Goldman Sachs vs Morgan Stanley : Battle Of The Investment Giants
When people talk about the investment banks in the United States, two names often come up in this discussion – Goldman Sachs and Morgan Stanley. They are two of the three largest investment banks in the country, the third one being JP Morgan Chase Bank. Both Goldman and Stanley have created a benchmark in the investment banking market, but how do they fare when pitched against each other? Why don’t we find out in this Goldman Sachs vs Morgan Stanley : Battle of the investment giants?
JPMorgan Chase and Wells Fargo are the largest commercial banks in the US. Check out which one is better through JPMorgan Chase vs Wells Fargo.
Table of Content
- 1 Goldman Sachs vs Morgan Stanley
- 1.1 History
- 1.2 Business Model
- 1.3 Fourth-Quarter Earning Report and Full Year 2017
- 1.4 Controversies
Goldman Sachs vs Morgan Stanley
In 1869, Marcus Goldman founded Goldman Sachs in New York. Goldman’s son-in-law Samuel Sachs joined the firm in 1882. In 1885, Goldman’s son Henry and son-in-law Ludwig Dreyfuss joined the business and thus, Goldman Sachs & Co. was born. The company gained huge popularity as a pioneer for using commercial paper for entrepreneurs. Goldman joined the New York Stock Exchange (NYSE) in 1896. Two years later, in 1898, its capital stood at $1.6 million, continuing to grow at a fast pace.
If you look into the history of Morgan Stanley, you can trace its roots to days when JP Morgan & Co. started operating. After the Glass-Steagall Act came into effect, it became no longer possible for a corporation to have investment banking and commercial banking businesses under a single holding entity. JPMorgan & Co. elected commercial banking business over the investment banking. This resulted in some employees (Henry S. Morgan and Harold Stanley) of JPMorgan & Co. leaving the company and joining others from Drexel partners to form Morgan Stanley. They opened the doors for business on September 16, 1935, at Floor 19, 2 Wall Street, New York City.
Goldman Sachs is one such bank that depends on trading revenue more than any other bank you’ll find on Wall Street. And this dependence has actually given huge trading profits when the market is on a bull run like these days. This means Goldman has a cyclical feel to its business and many market experts refer to this revenue system as unsustainable. If you take a deeper look, Goldman’s financial statements concentrate more on fixed income, currency and commodities trading.
On comparing Goldman Sachs with other investment giants, the firm has stuck to most of its pre-crisis-style business model. Goldman utilizes bank capital in risk-taking ventures, going after return on investment (ROI) and return on equity (ROE) figures. Well, if you use a sizable capital in high-rewarding areas, you are bound to earn good profits.
Goldman Sachs is one of those banks that is willing to engage in trading and lending, especially after the Financial Crisis. Its model has yielded huge profits from 1995 to 2005 and from 2010 to 2013. And interestingly, it is also the same model that turned many banks vulnerable a few years ago.
Though Morgan Stanley is generally referred as an investment bank, it is a financial holding company or commercial bank. Morgan offers its services to corporations, governments, large private financial institutions and high-net-worth individuals.
Between 2011 and 2012, the company made drastic changes to its business model. They reduced the number of employees in fixed-income activities and added them to their equities trading unit. The company executives concentrated more on wealth-management than derivatives. The new changes fit a new, lower-beta revenue model to specially abide by the strict rules of Dodd-Frank Wall Street Reform Act.
Talking about the investment banking side of Morgan Stanley, they have largely focused on the riskier, high-growth tech sector. They were the lead underwriter for offering of Groupon, Inc., Salesforce.com and Cisco Systems, Inc. Moreover, Morgan played a key role in the IPOs for Facebook, Inc. and Apple, Inc.
Morgan Stanley is a global financial services company, providing services in investment banking, wealth management, investment management and securities. Wealth management is the firm’s largest branch and their associated broker-dealer, Morgan Stanley Smith Barney, is the largest single wealth management entity in the world.
Fourth-Quarter Earning Report and Full Year 2017
Goldman Sachs recently reported their Earning Report for Fourth Quarter and Full Year 2017. The firm reported a net revenue of $32.07 billion and net earnings of $4.29 billion for 2017. Their diluted earnings per common share was $9.01, which was a lot less than earnings per common share of $16.29 for 2016.
Goldman Sachs net revenues for the fourth quarter was $7.83 billion with a net loss of $1.93 billion. The diluted earnings per common share was $5.51 while it was $5.08 for the fourth quarter of 2016 and $5.02 for the third quarter of 2017.
Goldman Sachs’ net revenue in Investment Banking for 2017 was $7.37, which was 18% higher than 2016. And the net revenues in Financial Advisory was $3.19 billion, 9% higher than 2016. The report showed an increase in completed mergers and acquisitions transactions.
Morgan Stanley also reported their net revenues of $37.9 billion for the full year, which was $34.6 billion for 2016. The diluted earnings per share for 2017 was $3.09. The results for 2017 also included a net discrete tax provision of $925 million or a loss of $0.51 per diluted share. If we exclude the net discrete tax, the net income applicable of Morgan Stanley was $7.1 billion and $3.60 per diluted share. The net income was $5.9 billion or $2.88 per diluted share in 2016, though.
Morgan Stanley reported net revenues of $9.5 billion for the fourth quarter of 2017, which was $9.0 billion in 2016. The report for the fourth quarter also showed a net discrete tax provision of $990 million or a loss of $0.55 per diluted share. On excluding these net discrete tax item, the net income applicable was $1.7 billion or $0.84 per diluted share.
Goldman Sachs is one of the largest investment banks in the country and in the world. This means they have faced a decent number of pubic criticisms and controversies:
Role in the financial crisis of 2007-2008
Goldman Sachs saw themselves amidst harsh criticism in the aftermath of the financial crisis of 2007-2008. It was alleged that the firm misled its investors and gained profits from the collapse of the mortgage market. Goldman had to pay $550 million as settlement following investigations from the United States Congress, the United States Department of Justice and a lawsuit from the US Securities and Exchange Commission.
Sale of Dragon Systems to Lernout & Hauspie despite accounting issues
In 2000, Goldman Sachs advised Dragon Systems on its sale to Lernout & Hauspie of Belgium for $580 million in L&H stock. Soon after the sale, L&H collapsed and Dragon’s founders filed a lawsuit against Goldman Sachs, alleging negligence, intentional and negligent misrepresentation, and breach of fiduciary duty. However, a federal jury rejected the claims and found Goldman not liable.
Insider trading case
In April 2010, Goldman director Rajat Gupta found his name in an insider-trading case. It was alleged that Gupta “tipped off a hedge-fund billionaire”, Raj Rajaratnam of Galleon Group, about the $5 billion Berkshire Hathaway investment in Goldman during the financial crisis of 2007-2008.
Every company and bank on the Wall Street have been involved in one controversy or another and Morgan Stanley is no different:
In 2003, Morgan Stanley paid $125 million to settle their portion of a $1.4 billion settlement directed by Eliot Spitzer, the Attorney General of New York, the National Association of Securities Dealers (now the Financial Industry Regulatory Authority or FINRA), the United States Securities and Exchange Commission (SEC), and a number of state securities regulators in relation to intentionally misleading research, motivated by a desire to win investment banking business with the companies covered.
After a settlement with New York Attorney General Andrew M. Cuomo, Morgan Stanley agreed to repurchase approximately $4.5 billion worth of auction rate securities. Morgan Stanley was accused of misrepresenting auction rate securities in their sales and marketing.
In January 2017, Morgan Stanley paid a fine of $13 million as a result of over-billing and violating investor asset safeguarding custody rules.
The rivalry between Goldman Sachs and Morgan Stanley goes a long way back. But it is their rivalry that drives to come up with better customer products which is beneficial for us. You need Goldman Sachs Bank Routing Number and Morgan Stanley Routing Number if you have an account in these banks.