Goldman Sachs's Parts are Worth More than the Whole

One way that has been suggested to make Goldman Sachs less risky but still profitable is to break up the bank into various units. Each part would be viable but the risk for the whole would markedly decrease. So Rob Cox says--

Goldman Sachs should consider its own breakup
By Rob Cox - Reuters Breakingviews

Goldman Sachs has often helped chief executives boost their companies’ shares by breaking them into pieces. The U.S. bank run by Lloyd Blankfein is currently advising Kraft Foods on its split and counseling McGraw-Hill on whether it should do the same. So it’s logical that some inside Goldman have run the numbers on their employer. The results are compelling. Should the firm’s stock linger below its book value, or assets less liabilities, of about $130 a share for much longer, a breakup could be hard for the firm’s board to resist.

There’s no suggestion for now that Goldman is considering such a radical maneuver. Most of its peers are also trading at a discount to book value, suggesting a sector-wide issue rather than something Goldman can easily tackle individually. And the company has a long-held view that the individual pieces — an industry-leading investment bank, a massive securities trading operation and an asset management arm — function best in combination.

Yet based on current market metrics, Goldman’s parts are potentially worth a lot more than the whole. And many of the justifications that the firm has given in the past for maintaining its structure look out of step with the changing global regulatory framework.

The starkest illustration of this mismatch comes in asset management. The Volcker Rule provision of the U.S. Dodd-Frank Act stipulates that a bank’s own money cannot comprise more than 3 percent of a private equity fund it manages. At present Goldman’s own capital accounts for a third of the $20 billion fund overseen by GS Capital Partners. Once the Volcker Rule becomes effective, the benefit of investing Goldman’s money alongside clients’ cash will be much diminished.

It could, however, be the simple dollars and cents that eventually talk loudest. Valuing each of the firm’s pieces is art as well as science, partly because the company’s published financial statements do not show the profitability of each segment in detail. But the available information does support a rough sum-of-the parts analysis.

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