top are over.

Analyst downgrades and lawsuits
Goldman is suffering from a lack of investment-banking business, affecting its bottom line and spurring analyst downgrades. Egan Jones last month noted the bank's significant decrease in year-over-year revenues, and JPMorgan Chase (NYS: JPM) cut Goldman to the quick, placing it last among the world's investment banks -- while upgrading rival Morgan Stanley (NYS: MS) .

Meanwhile, lawsuits alleging securities fraud are piling up. Last week, a German bank filed suit against Goldman and Citigroup (NYS: C) for misrepresenting $73 million in securities they sold the German lender. Before that, another German bank sued Goldman, alleging the same problem with its own purchase of $512 million in securities, while HSH Nordbank also filed against Morgan Stanley and Goldman for the same type of behavior. In addition, a class action lawsuit that had been dismissed two years ago against Goldman was recently brought back to life in New York.

Goldman is suffering in another way, too: The bank has been hemorrhaging executives for more than a year. A list compiled by Financial News shows that at least 63 partners had left or were planning to leave the company as of this past April of this year. This list surely includes ex-global bank loan trading and distressed investment boss Buck Ratchford -- currently in talks with Reservoir Capital about funding to start his very own hedge fund. In addition, traders have been leaving the company, lured away by companies that aren't subject to regulations that require bonus and salary caps.

Misery loves company
Things certainly aren't rosy for Goldman right now, but I wouldn't count it out just yet. Even as JPMorgan slammed the bank in its ratings, it also noted the gains Goldman has made in risk management, setting it apart from its peers. Investors obviously ignored the analyst price target of $107, and the stock closed at a little over $116 last Friday.

All the big banks are suffering from a lack of investment and M&A work, and Goldman is no exception. Neither is Morgan Stanley, whose Q2 report was depressing, too. While Goldman's year-over-year drop in investment-banking revenues was reported as 14%, Morgan Stanley saw a revenue decrease of 37% in its securities division. And, sure, Goldman is drowning in lawsuits these days, but tallying up all the court actions against JPMorgan, for example, can be downright dizzying.

A change of attitude, and direction
Goldman is cognizant of its problems and is working toward turning the tide. Last month, the bank announced plans to expand its private-banking business, which caters to wealthy clients all around the globe. It took some time for the bank to see the wisdom in this change, but it has now decided that what has worked for JPMorgan and Bank of America can also work for Goldman.

With investment and acquisitions business stalled in the U.S. and Europe, Goldman is looking to renew its private-equity experiment in Brazil. Despite two earlier investment failures back in 2007, Goldman execs are certain that this time, their efforts will reap returns up to 35%. Instead of focusing on sugar cane and airlines, the bank will be putting money into infrastructure upgrades, as Brazil looks forward to hosting the World Cup in 2014 and the Olympics two years later.

Recently, bank managers met with Jeffery Harte of Sandler O'Neill and expressed their belief that Goldman can return to a ROE rate of 20% once the economy turns around. But that sounds rather lofty, considering the 5% the bank has been returning as of late.

Can the bank pull it off? In time, perhaps. Goldman execs have mentioned this higher figure before, and there's still no word on when this prediction can be expected to materialize. But the bank, as most tellingly illustrated by its move into high-net-worth retail banking, seems to be coming to terms with the fact that the good old days are gone, and that a return to the fundamentals of retail banking -- even if it means developing a concierge-style bank for well-heeled clients -- is integral to a return to profitability.

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