Goldman Sachs Vs. Morgan Stanley: Comparing Business Models – Investopedia (blog)


Morgan Stanley (MS) and Goldman Sachs (GS) have been top rivals for more than 80 years. After the 2007 – 2008 Financial Crisis left the nation’s banking sector in shambles, the two firms helped lead Wall Street’s recovery, and now with financial stocks soaring during the second-longest bull market in history, their high-stakes rivalry continues to take the spotlight.

Each bank has a distinct business model. Goldman has long been known for hustling after upside in lending, private equity and hedge funds, while Morgan has built its reputation on being more conservative and cautious. The differences between the two banks are as clear as they’ve ever been.

Morgan Stanley’s Model

Morgan Stanley is often referred to as an investment bank. More accurately, it is a financial holding company or commercial bank. It provides services to corporations, governments, large private financial institutions and high-net-worth individuals (HNWIs).

Morgan made widespread changes to its business model from 2011 to 2012. The company reduced headcount from fixed-income activities and added employees to its equities trading unit. Morgan executives focused their business on wealth management rather than derivatives. These changes fit a new, lower-beta revenue model in a financial era abiding by the Frank-Dodd Wall Street Reform Act’s more stringent rules.

On the investment banking side, Morgan Stanley has long focused on the riskier, but high-growth, sector of technology. The bank was lead underwriter for offerings of Google, Inc., Groupon, Inc., Cisco Systems, Inc., and Salesforce.com. It was also instrumental in IPOs for Apple, Inc. and Facebook, Inc. Morgan Stanley was also the lead underwriter for Snap Inc.’s IPO, which raised $3.4 billion earlier this year.

Morgan Stanley divides its business units into three distinct areas: institutional securities, wealth management and investment management. Wealth management is the largest branch, and its associated broker-dealer, Morgan Stanley Smith Barney, is the largest, single wealth management entity in the world. However, the institutional securities group is generally more profitable.

Goldman Sachs’ Model

Goldman Sachs depends on trading revenue perhaps more than any other bank on Wall Street. Of course, its trading profits are usually at their highest when the markets are soaring as they are today.

As a result, Goldman’s business has a cyclical feel, and some industry experts say its revenue stream is unsustainable. Compared to Morgan Stanley, Goldman’s financial statements reveal significantly more focus on fixed income, currency and commodities trading.

Of all the major investment banking powers, including JPMorgan Chase & Company (JPM), Bank of America Merrill Lynch (BAC) and Citigroup, Inc. (C), Goldman Sachs has retained the most of its pre-crisis-style business model. The company deploys bank capital in risk-taking ventures and chases high return on investment (ROI) and return on equity (ROE) figures. If a bank deploys enough assets in enough high-reward areas, profits should follow.

Since the Financial Crisis, Goldman Sachs seems to be the bank that’s most willing to engage in trading and lending activities. It is the same model that yielded great profits from 1995 to 2005, and from 2010 to 2013. But it is also the same model — albeit less leveraged — that made many banks so vulnerable a decade ago.

Goldman’s business model is sensitive to two variables that it can’t control: low interest rates and broader market volatility. Low activity in the bond market is a significant problem too.

Different Strategies in a Post-Recession Environment

Of course, the banking world changed after 2008. Investors became skittish, but not as skittish as lenders. Dodd-Frank significantly increased the level of regulatory scrutiny on banks like Goldman Sachs and Morgan Stanley.

Morgan responded to a different environment by slashing trading operations. In effect, the bank moved away from high-risk and high-reward trading, and into more dependable money management. By contrast, Goldman Sachs stressed corporate investing, trading and lending, and roared back to life following the crisis.

Another major market downturn would but both banks’ post-crisis business models to a true test.

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