We already knew it was an ugly quarter for Goldman's trading desk. This morning, when Goldman issued its 2017 10-K we got an indication just how ugly it really was, and more importantly why.
According to the world's biggest incubator of central bankers, in 2017 Goldman had just 4 days in which it generated profits of more than $100 million. According to Bloomberg data, this was the lowest number of sessions since at least 2004. This is shown in the chart below which presents the frequency distribution of Goldman's daily net revenues for positions included in VaR for 2017.
It also marks a remarkable fall from grace for a bank which milked the crisis for all it was worth to make a killing: for example, in 2009 Goldman traders made over $100 million on 131 days; even during the depths of the crisis, in 2008, Goldman managed to make more than $100 million per day on at least 10 days.
Meanwhile, on the other end, the bank suffered 31 days of losses in 2017, the most in two years.
While we already knew that Goldman’s fixed-income trading group struggled last year as the commodities unit turned in its worst performance since the firm went public and persistently low volatility kept clients on the sidelines, the data suggest that weakness was persistent across all verticals. Competitors also have eaten into the bank’s business, leading it to add language in its filing to show that "prices as reflected in bid/offer spreads are under threat", according to Bloomberg, to wit:
"Price competition has also led to compression in the difference between the price at which a market participant is willing to sell an instrument and the price at which another market participant is willing to buy it (i.e., bid/offer spread), which has affected our market-making businesses. In addition, we believe that we will continue to experience competitive pressures in these and other areas in the future as some of our competitors seek to obtain market share by further reducing prices, and as we enter into or expand our presence in markets that may rely more heavily on electronic trading and execution.
We also compete on the basis of the types of financial products that we and our competitors offer. In some circumstances, our competitors may offer financial products that we do not offer and our clients may prefer."
Finally, for those curious why the mighty have fallen so hard, the answer can be found in Goldman's VaR, which as Goldman reveals has plunged in recent years, with Goldman's average daily VaR decreasing to $54 million in 2017 from $63 million in 2016, as a result of a drop across all categories - rates, equities, currencies, and commodities - "due to reductions across all risk categories, partially offset by a decrease in the diversification effect."
The real culprit, however, central banks and buybacks as "the overall decrease was primarily due to lower levels of volatility."
And with Goldman predicting a 23% increase in buybacks this year to a record $650 billion, which would suggest a further drop in VIX - and thus Goldman's VaR - one can understand why Goldman is increasingly shifting its strategic focus to its consumer-focused lending and depositor platform, Marcus, i.e. old-school banking, which in a world where trading is no longer as profitable as it once was, is the Plan B alternative for Lloyd Blankfein.