By Joseph Neu
Over the past 18 months, treasurers have no doubt heard countless statements from banks regarding how client-focused they are, have been, always were—unlike “some other banks” that favored trading for their own account—and therefore customers should allocate more post-crisis share of wallet their way to reward their client-centric way of doing business. The some-other-bank that is most often understood to be the target of these comments is Goldman Sachs. Little wonder then, that Goldman feels like it has had to respond to such competitor commentary, as it has done most publicly in the letter to shareholders accompanying its annual report released early this month.
A SOUND BANK IS BETTER
Goldman’s countermessage as expressed in the letter signed by Chairman and CEO Lloyd Blankfein and President and COO Gary Cohn is essentially this: “Maintaining a sound financial profile is vital to be effective in meeting the needs of clients.” While competitor banks can claim a higher proportion of revenue that is directly related to servicing client needs, Goldman’s position is that it wants to be in a position to service clients—even through extremely adverse market conditions—by proactively seeking to strengthen its financial position at all times.
Does this mean Goldman is looking to make a buck? Sure. But in the context of two-tailed risk management, seizing upside opportunities even as they run counter to the market or, arguably, the positions of clients serves as useful hedging of actual or potential loss positions that would also limit a bank’s ability to respond to client needs.
Surely, treasurers would rather have a bank that manages its risk well when it comes time to, say, rollover a long-dated FX forward, rather than see a bank stop them out on the day of execution due to less
active risk management.
Promoting the idea that greed is good in the current environment may seem out of touch to some, but Goldman’s performance through the crisis seems to validate its strategy. “In 2009,” as the letter to shareholders notes, “the firm generated net revenues of $45.17bn with net earnings of $13.39 bn.” By comparison, JP Morgan, another bank that withstood the crisis well, made some $12bn on $100bn in revenue (but with its investment bank accounting for $6.9bn of profits on revenue of $28.1bn).
Goldman’s crisis track record surely helps cement the idea that its people know what they are doing in terms of navigating financial markets. And this clearly helps its already stellar brand when it comes to strategic advice and related client services. But not if the notion takes hold that Goldman is taking advantage of the information it receives as a trusted advisor and leading market intermediary for its own account and in a manner detrimental to its clients. This is why Goldman has to move aggressively against claims that it puts its own interests first.
TRUST IN ALIGNED INTERESTS
Goldman’s problem, though larger given its success and reputation, is indicative of a broader bank problem: restoring confidence in the financial system generally and trust in each financial institution specifically. Indeed, a big part of the solution is establishing a renewed sense that the interests of market participants are aligned.
For bankers, this means taking more time to understand customer needs and their context, but also explaining how bank actions in response serve customers’ interests. If a bank partner plans to short your debt in response to a transaction, for example, it had better disclose this and walk through the reasoning. Your banker might also walk through various things that the bank might do in response to the transaction, even if the knowledge that it will or will not be done lies on the other side of a Chinese wall.
The extent to which a client finds a banker’s explanation of bank actions thorough and the reasons for them sound may well determine if that banker’s bank is considered a trusted and strategic relationship.
For treasurers, it is also important to note that this logic cuts both ways. If bank relationships are to be rebuilt on trust, then they too need to be more up-front about what they are doing, why, and what else might be done as a result. Realize, too, that a bank that seeks to make a buck like Goldman also serves treasury’s interests if it means that the bank is more likely to be there for them when it counts.