Goldman Sachs: principles and agent

Once upon a time, investment banks such as Goldman Sachs existed to serve clients. Eventually, these groups figured out that borrowing was easy and that trading for themselves was more lucrative than working with companies for fees. Thursday's first-quarter results from Goldman, the model of client adviser turned investor, shows how far investment banks have returned to their heritage.

Goldman's strong earnings were driven by good performances from straightforward client activities - M&A advice, and stock and bond underwriting. In the first quarter, Goldman earned $961m advising on deals and another $944m from debt and equity offerings. In the same period in 2007 (Goldman's best first quarter before the crisis) those figures were lower, at $861m and $855m respectively. That is noteworthy, particularly in M&A. While bulge bracket rivals have shrunk or seen star bankers leave for boutiques, Goldman continues to thrive.

Those core investment banking functions now account for 18 per cent of revenue, up from 14 per cent eight years ago. At the same time another safe business, asset management, has seen its revenue proportion jump more sharply, almost doubling to 15 per cent.

Perhaps surprisingly, the share of Goldman's trading and principal investing units has fallen from 74 per cent only to 63 per cent. But crucially, Goldman is a smaller business. First-quarter revenue of nearly $10.6bn (a strong number) is down almost a fifth from 2017.

The balance sheet has also changed. As Goldman noted in a recent investor presentation, even with a smaller asset base, the company's equity is up 85 per cent since 2007. That has pushed return on equity down from 38 per cent in the first quarter of 2007 to (a still very decent) 14.7 per cent this time around.

So Goldman - smaller, funded by more equity and shifting from investment to client servicing - is finding a post-crisis business model that works. But contrast its progress with that of Blackstone, Wall Street's latest darling. First-quarter profits, also reported on Thursday, rose 130 per cent, driven both strong debt and equity markets and Blackstone's own investment prowess. In good times, investing is an alluring business. But Goldman's client roster must be pleased to have the company's attention back.

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