U.S. Investment Bank Business Structure Case Study: Goldman Sachs

In 2010, Goldman Sachs divided its business into the following three units:

1. Investment banking

2. Asset management and securities services

3. Trading and principal investment

The investment banking unit provides a series of investment banking services for companies, financial institutions, governments, and individuals. The asset management and securities services unit focuses on helping institutions, governments, and government agencies across the world meet their investment needs. The trading and principal investment unit engages in investment, trading, liquidation, and market maker business. This unit has the following three divisions:

1. The fixed income, currency, and commodities division (FICC)

2. The equities division

3. The principal investment division

Of these divisions, the FICC engages in trading and market making in relation to interest rates, credit products, loans, currency, derivatives, and commodities. It enjoys a great reputation among investors around the world. The equities division mainly engages in trading of stocks and stock-related derivatives, as well as proprietary business. The principal investments division mainly invests in real estate and company equities.

In terms of the absolute amounts of revenues, the income of Goldman Sachs skyrocketed from USD 12.8 billion in 2001 to 46 billion in 2007. Although its revenue plummeted in 2008 due to the subprime mortgage crisis, it bounced back to USD 45.2 billion in 2009. The nine-year track record shows a stable net interest income, investment banking income, asset management income, and securities service income. The net interest income came mainly from fair value-based asset transactions and

Comparison of Various Revenues of Goldman Sachs (2001-2009)

FIGURE 8.6 Comparison of Various Revenues of Goldman Sachs (2001-2009)

Source: Goldman Sachs Annual Report 2001-2009.

securities reverse repurchases, which significantly increased during the crisis. The incomes for 2006, 2007, 2008, and 2009, respectively, were USD 3.5 billion, USD 4.0 billion, USD 4 .3 billion, and USD 7.4 billion. Incomes from transactions and proprietary business were volatile in comparison, plummeting from USD 29.7 billion in 2007 to USD 8.1 billion in 2008, which was due to the market environment during the crisis, as well as Goldman Sachs's own risk position (see Figure 8.6 for a graphic representation).

In terms of the relative amounts of revenues throughout the period from 2001 to 2007, revenues from transactions, proprietary business, and investment banking were the major income contributors for Goldman Sachs, accounting for approximately 70 percent consistently, including 78 percent in 2001 and 81 percent in 2007. In 2008, the percentages of transaction revenues and proprietary business revenues dropped, but the percentage of investment banking revenues rose, so the combination of the two still accounted for 60 percent of total income. Even in the worst market environment, the two business lines were still the core business of Goldman Sachs. Their stability as income sources is beyond doubt. Goldman Sachs has traditional advantages in investment banking. However, in recent years, the most profitable business has been transactions and proprietary business, with revenues mainly from FICC, which engages in transactions with mainly proprietary funds. In comparison, the asset management business and brokerage business of Goldman Sachs are not as significant (see Figure 8.7 for a graphic representation).

Goldman Sachs Revenue Structure (2001-2009)

FIGURE 8.7 Goldman Sachs Revenue Structure (2001-2009)

Source: Goldman Sachs Annual Report 2001-2009.

After 2010, Goldman Sachs restructured its business into the following four blocks:

1. Investment banking

2. Institutional client services

3. Investment and lending/borrowing

4. Investment management

The investment banking business provides a series of investment banking services to companies, financial institutions, governments, and individuals. The institutional client service business provides transaction services to clients in the fixed income market, stock market, futures market, and commodities market. The investment and lending/borrowing business mainly involves long-term investment, lending, and borrowing, investing mostly in funds, bonds, loans, stocks, real estate, and industrial assets managed by the company. The investment management business provides wealth management products to discrete individual and institutional clients through asset portfolios. Adjustments were also made to the revenue statistics structure accordingly. The original four-part structure was changed into a six-part structure. Although the investment banking income and the net interest income remained unchanged, the transaction and proprietary business revenue and the securities service income were further divided into asset management income, commission income, market maker income, and other proprietary business income. Incomes from investment banking and proprietary business still account for 65 percent of the total revenue, rather consistently. See Figure 8.8 for a graphic representation of this information.

Revenue Structure of Goldman Sachs in 2010

FIGURE 8.8 Revenue Structure of Goldman Sachs in 2010

Source: Goldman Sachs Annual Report 2010.

 
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