To cut or not to cut?
That is the question Goldman Sachs (GS) executives are preparing to answer when the firm unveils second-quarter earnings next month, and investors will be focused on the shrinking profitability of the firm’s once-mighty traders, the FOX Business Network has learned.
Goldman is weighing whether to make a formal announcement about the size and scope of potential cuts among traders, amid a sharp decline in revenue -- particularly in the fixed-income business, according to people with knowledge of the matter.
This announcement could be made during the firm’s second-quarter earnings announcement, scheduled for July 15.
FOX Business earlier reported that a sharp reduction in trading revenue has sparked a panic inside Goldman Sachs as executives there brace for additional layoffs in the firm’s trading ranks unless business conditions improve. The cuts would go beyond the 10% staffing reductions that usually take place at the big bank.
At a recent investor conference, Goldman Sachs president Gary Cohn conceded that the trading environment -- squeezed by post-financial crisis regulations that reduce Wall Street risk taking -- is difficult and could lead to head-count reductions. But people close to the firm say there is still no agreement on whether larger cuts are needed. The firm’s chief executive, Lloyd Blankfein, is hesitant to make large cuts fearing that the trading slowdown is cyclical and the business could bounce back.
“Every time I talk to them, they say if things continue we are going to have to reevaluate,” said one Wall Street analyst who spoke on the condition of anonymity.
Dick Bove, an analyst at Rafferty Securities, say larger cuts in trading are inevitable at Goldman and elsewhere on Wall Street. "As they move more towards electronic trading and outsource more of their (market-making) activity there is no question that they will be reducing traders,” Bove said. “Goldman will not have as many traders next year as they do this year.”
The big problem for Goldman and other banks is that volatility levels remain low, meaning there is less opportunity to profit from trading in and out of stocks that are gyrating. Trading revenue at Citigroup (C), for instance, could fall more than 20% for the second quarter, the firm recently indicated.
But a similar decline at Goldman would hit the firm harder because it's considered the premier trading outfit on Wall Street, with one of the biggest trading desks in banking. A Goldman spokesman declined to comment on the matter.
Charles Gasparino joined FOX Business Network (FBN) in February 2010 as Senior Correspondent.