Yves Smith at Naked Capitalism discusses the ways Goldman is trying to use technology to shore up its declining profits. It would only be fair if Goldman suffered a little for its profit-making.
Bankers Beginning to Look a Smidge Desperate: Goldman Looking for Technology Magic Bullets to Fix its Cost Problem
By Yves Smith - Naked Capitalism
Now that Wall Street blew up the global economy in its search for fun and profit, it is finally having to eat its own cooking in the form of more modest profits. Of course, the slightly chastened Masters of the Universe seem constitutionally unable to recognize that their own actions might have something to do with the fix they are in. Yes, the immediate aftermath of the crisis looked just dandy, as super low interest rates and official confidence building led to some lovely trading opportunities, which in turn produced record bonuses in 2009 and 2010. But as the Fed flattened the yield curve and the economy has stayed stuck in low gear, investors aren’t keen on taking risk, even if negative real interest rates leave doing nothing as an unattractive option.
An article at Dealbook gives some insight into the distress on Wall Street (yes, Virginia, uncertain bonus prospects have this way of focusing the mind in banker-land). Lloyd Blankfein predictably makes “new regulations” the top scapegoat for Goldman’s reduced profit outlook, along with an uncertain market outlook. Ahem, the securities business has always been highly cyclical, but the Greenspan and Bernanke puts did such a good job of dampening the downside that the industry seems to have forgotten what a normal downturn looks like, let alone the sort of barely-averted Great Depression that we are working through.
So the current party line is that Goldman will be using more technology and cutting expenses to cope with the new normal. That sounds great until you dig into the nature of IT at big trading firms. There is a long, seldom told history of ambitious projects gone awry, as in multiple hundreds of millions of dollars poured down sinkholes. I’m hardly close to it, but even I know of a a major effort to build a fixed income utility in the 1990s was a total loss. Goldman had another major fixed income initiative in the later 1990s, to build a fixed income client portal. My understanding is that that was a costly flop. And remember, Goldman really is pretty well managed by securities industry standards.
Blankfein did make a sensible comment that was picked up in the Financial Times writeup of the same presentation: “Our industry has a long history of letting too many people go at the bottom of the cycle and hiring too many at the top.” But I heard firms making the same sort of statements in the last really bad downturn (the early 1990s) and they all (even Goldman) eventually started getting rid of people that they would have liked to have kept (this was acknowledged by headhunters: being fired in that era was not stigmatized if you were mid level. The firms were keeping the senior folks and the cheapest, the analysts and associates, and going through everyone in between with a howitzer).\
Read the whole article here