The Amazing Story Of The Downfall Of Goldman Sachs Asset Management

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Photo: Bloomberg Markets Magazine

Goldman Sachs is used to being number one.Besides claiming the mantle of Wall Street’s most successful securities firm, ever, the bank is one of few who came out swinging after financial crisis.

But one area in which they’re certainly not winning is asset management.

In fact, CEO Lloyd Blankfein and COO Gary Cohn are on a personal warpath to save its flailing AM arm, GSAM, according to this month’s Bloomberg Markets Magazine.

But GSAM wasn’t always the black sheep. In fact, at one point, it was Wall Street’s biggest asset manager.

What happened?

GSAM launched in 1988, but did not become a force until the 90s under Hank Paulson and Jon Corzine

Jon Corzine and Hank Paulson noticed the profits being generated in asset management by its rivals and doggedly built up the practice.

Source: Bloomberg Markets Magazine

In 1996 John McNulty, 'a visionary broker in the wealth management department' joined David Ford to run GSAM.

McNulty divides GSAM into 10 boutiques, 'each with a different investment strategy, independent of each other and of the front office' - it's a success.

Source: Bloomberg Markets Magazine

And so began a game of musical chairs of GSAM's management that has enraged investors and staff

But McNulty retired in 2001 (the same year the firm's AUM hit $351 billion), and ever since, Goldman has
'played musical chairs' with GSAM's management.

In 8 years, Goldman hires and replaces 8 GSAM chiefs.

Source: Bloomberg Markets Magazine

Peter Kraus and Phil Murphy replaced McNulty. When Kraus retired in '08 the unit had been battered by the financial crisis

In March '08, GSAM head Peter Kraus resigned.

Incentive fees had plunged 81% the previous year, and the flagship hedge fund, Global Alpha lost 40%.

Source: Bloomberg Markets Magazine

And the constant management turnover exacerbated the problems caused by the crisis

So Ed Forst takes over GSAM in 2008, after Kraus leaves; then he leaves after three months to take a job at Harvard.

But then, he suddenly retires from Harvard and comes back to GSAM.

Source: Bloomberg Markets Magazine

By the time 2009 rolled around, two new execs were running the unit, and revenue continued to plunge

To replace Forst, Marc Spilker and Tim O'Neill, become the seventh and eighth Goldman investment heads in eight years. And they didn't improve on Kraus' numbers.

The division's 2009 net revenue fell 12.8% from 2008 under their management.

Source: Bloomberg Markets Magazine

One of the major factors was GSAM's hedge funds, which have plunged 34% since '06

GSAM's 'once-vaunted hedge funds have lost their sizzle' - their value has fallen by 34%. Now hedge fund AUM is about $19.5 billion - making Goldman the 16th-largest hedge-fund firm.

Back in 2006, AUM was $29.5 billion. And GSAM was the Street's largest hedge-fund manager.

Source: Bloomberg Markets Magazine

And its mutual fund returns have been just as bad

According to Morningstar, just 44.9% of Goldman's U.S. diversified stock funds managed
to beat their peer average in the last three years.

Goldman's reputation is not 'the average firm that gets you average returns.' The bank is supposed to be the best, and investors were beginning to squirm.

Source: Bloomberg Markets Magazine

Of course, once AUM began to plummet, more investors began to flee

In 2010, AUM fell 3.6% as investors yanked their cash from low-yielding money market and equity accounts.

Flows out of asset management totaled $71 billion in 2010.

Source: Bloomberg Markets Magazine

In March of 2010 a $22.7 billion Nevada pension fund fired GSAM

Then in June, a $2.8 billion pension fund pulled $347 million from GSAM

Then in June, the $2.8 billion Kern County, California, Employees' Retirement Association pulled $347 million from two GSAM accounts.

Executive director Anne Holdren cited both performance and turnover at Goldman as reasons.

Source: Bloomberg Markets Magazine

GSAM employees also began to resent that their constantly changing bosses

Soon, Goldman's SEC lawsuit in court hurt GSAM fundraising too

In July, CFO David Viniar, responding to a question on a conference call, said that the 2010 Abacus SEC suit had impacted on GSAM's ability to raise money.

Source: Bloomberg Markets Magazine

And then came the Facebook fail...

Goldman planned to sell as much as $1.5 billion of Facebook's stock to clients through a GSAM-affiliated fund known as a special-purpose vehicle.

They pitched clients; they got everyone excited. And then within days, yanked the opportunity away from its U.S customers.

Source: Bloomberg Markets Magazine

All of the press the deal got hurt the Facebook deal even more

Because of all of the press the deal got, the bank apparently decided that the level of media attention might contravene 'proper completion of a U.S. private placement under U.S. law.

GSAM has particular culture, that is far more 'academic, collegial, less cutthroat' than the rest of Goldman.

Now Blankfein and COO Gary Cohn are attempting to 'Goldmanize' GSAM and 'tether it more closely to its parent.' But with their independence gone, 'a parade of portfolio managers have left.'

Source: Bloomberg Markets Magazine

Now, GSAM's total AUM is now about $71 billion, down from a peak of $351 billion

Reality bites.

But at least the firm has a fresh new crop of Partners!

Now click here to meet Goldman's most impressive new Partners >

Source: Bloomberg Markets Magazine

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