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Goldman Sachs (NYSE: GS ) reported first-quarter earnings today. Accompanying that release of data was the standard quarterly conference call, which turned out to be not so standard.
It contained some of the most interesting and insightful back-and-forth interactions between analysts bank management I've heard in a long time. Here are three quotes that stand out.
1. "In the end, it's all about the quality of the rulemaking process."
This quote came from Harvey Schwartz, Goldman's chief financial officer, in response to a question from Roger Freeman, an analyst at Barclays. Freeman asked how Goldman felt about the fact that the Volcker Rule might not be finalized until the second half of this year.
The Volcker Rule is one of the centerpieces of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, and it is supposed to keep big U.S. banks from making proprietary trades -- that is, make bets in the market with their own money. Caught up in a tug of war between the banks and regulators over wording and execution, the final version of the Volcker Rule is long overdue.
Schwartz's comment that, "In the end, it's all about the quality of the rulemaking process," must be -- in part, at least -- cover for the fact that Goldman and all of the big banks are anxious to have a final version.
The longer the wait for the final version of this rule, the longer the wait for banks to figure out how to design their business models. And the longer the wait for that, the longer before the banks can figure out how to maximize profits -- and therefore investor returns.
2. "With respect to ROE, it's an important question [but] we still don't have enough information."
Again, the quote is from Harvey Schwartz and is in response to a question from CLSA analyst Mike Mayo regarding what the bank expects its return on equity to be over the next few years.
ROE is a management-efficiency metric, and measures the amount of net income a company generates as a percentage of shareholder equity. Goldman reported a 12.4% ROE for the first quarter, which is solid. JPMorgan Chase (NYSE: JPM ) reported an ROE of 13% for Q1. Wells Fargo (NYSE: WFC ) reported a first-quarter ROE of 13.59%. So Goldman is in good company here.
But according to Mayo, at some point, Goldman targeted an ROE of 20%. Schwartz chalked up Goldman's current 12.4% to a lack of information regarding capital rules and regulations, and went on to say that Goldman remains overall focused on maximizing returns for its investors, however you want to look at it.
This is half blow-off of Mayo's question and half truth. It's true that capital rules and regulations are still in motion, but it's also true that ROEs of 20% or more haven't been seen since the pre-crash days, and are unlikely to be ever seen again. And that's a good thing. Those high ROEs were only possible thanks to insane amounts of leverage -- the same leverage that ultimately helped blow the banks up.
3. "The stress test is a really good concept."
Again, this is Schwarz's response to a question from an analyst at UBS. It was regarding the Federal Reserve's directive for Goldman to resubmit its capital plans after the results of the 2013 stress tests were released. The analyst was looking for a little clarification on what the Fed was looking for.
Schwarz didn't offer the analyst the "color" he wanted, but he did follow up his comment that "the stress test is a really good concept" with the notion that had something similar been in place before the financial crisis, the crisis may have been prevented. It was probably part PR and part truth, but that's OK with me.
Though they're not perfect, the stress tests are a good idea, and they have gone a long way toward making the banks safer. And when the banks are safer, the economy is safer.
CEO Lloyd Blankfein and his people are a smart bunch. Regarding fixing the capital plans, they'll do whatever it is the Fed wants them to do (1) because they have to, (2) because to not do it would mean bad PR, and (3) because I think Blankfein and his team really believe that proper capital reserves mean a stronger bank.
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