As Goldman Sachs (GS) weathers a new era of renewed controversy, the company's business model is showing definite cracks. Though this Wall Street giant hasn't been completely stable in years, it has somehow survived incredibly damaging disasters. No matter how many bailouts and concessions the company received from government bodies and celebrity investors (BRK.B), nothing could stop the gradual erosion of investor trust in this creaky institution. Though the investing public has given Goldman Sachs years to put its house in order, recent censures by regulators seem to have confirmed a general malaise at the bank. See also this article.
On October 17, Goldman stock dropped sharply after an announcement that the bank's third-quarter earnings had fallen short of estimates by over half a billion. This represented a 20% drop in year-over-year revenue. As if that weren't bad enough, this compromised situation relates to a 44% drop in Goldman's currency and fixed-income security business. Though Goldman executives are quick to link the plunge with broader market conditions, there's no denying that the public is fed up with the bank's sub par results.
Most available evidence demonstrates that Goldman's current problems are rooted in structural deficiencies. If this is true, the company will face continued loss of business in the coming months. Alternatively, Goldman Sachs may yet find a way to engineer a full comeback. To do so, however, the company will have to learn to answer shareholder questions openly and without reservation. This would be a major change of pace for a company that has grown increasingly tight-lipped. Though it is fairly natural for companies to put up their defenses when faced with widespread criticism, Goldman's reticence speaks volumes about the company's disregard for ordinary investors.
Throughout history, companies like Amazon (AMZN) have sold enormous amounts of stock while earning tepid profits. In the case of Amazon, shareholders have confidence in the firm's transparent, understandable business model. Since Amazon executives are open about their operational focus on gaining market share, they have earned the trust of the public. For a huge multinational corporation with historic Wall Street clout, Goldman Sachs is surprisingly opaque about how it conducts it's business. Members of Congress, SEC regulators and investigative journalists are all prone to meet a stifling wall of silence when attempting to analyze the investment bank.
To Goldman's staunchest supporters, the firm's laconic way is simply a defense mechanism developed over years of persecution. Defenders emphasize the histrionic nature of Goldman's worst critics, who can be reflexively dismissive towards any large corporation. In the final analysis, Goldman has attracted unusual scrutiny by developing a culture of impunity and corporate recklessness.
To be fair, Goldman Sachs once had an organizational culture that was far more thoughtful and responsible. Furthermore, the lower rungs of the bank's organizational chart feature hard-working, committed individuals with admirable qualities. Until the company conducts serious reforms, it simply isn't a safe bet for most conservative investors. Only those with deep pockets and high tolerance for risk will continue holding Goldman Sachs stock without reservation. In light of the company's continual problems and disappointing earnings, this might be the right time for ordinary investors to take their profits with at least a portion of their GS stock.