Persistent rumours — and some more hard evidence – of deepening difficulties at Goldman Sachs are fuelling debate over whether the investment bank will attempt another fund raising ahead of its fourth quarter results next month. The shares hit a five-year low, down 8.5 per cent to $71.21, on Monday after analysts at Barclays became the latest to forecast a Q4 loss for Goldman, citing in part its exposure to private equity. They were already diluted just six weeks ago by an offering that coincided with a sale of a convertible preferred stake to Warren Buffett, as John Carney notes on Clusterstock.
Now, we hear in Tokyo that Goldman executives recently approached Nippon Life, one of Japan’s biggest institutional investors, and separately, Mizuho Bank, about whether they would invest in the bank. Mizuho apparently went as far as taking a (half-hearted) look at Goldman’s books but quickly lost interest. Nippon Life didn’t call back, we gather.
Those approaches came after Goldman in September held talks with Sumitomo Mitsui Financial Group about a possible investment – another attempt that has so far gone nowhere. That was the month that CEO Lloyd Blankfein called Vikram Pandit, his Citigroup counterpart, to discuss his proposal of a merger. As the FT reported, “the conversation was brief as Mr Pandit rejected the proposal at once”.
Blankfein made the call shortly after Goldman – and Morgan Stanley – won the Fed’s (expedited) approval to convert themselves from investment banks into bank holding companies. Goldman executives “were not fully convinced of the merits of a deal with Citi”, notes the FT, “but felt there was little downside in placing a call”. If that was the sentiment behind such a radical proposal, no wonder there was little drama about hitting up the Japanese for capital injections – afterall, Morgan Stanley did it, though successfully.
As Carney notes, the secondary offering rumours are, of course, totally unconfirmed. CNBC’s David Faber said Monday morning that he doesn’t believe that Goldman has plans for a secondary. But Barclays cut to estimates on Goldman can’t be helping either.
Just six weeks ago, shortly after reporting a 70 per cent annual drop in Q3 profits, Goldman surprised investors by announcing it had sold $5 billion of expensive convertible preferred to Warren Buffet. The firm also increased a common stock offering Wednesday to $5 billion at $123 a share, an increase from the original $2.5 billion offering announced earlier. Those new shares are now deeply underwater.
Goldman recently received an additional $10bn from the Treasury Department’s capital purchase program, handing over another tranche of preferred stock. Goldman’s market cap is just $8 billion more than the total amount of new money it has taken in since September.
Among steps it is taking as it adjusts to its new persona, after converting from being a broker-dealer to a bank holding company, is a move to cut back the number of its hedge fund clients. While Goldman traditionally reviews its client list every year to winnow out, in the FT’s words, “the least profitable and leverage-dependent relationships,” this year, for the first time, according to the head of a prime brokerage at one competitor, “a flurry of clients are telling us Goldman has asked them to move off their platform”.
This may have more to do with the changing of hedge fund circumstances and market conditions than with Goldmans, some say, and a Goldman spokesman recently insisted the bank “doesn’t anticipate any impact on [its] prime brokerage business as a result of becoming a bank holding company”.
In Tokyo, for example, Goldman is bleeding prime brokerage clients. Worldwide, Goldman’s shrinking prime brokerage is adding to consolidation in the business of catering to the needs of hedge funds.
Then there are Goldman’s plans, confirmed last week, to cut 10 per cent of its workforce. Reuters reports Tuesday that the axe has already begun falling in Tokyo, where the bank laid off 10 per cent of its investment bankers including 10 from its mergers and capital markets teams — including one of Japan’s top women bankers, Naomi Matsuoka, who led the equity capital markets team.
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