Heavy mettle: The complex regulatory landscape transforming investment banking is a burden for any firm. Navigating it while dealing with reputational issues and serial investigations – and remaining focused on clients at the same time – is more difficult still. For doing all this successfully, and sticking it out to win substantial gains in market share despite tough economic headwinds, Goldman Sachs is IFR’s Bank of the Year.
Who’d be a bank chief these days? Lloyd Blankfein, chairman and chief executive of Goldman Sachs, has certainly been through the mill since the global financial crisis erupted. More than any other bank, Goldman has been a lightning rod for dissatisfaction with the banking industry. It has been unjustly cast as the embodiment of all that is wrong with bankers and their surrounding culture.
There have been years of personal vilification, criminal and regulatory investigations, intense political scrutiny and screeching public opprobrium.
Against that background, Blankfein refuses to get carried away with his bank’s huge market-share gains in advisory and financing in 2013.
“Given the context and the legacy issues we’re working through, it’s hard for me to thump my chest over anything other than maintaining focus where other people have found it hard to maintain focus,” he told IFR. “The only thing that’s close to a brag is that we had more reason than others to lose focus – and we didn’t.”
Since the industry has not exactly covered itself in glory of late, Blankfein believes that doing well now may be more about being stable when others are not; being confident about the model when others lack that confidence; persevering, running faster and jumping higher.
He says his goal is not to get Goldman back to where it was.
“Can we make mistakes? Of course. But I can promise you that the process and the judgement that is applied to our decision-making is more rigorous today”
“It’s about trying to get us to a better place – about demonstrating that the business model and client relationships are resilient, and the contract with employees that keeps them loyal is there.”
While the relentless scrutiny that shadows Goldman may have strayed slightly in pursuit of other targets, it’s never far away.
“If we even foot-fault, that focus will return with renewed vigour because there’s very low tolerance,” Blankfein said.
Being seen as a target of vitriol and suspicion so quickly after the financial crisis kicked in helped Goldman to turn adversity into virtue. Being forced to deal with problems early on – legacy issues, reputational troubles, and changes in the external operating environment – paid dividends in 2013.
“We didn’t volunteer [for the scrutiny] but we’ve tried to use it in the most constructive way possible, and we’ve channelled a lot of energy into self-examination,” Blankfein said.
“That was cathartic in itself, but it also resulted in real actions and real protocols. It doesn’t guarantee we won’t have problems in the future, but it certainly sharpens the senses.”
Call to action
Those actions were indeed real. The Business Standards Committee’s impact report unveiled in May 2013 was the culmination of more than two years of endeavour following the release of the BSC’s original report in January 2011 which itself was the result of eight months of work. Goldman reported that all 39 BSC recommendations – which broadly covered clients, reputational sensitivity and awareness, and accountability – had been fully implemented by February 2013.
The firm said the initiative was the result of tens of thousands of hours of discussion,analysis, planning, execution and a 100,000 hours of training and professional development. Under the umbrella of the Chairman’s Forum, 92 three-hour leadership development sessions were convened for MDs and VPs across 20 cities around the world. Blankfein led every one of the 23 sessions for MDs.
The recommendations were not intended to alter the DNA of the bank, which remains essentially unchanged. The culture that glues the firm together has evolved to meet the challenges. But some things have changed radically.
“People used to think process was the enemy of innovation and initiative, a synonym for bureaucracy. But it turns out it’s not. Process is no substitute for human judgement, but it makes sure that the people with the best judgement are overseeing the most important and consequential decisions,” Blankfein said.
“Can we make mistakes? Of course. But I can promise you that the process and the judgement that is applied to our decision-making is more rigorous today.”
Senior Goldman people refer to the firm as a mark-to-market institution – one, in other words, that deals with the world as it is rather than how it would like the world to be. And in that respect, the glittering successes of 2013 go way beyond the numbers.
“Our success didn’t derive from anything we did per se in the past year, but our prior actions certainly accrued to us in 2013,” Blankfein said. “We instilled discipline with respect to cost structure, and we right-sized our businesses. Not radically, but early enough that we didn’t have to be driven by the results but by our sense of strategy and where things were going to come out.”
In practical terms, that means that while Goldman’s peers and competitors are still in anguish over whether to be in certain businesses or to switch strategies, Goldman has got through its period of deep introspection.
“We like our strategy, so are focusing hard on doing things efficiently. We’re not going into new activities or getting out of old activities. That’s not from a lack of intensity in consideration. But we’re not exhausting ourselves on a deep strategic rethink. We know where we want to be and we’re very focused on executing, executing, executing,” Blankfein said.
Results, results, results
Looking at the firm’s business performance in 2013, that is plain to see. Goldman’s achievements in the investment bank are truly impressive: an industry-busting 39.5% share of US M&A and 36% of European M&A in the IFR Awards year; a number one position in global ECM on the same basis, unchanged from 2012 but with a hugely increased year-on-year market share (11.3% from 8.4%); and from sixth to first in US ECM, with an incredible market-share increase of 4.7 percentage points to 15%.
Goldman won a clean sweep of all of IFR’s ECM awards (Global, US, EMEA and Asia-Pacific) in 2013, as well as Americas Structured Equity House. Detailed accounts of those achievements can be found in the relevant articles in this Review of the Year.
“It’s not news to anybody that we place great emphasis on our equity product,” said Stephen Scherr, global head of the financing group. “In 2013 the sheer volume of equity activity was stunning, and our capture of it was impressive.”
David Solomon, co-head of Goldman’s investment banking division, feels equally good about the advisory achievements. The firm advised on a lot of the year’s largest, most significant and complex transactions across the trade and private equity arenas.
“We feel good about having grown our M&A market share. I point to the Verizon deal in particular because it’s reflective of what it means to have an M&A franchise. This is a transaction that the team that worked on it started some 13 years ago. The team has been relatively consistent through that period, so there are people who have been involved with this the whole time,” he said.
“But this is what we do,” he said. “We build long-term relationships, we build trust and confidence. So when big companies do things, you’re in a position to drive the advisory process and be compensated for years of work and relationship-building. That continues to be the core thought process behind our advisory franchise: intellectual capital, long-term relationships and patience. In 2013 it was nice to see clients respond when they moved forward with something and put us in the middle of it.”
Solomon’s comments are echoed by Richard Gnodde, the other IBD co-head: “We drive our advisory franchise by having the best people with the best ideas positioned to give the best advice. That’s how we’ve secured our market position. Our market shares have gone up this year in the face of that. We believe in the strategy: giving clients the best advice with the most creativity.”
Goldman’s financing and advisory businesses are highly integrated, and the former feeds off the broader strategic relationship footprint. “A lot of the financing we’ve done has been challenging project-oriented work involving deep and engaged teams working with more than just the treasury department of companies to look at the way in which capital is structured,” said Scherr. “This lies at the core of corporate finance – and as a consequence is at the core of what Goldman Sachs historically has done well.”
Take the work Goldman did for JC Penney. As well as a gutsy US$810.6m equity risk-trade, Goldman led a covenant-lite US$2.25bn Term Loan B for the struggling Triple C rated company that refinanced outstanding notes and added incremental liquidity. The loan was secured by US$4bn of assets (including real estate) and a second-lien claim to collateral under an existing asset-based lending revolving credit facility. The assignments showed that Goldman was focused on how best to finance the company during a period of distress.
“Establishing a mark of confidence in the market on their behalf was critically important,” said James Esposito, head of the EMEA financing group.
If the work Goldman did with JC Penney is an example of how the capital markets business is intertwined with the advisory business, its work with Apple is another.
Goldman’s engagement helped forge the second-largest bond of all time – a US$17bn six-part trade. “That deal didn’t come from a flow DCM dialogue; it came from a very in-depth corporate finance and advisory dialogue that we built up over years,” Esposito said.
Scherr and Esposito also cite assignments for Alcatel-Lucent (US$2.64bn secured term loan with an innovative security package, including the company’s extensive patent portfolio) ArcelorMittal (net-debt reduction and balance-sheet derisking via a US$4bn dual-tranche equity sale and mandatory convert) and Valeant Pharmaceuticals (committing 100% of the US$9.275bn financing backing the acquisition of Bausch & Lomb in a multi-tranche bank/bond financing that included the second-biggest high-yield deal since the financial crisis).
“These were transactions that were born of distressed situations or very big consequential corporate finance undertakings that were a big departure from ‘where’s my 10-year print relevant to my curve?’. They were thought-provoking strategic transactions,” Esposito said. “Either through innovation in the case of Alcatel-Lucent, or by using our balance sheet in the case of JC Penney, we identified situations that weren’t always obvious to the broader market.”
Debt goes strategic
Among so many achievements in 2013, it’s perhaps the performance of the investment-grade debt and leveraged finance businesses with which Goldman should feel most satisfied. Capitalising on the symbiotic relationship between advisory and financing – and the returns on judicious investments made in previous years – Goldman rose through the ranks to a highly creditable fifth place in global DCM in the IFR Awards year. This was up from eighth place over the previous year, with easily the biggest market-share gain of the leading firms.
Speaking to the international build-out, Goldman appreciably outperformed US peers in euro investment-grade DCM during the IFR Awards year, rising up the rankings at the time when all other major US banks saw their market positions stagnate or decline. The firm was active in all of the key DCM segments in 2013: mega-deals; debt IPOs; US and EMEA bank and corporate hybrids; non-domestic issuance in US dollars and euros; cross-currency solutions; and local currency trades. Goldman Sachs won IFR’s 2013 US Dollar Bond House and SSAR Bond House awards (see separate articles for full details) and was in close contention for others.
Its success was also down to changes in the external environment that have increasingly driven financing out of the treasurer’s office and down the corridor to the CFO or CEO.
“As liquidity and financing have become strategic, they’ve fallen into the heart of what Goldman Sachs does in terms of our engagement with companies of a strategic order,” said Scherr.
Gains have been made in Europe and Asia, where the investments began to pay off and Goldman picked up a greater share of non-US dollar underwriting.
DCM had been less of a core focus in Europe when credit was in essence provided by banks for free or at a subsidised price. But around the time of the global credit crisis, the team sensed that European banks needed to materially delever, and that as the process played out, credit would ultimately be repriced – and European capital markets would start to look and feel more like those in the US.
“We saw opportunity there,” Esposito said. “I think it’s noteworthy that as other banks were retrenching in Europe, we were investing. Our patient build-out is now paying off.”
Fixing the plumbing
Goldman’s FICC business generated some chatter in 2013, particularly after it underperformed its peer group in the third quarter. But Blankfein and Pablo Salame, global co-head of the firm’s securities division, dismiss the notion that anything is amiss. “Sure, we asked why did we zig when others zagged. But the answer is we had an unaccustomed sucky quarter in fixed income compared to the guys who did the best,” Blankfein said, referring to the thrid quarter.
Salame noted that 2013 has been a year of regulatory implementation in FICC.
“We’re spending a lot of time making sure the implementation of changes to the plumbing is done appropriately,” he said. “Whether that’s reporting requirements or getting clients to sign protocols, the fixed-income part of the business has an extraordinary amount of activity going on underneath it that you won’t see reflected in revenue today, because what you are seeing is a change in market structure,” Salame said.
“Over time the benefits of people having spent all that time working on the plumbing will emerge. We’ll reach a steady state and our flow of dialogue will be around execution.”
At that point, Goldman’s highly integrated equity and FICC trading business will give the firm an edge as the conflation of agency and principal channels gathers pace.
To see the full digital edition of the IFR Review of the Year, please click here.
To purchase printed copies or a PDF of this report, please email firstname.lastname@example.org