How It Works: As the most consistently profitable firm on Wall Street, Goldman is the Street’s most powerful talent magnet, ensuring continued success. It will execute any and all financial transactions for every kind of customer, and also happens to run one of the world’s largest hedge funds. Increasingly, Goldman is its own best source of moneymaking opportunities. In the company’s first fiscal quarter of 2007, 13.5 percent of revenues—$1.73 billion—came from investing on their own behalf. Like all Wall Street firms, Goldman pays top dollar for top talent. In its latest quarter, it paid out $6.1 billion in compensation and benefits, a full 48 percent of total net revenues of $12.73 billion.
New York Employees: 13,000.
Annual Revenue: $37.7 billion ($9.34 billion is profit).
Sources of Revenue: Investment banking: Arranging large transactions for big clients, often lining up both buyers and sellers, usually for a flat fee or a percentage of the size of the deal; $5.6 billion in revenues. Trading and investing: Executing transactions for clients and themselves, which could involve purchasing anything: stocks, bonds, currencies, and derivative securities; $25.6 billion in revenues. Asset management: Client portfolio management; $6.5 billion in revenues.
Annual Overhead Costs: Compensation and benefits: $16.5 billion (an average of $622,000 per employee, though the salary scale is exceedingly top-heavy); transaction fees to exchanges and brokerages: $2 billion; occupancy (i.e., real-estate) expenses: $850 million; legal and advisory fees: $545 million; communications and technology: $544 million.
Most-Profitable Activities: Trading and investing: 41.5 percent profit margin. Goldman’s most profitable department is also the most volatile and risky—the trading desk is in the red 40 days a year, compared with just 28 at Morgan Stanley and just eight at both Bear Stearns and Lehman Brothers.
Least-Profitable Activities: Investment banking: 27.8 percent profit margin. “Investment banking is the face of the business,” says Matthew Albrecht, a banking analyst at Standard & Poor’s. “They bring in clients, then say, ‘Hey, we can also provide asset-management services, and facilitate trades, and match you up with buyers and sellers of your stock.’” Extremely people-intensive, banking by nature has thinner profit margins than trading, where one brilliant call by a single trader can return more than an entire group of bankers brings in over months.
Gilt by Association: To have Goldman lead-manage your IPO is a stamp of legitimacy. Some clients want Goldman as much as Goldman wants them.
New Yorkonomics: Like all older, colder cities, New York City suffered greatly in the seventies when declining transport costs made it possible for manufacturing to relocate to cheaper places. New York’s resurgence since then has been based on innovations in financial services, including junk bonds, leveraged buyouts, mortgage-backed securities, and hedge funds. The flow of innovations was the result of a remarkable concentration of smart people in New York, each learning from the other how to get rich. Goldman Sachs is the ultimate example.