Richard X. Bove, Vice President Equity Research at Rafferty Capital Markets, highlights the compensation packages of Goldman Sachs Group Inc (GS)’s CEO and COO, and discusses what happened to the bank in the past decade.
Goldman Sachs Group Inc (GS) – The Lost Decade
The stock price on December 29, 2006 closed at $199.35 per share. The S&P 500 closed at 1418.30. From that date to last Friday, the price of Goldman Sachs has declined 19.6% while the S&P 500 gained by 47.5%.
Goldman underperformed the “market” in this period by 67.1%. Based on its basic shares outstanding at the end of 2006 (449 million) and those outstanding at the end of 2015 (still 449 million, 441 million at present), the company’s market capitalization fell by $14.6 billion.
The company ended 2006 with $838 billion in assets. It ended 2015 with $856 billion. Common equity was $32.7 billion yearend 2006 and $71.4 billion yearend 2015.
Revenues in 2006 were $37.3 billion. In 2015 they were $33.8 billion. Pretax income in 2006 was $14.6 billion. In 2015, it was $8.8 billion.
Every dollar of common equity generated $1.14 in revenues in 2006 and $0.45 in pretax earnings. In 2015, a dollar of common equity generated $0.47 in revenue and $0.12 in pretax income.
Stated differently, Goldman Sachs increased its common equity by $38.7 billion from 2006 to 2015. Pretax income decreased by $5.8 billion. Thus every new dollar in common equity bought a $0.15 reduction in pretax earnings.
It should be noted that 2006 was not the company’s peak earnings year. The following year, 2007 was. Comparisons with that year are much weaker than those with 2006. From 2007 to 2015, investment banking activity is down by 7.0%. Estimated trading results (accounting has changed) are down by 37.7%.
It is not difficult to understand what happened to Goldman Sachs in the past decade. The industry it services was dramatically restructured. The company was not. Apparently, management viewed its mandate to be to restructure its business to conform to the new demands of the new financial industry. It did a superb job in this regard.
What management did not fathom was the better approach would have been a transformational change so that capital could be used in a more productive fashion than supporting businesses that were declining on a secular basis.
Goldman argues that it does not manage the company a quarter at a time. It manages for long periods. A decade is a long period. The company needs to rethink its strategy and consider transformational changes in every aspect of its operations.