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Does Goldman Sachs need to change its business model?

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Goldman Sachs reported third-quarter earnings on Oct. 15 that fell short of analysts’ predictions. There were steep declines in revenues and profits from the same period in 2014.

Net income was down 36 percent year over year; revenues for the business unit that trades fixed-income, currency and commodities was down 33 percent, and the Investment and Lending unit’s revenue fell by 60 percent.

Banking equity analyst Michael Wong at Morningstar said that in the wake of Dodd-Frank financial regulation, investors are questioning whether the most heavily regulated bank holding companies, including Goldman Sachs, JP Morgan Chase and others, should still be so exposed to the volatility and risk of their trading activities.

“There are definitely at least two camps, in regards to fixed income, currency and commodities trading, and whether large banks should be investing more in them or scaling back,” Wong said.

In Goldman’s case, Wong sees recent performance as validating the strategy of CEO Lloyd Blankfein to stay the course and continue relying on traditional investment banking activities for a sizeable portion of revenues and profits. Wong points out that until the third quarter, Goldman’s previous earnings reports for several quarters have been very strong, outpacing the bank’s rivals. He believes that if other big banks in the U.S. and Europe back away from trading because of heightened regulatory limits and scrutiny, that actually creates opportunity.

“If Goldman Sachs is able to gain market share,” he said, “that should be positive for the firm.”

But Karen Petrou at Federal Financial Analytics said the ground is gradually shifting under Goldman Sachs. She said the sweeping new financial regulations brought in after the financial crisis broadly impact the bank’s business model.

“Their fixed-income trading is now significantly limited,” said Petrou. “They can’t do a lot of things they used to do, and they have to hold a lot of capital. The way Goldman Sachs knows how to make above-market returns is to take above-market risks. But when the rules won’t let you take those above-market risks, you’ve got a very significant long-term challenge.”

Petrou and Wong agreed that it would be difficult for Goldman Sachs to try to become a traditional retail bank, like Bank of America or Wells Fargo, with a nationwide network of branches, serving typical consumers with loans and deposits. And Petrou pointed out that Goldman is innovating in areas like online lending and payments processing, ahead of some of its rivals.

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