論稿

Challenge by Goldman Sachs Groupin the Competitive and Mature Market
競争・成熟市場におけるゴールドマン・サックス・グループの挑戦

Taka Okada, Aizawa Securities岡田高明（藍澤證券）

SummaryThis research study observed a price change of S&P 500 index for 65 years to analyze market maturity in comparison
with Kotler's sales life cycle curve. It also observed ROE ratios of five U.S. banks such as J.P. Morgan Chase, Morgan
Stanley, Citigroup, Bank of America, and Goldman Sachs to grasp overall characteristics for 16 years. A result of theobservations yielded a downward trend from 1999 to 2008 and a horizontal trend from 2009 to 2014, divided by thefinancial crises as a quantitative and qualitative change in the materialistic conception of history. This research study also
involved a survey to identify Goldman's management strategies, such as improvements of leadership, organization, andbusiness segment structures to enhance the company's profitability by mainly analyzing disclosure documents such as form
10-Ks and annual reports of Goldman Sachs Group from 1999 to 2014. This research study involved extraction of key
business strategies from the management's messages to shareholders in every annual report.

Trading was a corecompetence for Goldman Sachs, whose strength related to Blankfein's careers and its HR policies, and so forth. He also
evaluated sustainability of the core competence. Finally, the article includes consideration of sustainable trading should be.

1. A Point of View andMethodology

years recently, while differences in ROEs
among peer banks have been characteristicallynarrowing during the same period.

This

The return on equity (ROE) has become aresearch study raises the following questions

popular ratio to measure corporate profitability

to be resolved: Why could Goldman maintainrecently. Goldman Sachs Group (Hereinafter

the top ranks during the period? and why havereferred to asGoldman,

ROE ratios of the five other banks beenorconverging within a narrow range in recent

the company,

Goldman Sachs,
the firm,itthey ),

which is a major U.S. bank, has attained top-

years?

level numbers of the ratio since 2004, as seenin Figure 3. Surprisingly, the company has

2. Introduction to Goldman Sachs

attained first place on the ROE ratios among
the U.S. major banks, such as J.P. Morgan

Goldman Sachs was originally an investment

Chase, Morgan Stanley, Citigroup, Bank ofbank in the U.S. In its disclosure document, theAmerica, and Goldman Sachs, seven times fromfirm introduced itself as follows:2004 to 2014. Concerning Figure 3, Goldman

Goldman Sachs is a leading global investment

was able to maintain top place for a couple ofbanking, securities and investment management– 63 –

年報 経営ディスクロージャー研究

firm that provides a wide range of financial
service to a substantial and diversified client

2016年３月

第14号

3. External Environment
Surrounding Goldman Sachs

base that includes corporations, financial
institutions, governments and high-net-worth
individuals.

(Form 10-K of The Goldman

3.1 The U.S. Market
Figure 1 shows price changes of the S&P

Sachs Group, 2014)

500 Index (hereinafter referred to as

According to the document, the firm had four

500,

major business units, such as investment

the U.S. statutory stock exchanges NASDAQ

banking, institutional client service, investing(2015) stated the widely held common stocks

and lending, and investment managementin the Index are used to measure the general(Form 10-K of The Goldman Sachs Group, Inc.,

performance of the U.S. market. McGraw Hill2014). Moyer and Chaudhuri (2012) described

Financial introduced to the index as follows:

S&P

the index, or it ) for 65 years. One ofGoldman's business trading and investmentbanking arms as a traditionally strong business

The S&P 500® is widely regarded as theunit for the company.

The company was

best single gauge of large-cap U.S. equities.

established in 1869 ( Goldman Sachs Group:

There are over USD 7.8 trillion benchmarked

Who We Are, 2015). In September of 2008 in

to the Index, with Index assets comprising

the wake of the so-called Lehman Shock, theapproximately USD 2.2 trillion of this total.

two remaining independent U.S. investment

The Index includes 500 leading companies

banks, such as Morgan Stanley and Goldman

and captures approximately 80% coverage ofSachs, became holding companies overnight

available market capitalization. (McGraw Hill

(The timeline: How it all happened, 2008).

Financial, 2015)

According to Goldman's website, the company
introduced itself as a global investment banking,The Index captured 80% of its total market

securities, and investment management firm

cap, and it reflected the industries, such asthat provided a wide range of financial services

information technology, financial, energy,( Goldman Sachs Group: Who We Are, 2015).

industrials, consumer staples, consumer

article, Matt

discretionary, materials, utilities, and telecom

Taibbi used a powerful anthropomorphized

services, in the U.S. economy (S&P 500

image of Goldman Sachs as a great vampire

Factsheet, 2010, as cited in About News, 2015).

squid(Freund & Jacobi, 2013). The firm

Thus, it represents evaluation of not only theseemed to be considered as one of aggressive

U.S. large caps and stock market, but also thebanks, for better or worse.

U.S. economy.

In a July 2009 Rolling

In Figure 1, the Index had been fairly
increasing from the 1950s to the beginning of
2000, although experiencing some bumpiness.
– 64 –

Challenge by Goldman Sachs Group in the Competitive and Mature Market（Okada）

The early 2000s appeared to be a threshold

On the other hand, S&P 500 prices haveperiod for change of growth pace. After the

been going up since 2010, and reached a new

period, the slope of the index price change hasrecord in 2014. It was partly due to market

become nearly horizontal level with the two

conditions, including asset selection to stocks

deep bottoms, such as Iraq War crash, andunder ultra-low-interest-rate environment inLehman Shock. According to Kotler's curves

the U.S., and asset flight from emerging

that analyze the relationship between sales andmarkets for a risk aversion by international

profit life cycles (Figure 2.), sales curve

investors. The index is always replacing its

steeply increases in growth period, and thencomponent companies whose market value hadreaches a plateau area in the first half ofbeen lowering below a certain level with thematurity period.

new ones.

It sets to decline in the

According to S&P Dow Jones

second half of the period. In comparison with

Indices (2015), index membership eligibility for

Kotler's curves, the price movement of S&P

a company with multiple share class lines is

500 index after around 2000 appears to suggest

based on the total market capitalization of thethat the U.S. stock market and its economy hascompany, including all publicly listed andentered into maturity period as Kotler's sales

unlisted share class lines, if applicable. The

life cycle curve indicates.

replacement seems to partially contribute to     
Figure 1. S&P 500 index price change for 65 years.







+∆b

∆c-∆d
∆c
∆



   

1950-1959

1960-1969

(Source) Bloomberg

1970-1979

1980-1989– 65 –

1990-1999

2000-2009

2010-2014

!Figure 3. Sales
Profit Life Cycles
年報 and経営ディスクロージャー研究
2016年３月 第14号

Figure 2. Sales and Profit Life Cycles

Source: P. Kotler (2003) A Framework for Marketing Management
Note. A Framework for Marketing Management, by P. Kotler, 2003. Upper
Saddle River, NJ: Pearson Education. Copyright by Pearson Education, Inc.

Note. A Framework for Marketing Management, by P. Kotler, 2003. Upper Saddle River, NJ:
Pearson Education. Copyright by Pearson Education, Inc.
trading, and asset management. Commercial
upward trends, and buck against overallbanking seems not to be highly profitable in amaturity.
Further importantly, trading volume has

period of maturity, as it is a low economic

been gradually decreasing from around 2010,

growth time, while other businesses also

while index prices have been going up during

appear to be affected by economic maturity.

the same period. Commission income, including

In addition, those banks have been conducting

primary and secondary markets, generates

international activities, and global integrationfrom the following formula: Income = Valuationof the world's markets has been in progress at

× Volume × Commission Rate. Therefore, thethe same time, and the state of other economies

above phenomenon appears to offset profitability

has influenced the price movement of theof the rally.

index. The relationship between the world3
As a result, this author is convinced that the

recent rally never implies a breakoff of maturity

economy and the index, to some extent, isnever totally unknown.

for the U.S. economy. The economy, including
the financial sector, seems to be in a period of

3.2 Profitability of the U.S. Five Banks

maturity. Major businesses of the U.S. banks

Figure 3 is an analysis that charted returnare mainly composed of commercial banking,on equity ratios of the five major American

investment banking, brokerage services,

banks from 1999 to 2015 in the page 5. While– 66 –

Challenge by Goldman Sachs Group in the Competitive and Mature Market（Okada）! Figure 4. Analysis on change of ROEs of the U.S. major banks.

Figure 3. Analysis on change of ROEs of the U.S. major banks.

Note1. GS= Goldman Sachs Group; MS=Morgan Stanley; JPM = J.P.Morgan Chase; Citi =Note.
FromBÒHistoricaldata:
S&P500 from 1949 to 2000,Ó by Bloomberg, 2014, Retrieved from
Citi
group;of A = Bankof America
http://www.bloomberg.co.jp
Note2. From Historical data: S&P500 from 1949 to 2000, by Bloomberg, 2014, Retrieved
from http://www.bloomberg.co.jp

all ratios of the banks started from their peaks

the range from 0.00 to around 10.00 from 2010

in 1999 respectively and every bank's ROE

to 2014 as the overall trend changed fromcame to its second peak in 2005 or 2006, they

downward to horizontal. The years of 2008

had common trends as follows: (a) All the(the Lehman Shock) and 2009 (European Debt

ROE lines were declining from 1999 to 2002;

Crisis) were a transitional period.

(b) the banks had a one-time recovery in 2003,

Goldman's annual report, Blankfein pointed out

but lost it the following year (2004); (c) thethat market profitability of the industry has

period between 2005 and 2006 was anotherbeen changing after consecutive financial crises

recovery phase for the banks' profitability; (d)(Goldman Sach's Annual Report, 2010). Basedthe banks hit deep bottom in either 2008 or

upon the ROE lines, the five banks fell into two

2009 respectively; and (e) their ROEs weregroups as follows: (a) Goldman, JP Morgan,

becoming horizontally rocky from 2010 to 2014.

and Citigroup, all of which bottomed out in

The movementof their ROEs consisted of42008 (Lehman Shock).

In

The second group (b)two large trends between a traditional period:

consisted of Morgan Stanley and Bank offirst, a rougher trend on profitability of the five

America, which reached their bottoms in 2009

banks was lowered from 1999 to 2008 while(European Debt Crisis). Either investment

ROEs of 2005 and 2006 partially bucked againstbanking or commercial banking business at thethe trend. Second, all lines of the five banks'

five banks seems to have suffered from

ROEs had formed a convergent band within

subdued growth since the series of financial– 67 –

年報 経営ディスクロージャー研究

2016年３月

第14号

The law basically prohibits bank holding

crises occurred.
As a result, two crises, such as Lehman

companies, and so forth, and certain of their

Shock and European Debt Crisis, appear toaffiliates from proprietary trading or

have made the large U.S. banks changesponsoring or investing in hedge funds or

qualitatively in the aspect of profitability. The

private equity funds under the Volker Rules

banks entered a period of low growth after( Summary of Dodd-Frank,

that. Chairman and C.E.O. of Goldman Sachs

response, Goldman liquidated substantially all

Lloyd Blankfein suggested in 2010 that lowerof the positions that had been held withinrevenues and more subdued growth forecasts

Goldman Sachs Principal Strategies, its long/

were causing some to question whether the

short proprietary trading desk (Goldman

industry was undergoing secular change

Sachs' Annual Report, 2010). The firm also

(Goldman Sachs' Annual Report, 2010). In

liquidated the position that had been held bycomparison with Kotler's profit life cycle curve

Global Macro Proprietary Trading Desk, whichthat shows the relationship between sales andtraded in the fixed income markets (Goldman

profits, and time frames as a basic law (Figure

Sachs' Annual Report, 2010).

2), the industry seems to have been entering
into a period of maturity.

2010).

In

The Dodd-Frank Act protects homeowners
in real estate transactions by requiring they
understand risky mortgage loans (Amadeo,

3.3 Regulatory Reinforcement after2013). Goldman has assumed a market maker

Financial Crises

and underwriter in the mortgage securitization

According to Goldman's annual report ofmarket to provide liquidity to primary and2010, the Dodd-Frank legislation and liquidity

secondary markets (Goldman Sachs' Annual

requirements under Basel 3 are two of theReport, 2010).

more significant outcomes from the recent

company has assumed risk created throughfocus on enhancing financial stability (Goldman

client purchases and sales (Goldman Sachs'

Sachs' Annual Report, 2010).

After theAnnual Report, 2010). Goldman Sachs (2010)

Lehman Shock, the U.S. government enacted

insisted that such risk taking was fundamental

the Dodd-Frank Wall Street Reform andto the company's role as a financial intermediary.

Consumer Protection Act (Hereinafter referred

As stated in the Goldman Sachs' Annual

to as, Dodd-Frank Act ). The law aims toReport (2010),

prevent another AIG from becoming too big toserve our clients and to maintain a robust

fail (Amadeo, 2013) such as banks and so forthclient franchise while prudently limiting overallwith regard to several risk management

risk consistent with our financial resources (p. 8).

requirements including a liquidity requirement

The timeline: How it all happened (2008)

and capital adequacy requirement (KPMG

stated that Morgan Stanley and Goldman

Japan, 2015).

Sachs, the two remaining independent U.S.
– 68 –As the market maker, theIn this way, we are able toChallenge by Goldman Sachs Group in the Competitive and Mature Market（Okada）

investment banks, become holding companies

relationship (banks and government

overnight.

regulators).

The nine largest U.S. banks,

In the U.S. banking industry,including Bank of America, Citigroup, and JP

governmental regulation has increasingly

Morgan accepted more than $12.5 billion as

influenced the profitability of banks.

part of the government's package (Thetimeline, 2008). In this context, the five U.S.
banks, including Goldman Sachs appear to

4. Analysis on Goldman Sachs'
Strategies

have been subject to universal banking
regulation by Basel and Fed similarly. The

Leadershipcompany pointed out that the increase in the

For more than 16 years, Goldman Sachs hascost of capital has been joined by a corresponding

had two CEOs, such as Henry M. Paulson, Jr.

rise in the cost associated with an institution's

from 1999 to 2005 and Lloyd C. Blankfein fromscale (Goldman Sachs' Annual Report, 2012).

2006 (The Goldman Sachs Group's form 1-K,

Blankfein wrote concerning regulatory2005 and 2014). Goldman's ROE bottomed out inreform after the crises, which appeared to2002, and had been improving from the next year.

increase costs for banks as follows: In many ofBlankfein joined the company's management as

our conversations, clients have expressed

its president and chief operating officer in April

concern about the impact their businesses may

2002 (The Goldman Sachs Group's form 10-K,

experience, including new margin requirements,

2003). Before his assumption of the president

potentially less market liquidity, wider spreads

and COO, he had been responsible for theand less available, more expensive inventory

Fixed Income, Currency, and Commodities(Goldman Sachs' Annual Report, 2011, p. 5).

Division (FICC), and the Equity Division since

In comparison with the U.S. five banks' ROE

1997 (The Goldman Sachs Group's form 10-K,

trends (Figure 3), the above-mentioned2003).

regulatory events are significant for declining

divisions that conducted trading business.

He had experience heads of thoseand converging ROE ratios since 2010. Sharpe

Prominently, along with improvements of its(2010) indicated that we should weigh the

ROE from 2003 and its net revenues of trading

profitability concerns of the firms and theirand principal, investment doubled to $10,443

right to freely engage in financial enterprisemil from $5,249 mil. The numbers had been

against the dangers posed to the greater public

steeply increasing until 2007 (Goldman Sachs'

and the capital market from the realization ofForm 10-Ks, Inc., 2002-2007).

systemic risk in thinking about regulation.

appears to have strengthened trading as one of

Reinforcement of regulation provoked amajor profit centers for the firm during thedialectical qualitative change in the light of

period. Characteristics of Goldman's leadershipmaterialistic conception of history, such as

are perceptible in the section of the Executive

production power (profit) and production

Officer of the Goldman Sachs Group, Inc. of its– 69 –

Blankfein

年報 経営ディスクロージャー研究

2016年３月

第14号

form 10-Ks, which listed executive officers andplatform for the trading of unregistered

their businesses in charge. The number of

securities (Goldman Sachs' annual report, 2007,

executives has slightly increased from ninep.4-5).

board members in 2009 to 10 in 2014 to maintain

Financial service largely relied on information

effective management, while business has beentechnologies. In this point, computer system

expanding favorably as total net revenues havedevelopment is still important for the industry

nearly tripled to $34,206 mil in 2014 frommembers, including Goldman. Goldman Sachs$12,641 mil in 1999 (Goldman Sachs' Form 10-

pointed out that technological innovation would

Ks, 1999-2014). It is obvious that company

continue to be important and was likely to

had maintained efficiency of its management

increasingly become a differentiator amongst

during the period.

competitors and a potential driver of new orGoldman Sachs assigned a head of humanresource to a member of the board in 2001. He

incremental revenues (Goldman Sachs' annual
report, 2014).

continued to be the member until 2007. This

On the other hand, computerized highdeployment coincided with the growth period

frequency trading, in general, inclines to levelof Kotler's profit life cycle. The firm (2012)volatility to repeat high-speed offsetting

stated that strength of its business has always

transactions in the market.

been defined by the quality of its people andstated,its performance-driven culture. It appears toexperienced a particularly difficult year, given

particularly attach importance to HR policies

the significant decline in equity values. But

for enhancing its business profitability.

the quality of our portfolio has allowed us toGoldman (2014) stated that technological

The company

Our principal investing businessperform better than recent equity market

innovation would continue to be important anddeclines would suggest

was likely to increasingly become a differentiator

Annual Report, 2008, p. 4). Those comments

amongst competitors and a potential driver ofsuggest the importance of volatility for trading,new or incremental revenues. But it has neverwhich is the company's traditional main

assigned a head of the IT department as abusiness. With the development of computerized

member of the board after separation of ahigh frequency communication, trading is likely

board member who was responsible for theto represent a conflict of interest within its

department since 2005.

trade function.

The company(Goldman Sachs'

developed GSTrUE platform, which pioneered

The company has assigned two executives

the offering and trading of privately placed

who were in charge of international business,securities, bringing the liquidity of an exchange

Asian business in particular since 2011

with the flexibility of a private placement, and(Goldman Sachs' Form 10-Ks, 2011- 2014).

suggested GSTrUE would be integrated into

The company explained, While growth rates

The PORTAL Alliance ‒ an industry-wide

have slowed, we continue to see important– 70 –

Challenge by Goldman Sachs Group in the Competitive and Mature Market（Okada）

opportunities in a number of emerging

the firm because it has assigned multiple

economies, and we believe that our on-the-executives who were in charge of complianceground presence and local expertise bodes wellissues (Goldman Sachs' Form 10-Ks, 1999-

for our prospects there

2014).

(Goldman Sachs,

This deployment of compliance2008). Goldman Sachs (2014) insisted that theexecutives into the board members seems tocompany was particularly well-positioned forhave characteristically related its businessgrowth in cross-border activity given its global

strategies in the banking sector which was

footprint. It added that demand for funding

strongly regulated by the government.

and capital remained highly correlated to

Especially, regulation has affected banks'

economic growth and broader corporate

profitability since the crises.

activity (Goldman Sachs' annual report, 2010).

5. Organizational Strategy-Business Segment Strategy

On its management strategy, international
business appears to be more important forGoldman Sachs than IT development in the
recent years. Management of the company isGoldman Sachs drastically restructured its

likely to have recognized the emerging market

business segments in 2010. According to its

growth as profitable in the progress ofform 10-Ks, the company had three businessenhancing maturity of trading methods,

segments, such as Investment Banking,including high frequency trading.

Trading and Principal Investments, and AssetManagement and Securities services until 2009
Compliance has been always important for! Figure 5. Change of business segments before and after 2010.
Figure 4. Change of business segments before and after 2010.
Goldman's Business Segments until 2009!"#$%"&'

Investment BankingTrading and Principal
Investments

Asset Management andSecurities Services

Goldman's Business Segments after 2010!"#$%"&'

Investment Banking

Institutional Client
Services

Investing & LendingSources:Goldman's, Form 10-Ks, 2009-2010
Sources: Goldman's, Form 10-Ks, 2009-2010

– 71 –

Investment
Management年報 経営ディスクロージャー研究

2016年３月

第14号(Figure 4). In 2010, Goldman reclassified thosefunctions for equities, and Securities Services

three business segments into four segments:(Goldman Sachs' Form 10-K, 2010). Form

Investment Banking, Institutional Client

10-K also showed the Investment & Lending

Service, Investing and Lending, and Investment

business segment contained Industrial andManagement (see Figure 4).

Commercial Bank of China Limited (ICBC),

The company reallocated individual business

Equity Securities (ex. ICBC), Debt Securities

divisions which had been formed as threeand Loans, and consolidated investment entities

business segments until 2009 and then

(Goldman Sachs' Form 10-K, 2010).

reorganized into four business segments afterorganizational analysis, Goldman seems to have2010 (Goldman Sachs' Form 10-Ks, 2009, 2010).

reallocated the business divisions' functions of

Characteristically, Goldman has established two

Trading and Principal Investments of 2009 to

new business segments, Institutional Client

those of Institutional Client Service andServices, and Investing & Lending, among theInvesting & Lending business segments offour new business segments since 2010.

2010.

By

According to its form 10-K of 2009, Trading

In its Form 10-K of 2010, the company

and Principal Investments business segment

retroactively recalculated net revenues by

had three divisions, such as FICC, Equities, andbusiness segments of 2008 and 2009 to newly

Principal Investments (Goldman Sachs' Form

allocate them to the new four business

10-K, 2009). On the other hand, its form 10-K

segments, such as Investment Banking,of 2010 showed that Institutional Client Service

Institutional Client Services, Investing &business segment contained Fixed Income,Lending, and Investment Management, and so

Currency and Commodities Client Execution,

forth. Table 1 shows the comparison of net

including market-making functions for thoserevenues by business segments between the

products, Equities, including market making

previous business categories and the existing

Table 1. Net Revenue Comparison List

2008
5,453

(Mil. $)

Until 2009
Investment Banking

2008
5,185

2009
4,797

Trading and Principal
Investments

9,063

34,373

Asset Management andSecurities Services

7,974

6,003

5,245

4,607

Investment
Management

Total

22,22245,17322,22245,173

Total

22,345-10,821
11,524

Sources: Goldman's Form 10-Ks, 2009 and 2010

– 72 –

2009
After 2010
4,984 Investment Banking
Institutional Client
32,719 Services
2,863 Investing & Lending
40,566(Sub-total)

Challenge by Goldman Sachs Group in the Competitive and Mature Market（Okada）

In comparison between numbers ofgovernment's bailout package in the wake of

Trading and Principal Investments in 2008 andentry into bank holding companies by Morgan

2009 under the Until 2009 column, and their

Stanley and Goldman Sachs ( The Timeline,

counterparts, such as total numbers of2008).

ones.

Institutional Client Services and Investing &The ROE ratios of Morgan Stanley, Citigroup,

Lending in 2008 and 2009 under the After 2010

and Bank of America in Figure 3 were negative

column, the latter numbers exceed the former

in 2008. On the other hand, JP Morgan Chaseones respectively (11,524 > 9,063 in 2008s, andand Goldman Sachs managed to maintain

40,566 > 34,373 in 2009s).

positive levels of the above ratios in 2008

In addition, numbers of Asset Management(Figure 3). Looking at the ROE ratios during

and Securities Services in 2008 and 2009 underthe bailout period, Goldman Sachs, which was

the Until 2009 column decrease to those of

one of traditional investment banks, wasInvestment Management in 2008 and 2009

unlikely to have been on the brink ofunder the After 2010 column (i.e., 7,974 < 5,245

bankruptcy or dangerousness to a run on ain 2008s and 6,003 < 4,607 in 2009s).

bank unlike other banks, which were sufferingByfinancial resource analysis, it is recognizablefrom the financial crises at that time.

that resources of Trading and Principal

According to Goldman's annual report ofInvestments business segment, and partial

2008, to become a bank holding company

resources of Asset Management and Securities(BHC) was done to allow Goldman Sachs toServices business segment were allocated toaddress market perceptions that placed aInstitutional Client Services and Investing &premium on the value of oversight by theLending business segments respectively. In

Federal Reserve Board and to be able to accessthis context, Goldman Sachs appears to havea broader set of funding alternatives (Goldman

transferred all its trading business resources to

Sachs' annual report, 2008).

both Institutional Client Services and Investing

pointed out that Goldman Sachs was forced& Lending business segments.

by the Federal Reserve to accept a $10 billionIn

Fry (2010)

loan from the TARP facility in October 2008.

( The Timeline, 2008) reported that Morgan

It is obvious that inclusion of Goldman Sachs

Stanley and Goldman Sachs, the two remaining

into bank holding companies led to not only

independent U.S. investment banks, became

participation in the bail-out program by theholding companies overnight in September

firm, but also strategic incorporation of the2008. It seems to have been like the strategic

firm into several banking regulatory schemes,

placing arrangement of go stones for the two

including Dodd Frank laws and Basel rules byinvestment banks to join the U.S. bailout

the government. By that, business segment

program. The nine largest U.S. banks acceptedand profit structures of Goldman Sachs havemore than $125 billion as part of thequalitatively changed.
– 73 –

年報 経営ディスクロージャー研究

2016年３月

第14号

Table 2 shows that change of financial

Goldman's business characteristic to differentiate

importance of Goldman's business segment

the firm from other banks has been weakening,typically related to merchant banking, such as

and similarity among the five banks has beenlending from 2008 to 2014. Goldman Sachs

intensifying since then. Obviously, government

managed to pull its Investing & Lending

regulation has helped Goldman Sachs transformbusiness segment into the black in 2009. Afterto a common universal bank to generate athe year, net revenue share of the businessprofit in its business segments since 2010.

segment has increased to the range from 17.2%

Table 4 shows annual component ratios ofto 20.5%, except at the severest period of

three business segments, such as Investment

European Debt Crisis in 2011.

Banking, Trading, and so forth (Trading andGoldman Sachs pointed out that its merchantPrincipal Business), and Asset Managementbanking business helped diversify the firm's(Asset Management and Securities Services)

revenues (Goldman's annual report, 2009).

from 2000 to 2009. In the table, the numbers ofTable 3 shows profit margins of its Investing

Trading, and so forth, from 2003 to 2008, and in& Lending business segment has been strongly

2009 were more than 60%, and the number in

improving since 2012, and proved accuracy of2009 reached more than 70%. In comparison

the above comment of the company. On thewith S&P 500 Index price change (Figure 1),other hand, Goldman's ROE line (Figure 3)

the market appears to have been highly

appears to have been incorporated into so-volatile during those years. Additionally, thecalled the ROEs' convergent band area sincetrading segment and so forth was the top-2010. Looking at the above increase in banking

ranked profit center among the three businessrevenue share (Table 2), it seems that, along

segments, given all the numbers of Tradingwith reinforcement of regulation by Fed,and so forth; from 2000 to 2009, it surpassed

Table 2. Component Ratios of Net Revenues by Business Segments

(%)

2008

2009

2010

2011

2012

2013

2014

Investment Banking

24.5

11.0

12.3

15.1

14.4

17.5

18.7

Institutional Client
Services

100.6

72.4

55.6

60.0

53.1

46.0

44.0

Investing &Lending

-48.7

6.4

19.3

7.4

17.2

20.5

19.8

23.6

10.2

12.8

17.5

15.3

16.0

17.5

100.0

100.0

100.0

100.0

100.0

100.0

100.0

Investment
Management
Total

Sources: Goldman Sachs' Form 10-Ks, from 2008 to 2014

– 74 –

Challenge by Goldman Sachs Group in the Competitive and Mature Market（Okada）

market enhanced Goldman's profitability.

numbers of other segments except in 2002.
On the other hand, Table 5 is a list on annualGoldman Sachs' strength was its trading andprofit margins of the three business segments

investment banking businesses. Moyer andin the same years.

Chaudhuri (The list suggests the, 2012)

following three features: The first point is thatreported that Goldman s traditionally strong

trading, and so forth marked high profitability

trading and investment banking had been

(more than 40% of annual profit margins) in

struggling for the past couple of years.

2006, 2007, and 2009, and it particularly reachedthe highest number, 50.4%, in 2009.

The

Blackfein appears to have been sticking tothose businesses after the financial crisis. He

second point is that the trading businesstold Goldman Sachs' shareholders,segment and so forth marked a minus number

pleased to report that the firm retained its(-30.3%) in 2008 when the Lehman Shock took

industry-leading positions across our global

place in the same year.

investment banking client franchise (Goldman

Finally, all the

We arenumbers at the asset management were stable

Sachs' Annual Report, 2011, p.

from 22.4% to 38.1%.

restructuring in 2010, the Institutional Client

2).

After

In comparison with Figure 3 with the list on

Services business segment has partially

ROEs of five U.S. banks, including Goldman

contained market-making as one of trading

Sachs, Goldman's ROE marked at the second,

functions, according to Goldman's Form 10-K

third, and fourth peaks in 2006, 2007, and 2009

(Goldman Sachs' Form 10-K, 2010). In its

respectively. In comparison with the priceannual report, Blankfein (2011) insisted thatchange of S&P 500 (Figure 1), the volatile

they had further strengthened the liquidity

Table 3. ‌Profitability on Goldman's Investing & Lending Segment from2010-2014

Investing & Lending
Net revenues
Pre-tax earnigs
mil.$
mil.$
2008
2009
2010
2011
2012
2013
2014

-10,821
2,863
7,541
2,142
5,891
7,018
6,825

Profit Margins%-13,540
-660
4,180
-531
3,225
4,334
4,006

Source: Goldman's Form 10-Ks, 2010 to 2014
Note. From Form 10-K: The Goldman Sachs Group, Inc. Retrieved fromhttp://www.goldmansachs.com/investor-relations/financials– 75 –-125.1
-23.1
55.4
-24.8
54.7
61.8
58.7

年報 経営ディスクロージャー研究

2016年３月

第14号

Table 4. Annual Component Ratios of Business Segments

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
%

%

%

%

%

%

%

%

%

%

Investment
Banking

32.4

24.3

20.2

16.9

16.4

14.8

14.9

16.4

23.3

10.6

Trading, etc.

39.9

40.1

37.5

65.2

64.9

66.0

67.9

67.9

40.8

76.1

Asset
27.7 35.6 42.3 17.9 18.7 19.2 17.2 15.7 35.9 13.3
Management
100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Total
Sources: Goldman Sachs' Form 10-Ks from 2000 to 2009

position of Goldman Sachs relative to pre-crisis

Enhancement of Ethical Literacy inlevels.

Mature Market:

Kotler (2003) defined core competency as

In a mature economic society, companies

follows: (a) It was a source of competitive

must enhance ethical literacy in their economic

advantage in that it made a significant

activities to survive in intensively competitive

contribution to perceived customer benefits,markets.

(b) it had a breadth of applications to a widestores have trash boxes inside or outside thevariety of markets, and (c) it was difficult for

stores in Japan. If many consumers used tocompetitors to imitate. Accordingly, trading

throw away their trash on the roads without

appears to be a core competence for Goldman

their ethical literacy like Japanese growth

Sachs that other banks cannot easily follow

market era in 1970s, they did not go to thesuit in comparison with other banks' ROEs ofconvenience stores to put their trash into a2007 and 2009 (see Figure 3).

trash box, and never have had opportunity to

For example, most convenience

On the other hand, Table 5 shows the Assetbuy something else to go to the convenience

Management business segment had been

store for looking for a trash box at that time.

attaining relatively stable profit margins within

This seems to have been a marketing strategy,

the range from 22.6% to 38.1%. In comparison

adopted by convenience stores in the mature

with the price change of S&P 500 (see Figure

economic society.

1), the business segment represented reliable

In trading activities, investors can obtainstability during the periods of volatile market.

profit to sell their securities at higher prices

It appears to be an important businessthan the prices of the securities when they

segment to stabilize Goldman's management.

bought.

A rise in prices largely reflects

economic development, and so forth, including
corporate prosperity in the growth market. In
a mature market, however, economic growth is– 76 –

Challenge by Goldman Sachs Group in the Competitive and Mature Market（Okada）

Table 5. Annual Profit Margins of Business Segments

Investment
Banking
Trading, etc.
Asset
Management

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

%

%

%

%

%

%

%

%

%

%

32.1

18.7

13.3

7.6

11.9

11.3

27.8

34.0

39.4

26.5

36.6

19.1

18.6

33.6

37.8

38.0

41.5

42.4

- 30.3 50.4

34.5

37.8

35.8

33.9

36.9

35.4

37.7

25.6

38.1

22.4

Sources: Goldman Sachs' Form 10-Ks from 2000 to 2009

weakening and limited. Investors are likely tobusiness conditions, including prices not so

obtain slight gains, which are derived fromdifferent from those of their competitors but

growth of the market, while it seems to be still

more valuable than that of the competitors.

effective for other factors, including speculative

This is the logic used to explain the relationshiptransactions and market volatility to influence

between the maturity of the market andprice fluctuations in the market.

enhancement of ethical literacy on economic

Ultimately, maximization of gains by trading

behavior in the process of economic

in the low growth market prompts market

development of the market and economic

participants to play a zero-sum game in thesociety. In the process of becoming a mature

marketplace. It is a gamers' market that one

market, ethical companies can increase theirinvestor's gain directly links to other investor'sr e v e n u e an d p r o f i t t o b e s e l e c t e d b yloss. The market cannot contribute to theconsumers, and selfish, profit-seeking

sound development of economy, and it is nocompanies are likely to be removed from thelonger a marketplace to realize sound asset

market eventually.

formation for people's welfare. Because humanConcerning financial services, financial

beings are social beings and unable to live

intermediaries can charge fees linked with thealone, such investment activity to seek selfish

value of the transactions to carry out their fee

returns generates a conflict of interest with thebusinesses, including brokerage commission

market for the public.

business and M&A advisory business,

Market maturity appears to make the market

regardless of the change of the prices. Conflictchange to become a buyer's market in theof interest between a financial intermediarywake of intensive competition to seek slightand its clients may occur if a selling price is

profit among business competitors like banks

below its buying price. On the other hand,in the financial industry. Clients tend to ask

commercial banking has a strong linkage withthem to demonstrate high business integrity

the interest rate generally. The interest rateand standards in their transactions, given

reflects the growth of economy, and the– 77 –

年報 経営ディスクロージャー研究

2016年３月

第14号

economic growth basically becomes weaker inaverage, 35.6 times of the above words in theira mature market.

messages to shareholders after the crises from

Sharpe (2010) pointed out that, with2010 to 2014. Overall, they seemed to havedeclining profitability and an erosion ofrecognized the importance of growth for theinvestment banking business, the firms

company's profitability. In particular, while

increasingly relied on trading as a source ofindustry's profitability of the latter period

revenue and profit. Goldman Sachs stands in a(from 2010 to 2014) had been roughly

good position because trading is Goldman's

weakening (Figure 3), they more frequently

core competence. Grene (2009) reported thatused those words than relatively strong

a Goldman Sachs Asset Management agent

growth period from 2005 to 2007. Goldman

defined newly sustainable investment as it

Sachs is likely to have understood that it had

looked like in three to five years' time andto pursue potential growth opportunities tothen figured out which companies would do

improve its profitability. Such a profit-seeking

best in that environment.

They also

activity was to reduce conflict of interest

considered their marketing activities should be

between their clients and the market as asustainable (Grene, 2009, p. 8).

whole.

In thisdefinition, the word, environment seems to

Cooper and Kleinschmidt (1995) stated thatmean not only natural environment in the

new product success could result in successnarrow sense but also overall environment

rate profitability. For the banking industry,including market and society in the broad

trading in new products tends to do so. In

sense.

In this context, sustainable trading

general, a new successful product market

means to avoid conflict of interest between theappears to generate relatively high-level profit

market and the public, and profitability of

due to low-level competition. In this context,

sustainable trading is attributable to thenewness can reduce conflict of interest forfollowing key words: Growth, newness,market participants not to scramble for limited

diversification, niche, and long-term

profit from low growth.

relationship with clients, and market economy,

specialized but profitable segment of the

as a whole.

marketNiche means(Oxford Dictionary, 2003).

a

Based

This author has already explained theupon that definition, its connection with conflict

relationship between growth and return, andof interest appears to be very similar to that ofthat the growth was able to avoid a zero-sum

newness.

game and conflict of interest.

Goldman's

Diversification means to pursue profitability

management used average 17.7 times of aamong broader resources.

noun,

their

probability of conflict of interest seems to bemessages to shareholders before the crises

lessening by the action. Given that Goldman

from 2005 to 2007. They used the word, on

Sachs diversifies its portfolio investment in, and a verb

– 78 –

Of course, theChallenge by Goldman Sachs Group in the Competitive and Mature Market（Okada）

growth companies or markets, the same effects

6. Conclusionsof pursuing growth are anticipated as well.
With regard to long-term relationships, it is

The U.S. bank Goldman Sachs, which was

generally difficult for anyone to hide somethingoriginally an investment bank, had strong

for a long time, and the longer the time, theperformance in comparison with recently

more difficult to hide. In this context, long-popular ratios to measure profitability.

term growth has sustainability to some extent.

Goldman Sachs' ROEs ranked high in comparison

To pursue profit by an accumulation of small

to four other peer American banks, such as J.P.

returns from a low growth market in the long

Morgan Chase, Morgan Stanley, Citigroup, andrun appears to reduce conflict of interest with

the Bank of America during the period fromthe market as a whole.

1999 to 2014.

On the other hand, the U.S.

Goldman Sachs pointed out in its annual

market economy shows signs that it has beenreport that the long-term demand for productentering into a maturity period in which toinnovation and high touch services remained

compare S&P 500 index prices with Kotler's(Goldman Sachs' Annual Report, 2013). The

sales life cycle curve in the long run.

company's profit-seeking activities aim at

Profitability of the U.S. banking industry for

exploring the following growth opportunities:

the 16 years that ROEs of the five banks

We are particularly well-positioned forindicated had two trends, divided by financial

growth in cross-border activity given ourcrises, such as Lehman Shock and European

global footprint.

And, we believe that the

Debt Crisis. The profitability showed before

demand for funding and capital remains highly

the crises went downward, except for a rally

correlated to economic growth and broader

period from 2006 to 2007, which occurred after

corporate activity

the crises was in progress horizontally within a(Goldman Sachs' Annual

Report, 2014).

convergent band. In the wake of a series ofThis investment strategy contains the key

global financial crises, the United States andwords about sustainability in their economic

European governments have reinforced

activities, such as profit-seeking activities toregulations toward the industry to cope withavoid generation of the above-mentioned

fallout of the crises.

conflict of interest to enhance ethical literacy.

reinforcement appears to have provoked aGoldman's management seems to have at least

qualitative change for the industry's profitability

perceived the relationship between sustainable

in the light of a materialistic conception ofbusiness activities and economic benefit.

history. Such a dialectically qualitative change

Therefore, sincere and faithful execution of thisis that a change of relationship between thebusiness strategy is to avoid or reduce conflictbanks and the government regulators (aof interest between the market as a whole.

production relationship) was attributable toConsequently, thechanges of the banks' profitability (production– 79 –

年報 経営ディスクロージャー研究

2016年３月

第14号

being caused by regulation, which was forcing

power) in the 16 years' time (historically).
As part of this research study, the coincidence

derivatives out of opaque and highly profitableof Lloyd C. Blankfein's assumption of the roles

private dealings on to lower-margin exchangesof president and CEO at Goldman Sachs withand centrally cleared trading.

the start of resilient improvement of Goldman's

profitability had tended to be roughly

profitability in 2002 was identified. Before thehorizontal, staying within the convergent bandassumption of the executive positions atarea from 2010 to 2014 (see Figure 3).

Goldman's, Blankfein had experienced heads ofProfitability in the industry had been much of

trading-related divisions for a long time. His

a muchness eventually. This author pointed

leadership apparently led Goldman's tradingout that incorporation of a commercial banking

business segment to become a major profit

function into Goldman's business segments

center for the company.

basically contributed to those trends.

It had stronglyGoldman's

performed in 2007 and 2009 respectively when

Finally, this author argues that ethicalother peer banks suffered severely due to aliteracy rises in the process of maturity of thevolatile market at that time (see Figures 1 andmarket economy as evolution of an economic3). Within this context, this author recognizedsociety occurs. At the same time, globalizationthat trading has become Goldman's coreand integration of the world's markets coincidecompetence under Blankfein's leadership.

with the process. Goldman should strengthen

By comparative analyses between Goldman's

and activate its activities of sustainable tradingbusiness strategies, such as leadership,

to pursue the company's high profitability andorganizational structure, and business segments

avoid conflict of interest with the markets as a(see Figure 4, Goldman Sachs' Form 10-Ks,

whole or the public in the world. Sustainable

and Annual Reports), and its profitability (seetrading means to invest in businesses andFigure 3), this research study clarified thatmarkets related to the following key words:

H.R. management and IT system development

Growth, newness, niche, diversification, long-played roles to support enhancement of theterm relationship with clients, and market

core competency. The company seems to haveeconomy as a whole. In addition, investment incarried out reclassification of business segments

sustainable businesses and markets in the formin 2010 to allocate its core competence (tradingof sustainable trading is effective as well. In

function) to several divisions to raise synergic

the sustainable trading activities, investment in

effect.

conventional companies in the mature market

Reinforcement of regulation after the crises

should be limited to playing a role to supply

triggered changes in Goldman Sachs' profit

liquidity for the market. High performance instructure and its profitability from quantitative

the mature market by Goldman Sachs may

to qualitative nature. McLannahan and Noonan

have led to the name-calling from Rolling(2015) pointed out that structural change wasStones magazine: A great vampire squid.

– 80 –

Challenge by Goldman Sachs Group in the Competitive and Mature Market（Okada）

By the way, Blankfein announced that he

2 0 07 a n nu a l r e po rt. Re tr i e v e d fr o m h tt p: / / w w w .
goldmansachs.com/investor-relations/financials/current/

had lymphoma and expected to undergo
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