We knew in advance of Goldman's earnings release Tuesday that it wasn't going to be a banner day for the fixed-income desk. Volatility has been low, complacency high, and traders consumed with distractions like Tinder and their offspring. But now that the markets have had some time to digest the news – a 40 percent decline in Goldman's FICC trading, offset by gains in equities and Investing & Lending – it's clear that something is awry over at 200 West. As Bloomberg noted:
Revenue from trading stocks and bonds in the first six months of 2017 tumbled 10 percent, dropping to the lowest level since before Blankfein took over from Hank Paulson 11 years ago.
Whatever's amiss, it isn't new. In the first quarter Goldman's FICC team shit the bed with equal force and to similar surprise elsewhere on the Street. As we later learned, what (reportedly) tripped Goldman up were some risky bets on shopping mall and coal debts.
You wouldn't have known it from CFO Marty Chavez, though. His tight-lipped diagnosis on an analyst call back in Q1:
Ultimately, we didn’t navigate the market well. But no quarter defines the franchise.
On Tuesday, following the Q2 announcement, Chavez had this to say:
We didn't navigate the market as well as we aspire to, or as well as we have in the past.
On one hand, you have to give Goldman a bit of slack on the trading results, given the Twilight-Zone-like calm pervading markets. But at some point – after two quarters, say – you have to wonder when Goldman is going to navigate the market well instead of not-well. That is, like, kind of the point of trading desks?
Or is it? They have to work with what they've got. If clients across the board aren't interested in trading, every bank will suffer. But notably, that's not the root diagnosis Chavez is offering. He's indicating it's about the broader coarse the FICC desk is choosing to take, rather than some rough seas that affect everyone.
Worst of all, the FICC team that's doing the not-navigating-well remains significantly larger than its peers, due to Goldman's reticence to part with a trading-heavy model so deeply ingrained in current leadership's managerial DNA.
So Goldman has a choice: Charge full speed ahead and risk an investor backlash should bond trading fail to ping back. It's that or whip out the carving knife.
Goldman’s Traders Turn In Worst First Half of Blankfein’s Reign [BBG]
Big bond fall leaves Goldman chasing the pack again [FN]
Why Goldman's Trading Slip Is Worse Than Bank Of America's Disappointment [Gadfly]