By Francesco Guerrera and Andrew Edgecliffe-Johnson in New York
Published: October 5 2010 23:03 | Last updated: October 5 2010 23:03
Wall Street’s sentiment towards Goldman Sachs and Morgan Stanley has turned sharply bearish over the past month with analysts’ estimates for the banks’ third-quarter earnings plunging amid a slump in trading activities.
The poor performance of the trading operations – a key driver of the two banks’ recovery after the financial crisis – will intensify questions over their business models and deepen fears of job
Analysts have slashed their forecasts for Morgan Stanley’s third-quarter results by more than 73 per cent in the past 30 days, according to Thomson Reuters’ StarMine.
Goldman’s consensus estimate has fallen by more than a quarter since early September and is now forecasting the lowest quarterly earnings per share, excluding exceptional items, since November 2008.
Sri Raman, StarMine’s quantitative analyst, said Goldman’s results, due on October 19, could still come in below the consensus numbers because five of the 22 analysts covering the bank were yet to lower their predictions.
“If they don’t all revise their estimates, we would expect Goldman to miss [the consensus forecast],” he said. “That is a bold prediction because Goldman has a history of always beating expectations.”
StarMine estimates that Goldman’s earnings could come in more than 16 per cent below the current EPS consensus of $2.52. In the same period last year, Goldman earned $5.25 per share.
The consensus estimate for Morgan Stanley is $0.15 per share, compared with the $0.38 EPS recorded in the third quarter of 2009.
Goldman and Morgan Stanley declined to comment, but executives said they expected most analysts to fall into line before the results. Financial sector analysts tend to move later than colleagues covering other sectors because bank earnings are more volatile.
Macroeconomic woes and political uncertainty have kept investors on the sidelines, prompting analysts to become more and more pessimistic during the quarter about the profitability of trading operations.
“Anxiety stemming from a waning economic recovery and uncertainty over the mid-term elections left clients paralysed and trading desks fell silent during the quarter,” wrote Brad Hintz of Bernstein’s Research in a recent note that lowered estimates for Morgan Stanley and Goldman Sachs.
StarMine weights analysts’ forecasts according to their past accuracy and gives more emphasis to those who make early calls or “bold” estimates, which differ strongly from the mean.
It estimates that its methodology has had an 80 per cent success rate over the past 10 years in predicting the direction in which estimates will move for highlighted stocks.
Mr Raman said this quarter’s reporting season should see earnings of North American companies rise on average by 23.8 per cent year on year, building on the 38 per cent growth seen in the second quarter.
Nancy Davis, a rising star at Goldman Sachs Group Inc., left in January 2008 after an eight-year run betting the firm’s money on derivatives to become a portfolio manager at Highbridge Capital Management LLC. She lost her job 10 months later when the hedge fund cut back in the recession.
For women in the financial-services industry like Davis, who’s still unemployed, the last few years haven’t been kind. More than five times as many women as men lost their jobs in the three years after July 2007, and pay for full-time female managers compared with their male counterparts worsened between 2000 and 2007, according to U.S. government data.
Women managers in finance, a group that includes bank tellers as well as executives, earned 63.9 cents for every dollar of income men earned in 2000, based on median salaries, according to Government Accountability Office statistics analyzed by Bloomberg. In 2007, the last year for which data is available, the figure was 58.8 cents. The 41-cent gap was the biggest in any of 13 industries surveyed by the GAO, and only two others had a widening disparity.
“When you have an industry dominated by men like finance, and compensation going through the roof, it’s not surprising that it increases the gender disparity between men and women,” said Joan C. Williams, a professor at the University of California’s Hastings College of Law in San Francisco who has written on gender and the workplace. “The sky’s the limit for men who hit a home run, but women can’t get to first base.”
Goldman Sachs Lawsuit
It has been more than a decade since a case brought by Smith Barney brokerage employees served to dismantle Wall Street’s mandatory arbitration rules, Merrill Lynch & Co. was confronted with sex-discrimination claims from 900 women and Allison Schieffelin, a former bond saleswoman, filed a gender- bias suit against Morgan Stanley -- a case later settled for $54 million. Yet not a lot has improved for women in banking.
Last month New York-based Goldman Sachs was sued by three former female employees who say they faced discrimination in pay and fewer opportunities for promotion than men at the firm. One of the women claimed she had been pinned against a wall and groped by a male colleague after a 1997 outing that included a stop at Scores, a Manhattan topless bar.
Ed Canaday, a spokesman for Goldman Sachs in New York, said the suit is “without merit” and that the company takes “extraordinary efforts to recruit, develop and retain outstanding women professionals.”
‘Culture Hasn’t Changed’
“Despite their sustained participation and economic influence, women have experienced a shockingly slow rate of progress advancing into business leadership, regardless of industry,” Ilene H. Lang, president and chief executive officer of Catalyst, a New York organization that promotes workplace diversity, told lawmakers at a Sept. 28 hearing in Washington.
It’s harder for women on Wall Street where trading floors can create a hostile environment, said Nina Godiwalla, a former investment banker at Morgan Stanley and author of “Suits: A Woman on Wall Street,” which will be published by Atlas & Co. in February.
“Based on the women I’ve talked to, the culture hasn’t changed,” Godiwalla said. Women are routinely subjected to crude jokes and excluded from outings, she said. “Even if it doesn’t happen to you, you see it around all the time, and it’s just a reminder that you’re not part of the team,” she said.
Maternity ‘Buddy’
To be sure, women have gained some ground over the last decade. Executives including Mary Erdoes, CEO of asset management at JPMorgan Chase & Co., Lisa Carnoy, co-head of global capital markets at Bank of America Corp., and Isabelle Ealet, global head of commodities at Goldman Sachs, have risen to positions of prominence at the biggest U.S. banks.
Davis, 33, said Goldman Sachs and Highbridge, which is owned by JPMorgan, bent “over backward to keep women.”
Goldman gave Davis a maternity “buddy,” a senior female manager, to help her transition back to work after both of her pregnancies and placed her in its Leadership Acceleration Initiative, a program to promote the development of high- performers, she said.
“Of course you’re going to run into your share of jerks on Wall Street, but my experiences at Highbridge and Goldman were very positive,” Davis said. “I was fortunate to work with good groups of people, and I never saw unfairness or discrimination.”
‘Mommy Track’
Still, for a trader with her credentials, finding a job has been harder than she expected. Davis, who ran proprietary derivatives trading for Goldman Sachs, wants something that will allow her to see her 4-year-old and 7-year-old before bed without being relegated to the “mommy track,” she said.
“I interviewed for a job recently with a small hedge fund. I think they were concerned about my ability to work until 2 a.m. given my family commitments,” Davis said. “They realized that, and I realized that. It wasn’t the right fit.”
More than half of women between 15 and 44 years old have children, according to the U.S. Census Bureau, which can cause problems like the ones facing Davis, said Williams. Studies have found that mothers are less likely to be hired or promoted and receive lower pay for similar jobs, Williams said. Becoming a mother is one of the leading reasons women leave Wall Street, she said.
“They get the sense that it’s going to be impossible to have children and keep their jobs at the same time,” Williams said.
Job Losses
The number of women in finance, banking and insurance in the U.S. fell by 537,000 between the second quarter of 2007 and the second quarter of this year, according to data compiled by the Bureau of Labor Statistics. That’s 12.5 percent of women in those industries compared with 3.6 percent of jobs held by males cut in the same period, according to the data. Across all industries, the female workforce decreased by about 2.6 percent, or 1.7 million jobs, in the three-year period, the data shows.
Women who get a foot in the door on Wall Street often find themselves assigned to less prestigious trading desks and divisions with smaller bonus pools, said Kelly Dermody, a partner at Lieff Cabraser Heimann & Bernstein LLP in San Francisco who’s representing the women suing Goldman Sachs along with Outten & Golden LLP. The two law firms have gender- discrimination cases pending against Bank of America and its Merrill Lynch unit, among other firms, Dermody said.
“Women are fighting the same old battles, just in a new environment higher up the chain,” she said. “These cases keep coming and coming. Wall Street isn’t learning the lessons.”
Bloomberg LP, the parent company of Bloomberg News, is currently in litigation with the Equal Employment Opportunity Commission in a gender-discrimination case.
JPMorgan, Citigroup
One of the complaints in the Goldman Sachs case is that the proportion of female managers shrinks at higher levels. Women constituted 29 percent of the firm’s vice presidents, 17 percent of managing directors and 14 percent of partners in 2009, according to the complaint. Four of 30 members of the management committee and one of nine executive officers were women.
JPMorgan has three women on its 16-person operating committee, including Erdoes, Heidi Miller, president of international operations, and Chief Investment Officer Ina Drew. Morgan Stanley has just one woman, Chief Financial Officer Ruth Porat, among its top dozen executives. Citigroup Inc. CEO Vikram Pandit doesn’t have any women on his executive committee, which consists of 19 men, including himself.
Shannon Bell, a spokeswoman for Citigroup, said women run many businesses and important functions, including the firm’s private bank, personal banking and wealth management. Darin Oduyoye, a spokesman for JPMorgan, and Mark Lake, a spokesman for Morgan Stanley, declined to comment.
Unconscious Discrimination
“In the old days, the problem was conscious, explicit discrimination -- the doors were literally closed and we had to put our heads against them and pound them in,” said Susan Estrich, a professor of gender-discrimination law at the University of Southern California in Los Angeles and author of “Sex and Power.”
Discrimination today is largely unconscious, and people in power don’t even realize they’re doing it, she said.
“People who are doing the judging unconsciously prefer people they’re comfortable with, people they know, people who look like them, people whose experience they recognize,” Estrich said.
Sharon Meers, a former managing director at Goldman Sachs who left the firm four years ago to write “Getting to 50/50: How Working Couples Can Have It All by Sharing It All (Random House, 2009),” describes studies in her book that show both men and women are more apt to choose male job candidates over females, even if their credentials are identical.
“The air we breathe is filled with assumptions about men and women that are hard to shake,” Meers said. “Instantaneously and subconsciously, we end up prioritizing men over women in a way that doesn’t make any sense.”
Testosterone’s Role
That’s especially true on Wall Street trading floors, said Williams, the Hastings law professor, who has studied traders.
“The gender bias faced by female traders is open, dramatic and pervasive compared with other professionals,” she said. “It’s all about masculine signaling -- mine’s bigger than yours. But in this case, it’s measured by salary and fueled by risk.”
That may have something to do with testosterone, according to John Coates, a former derivatives trader at Deutsche Bank AG and now a senior research fellow in neuroscience and finance at the University of Cambridge. Coates left the bank to study the correlation between hormones and trading after noticing that male traders exhibited manic behavior during bull markets.
‘Feeds on Itself’
“You put on a trade, you get it right, you make a big win, your testosterone levels go up, you get more confident, you want more risk and this thing feeds on itself,” said Coates, whose studies of traders in London found that men with higher levels of testosterone earned more money. “If you get into a bull market, all these guys are in synch. And eventually they get T levels that are so high they’ve gone over the top of this dose- response curve, and they are over-confident and are putting on too much risk, and it’s risk with terrible risk-reward tradeoffs, and that is a bubble.”
Women produce about 10 percent of the testosterone of an average man in his 20s, which may explain some differences in risk-taking, Coates said. In the investment banks he studied, only 2 percent to 3 percent of the traders were women, while about 60 percent of the asset managers, who have more time to analyze the risks they’re taking, were female. Brokerage accounts managed by women tended to outperform those held by men, he said.
“Women are better at more reflective types of trading or trading that requires more analysis and a longer holding period,” Coates said. “Why isn’t Wall Street valuing that?”
Competition, Risk-Taking
Hormones alone don’t explain the differences between males and females on Wall Street, said Anna Dreber, a researcher at the Institute for Financial Research in Stockholm who’s studying competition and risk-taking among men and women. She said she has found that girls can be as competitive as boys, depending on the environment.
“Even if you have some specific version of a gene that makes it more likely to take a risk, your social environment can still affect whether that gene is expressed or not,” Dreber said. “I would expect a fairly big chunk of the variation of behavior in individuals is some sort of interplay between biological and social variables.”
Davis, who thrived on one of Goldman Sachs’s most elite trading desks, may be an exception to the rule, said Williams, whose latest book is titled “Reshaping the Work-Family Debate: Why Men and Class Matter” (Harvard University Press, 2010).
Walking a Tightrope
Bias against women in the workplace today is more subtle than in the past, she said. Women have to walk a tightrope in the office between being too feminine and not being taken seriously or being too masculine and viewed as a “bitch” with a personality problem, she said. They also have to keep proving their competency, she said.
“There are dramatic gender pressures on both men and women who are traders that systematically disadvantage women, regardless of which hormone is surging when,” Williams said. “The gender pressures on men are to be the biggest cowboy with the biggest gun who shoots the fastest. It’s all about who demonstrates manliness the best.”
A bit more on the stronger than expected Chinese inflation data. Economists now expect further policy tightening measures and sooner rather than later.
Barclays Capital: In view of the higher-than-expected inflation in February, More…
A bit more on the stronger than expected Chinese inflation data. Economists now expect further policy tightening measures and sooner rather than later.
Barclays Capital:
In view of the higher-than-expected inflation in February, we revise upward our projection of average CPI inflation for 2010 to 3.5% from 3.0%, which implies a rise in the headline rate to around 3.5% by mid-2010 and 4% by Q4. This is compared with the government target of 3% announced at the NPC meeting.
Consequently, we revise our call on the benchmark interest rate and now look for a hike in Q2; previously we expected rated to begin rising in Q3. We now project three increases of 27bp in the benchmark rates in 2010 – one in Q2 and the remaining two in H2. We maintain our projection of real GDP growth of 9.6%, but change from upside to balanced risks around the baseline, owing to the quickened pace of tightening
Morgan Stanley:
We continue to see multiple RRR hikes as necessary over the next few months to sterilize the liquidity impact from the BoP surplus, with the next RRR hike likely to be in the very imminent future. The first interest rate hike of 27 bps could come as early as April, in our view, followed by two more hikes in 3Q and 4Q. Nevertheless we stand by our call that Renminbi appreciation (against US$) will not resume until 2H10, although appreciation on a trade-weighted basis is already taking place given the US dollar’s recent and projected strength against other major currencies in the course of this year.
And finally, Goldman Sachs:
Although inflationary pressures remain moderate for now, we believe if there are no measures more decisive than the modest (although relatively frequent) RRR hikes, we are likely to see higher inflationary pressures. Recent comments by a number of policymakers that there are no signs of inflation yet are worrisome as it indicates a lack of willingness to take more decisive measures until higher inflation actually occurs.
Having said that, we still believe policymakers will take a combination of tightening measures in the coming months to prevent overheating. These measures are likely to be targeted at FAI-related areas given the government’s strong emphasis on stimulating private consumption and the unwillingness to fully utilize the exchange rate as a policy tool to influence exports growth.We expect these so called macro tightening measures to include a mixture of credit controls, further RRR and interest rate hikes, administrative controls on investment approvals and funding and other “industrial policies” to curb investment activities in sectors regarded as having problems such as overcapacity.
Melody's note, Comment from RBS (but its estimate for CPI, PPI n bank loan are all way wrong):
More concern about growth: property-sector FAI and export growth in 2H10 Returning to centre-stage, in our view, is the need to cement growth in 2010. While policy makers prefer stable to steadily rising property prices, these have seen nothing but extreme volatility. Combined with possible uncertainty about export growth in 2H10 and the close of the politically sensitive NPC session, we may have several months of relatively benign良性的 regulation of property, which may help property FAI. The risk is that if property prices start rising again, it may lead to greater social tension and more regulatory actions just as the supply of residential property increases in 2H10F.
A slight reversal of the exit/normalisation trade for several months? We see 2010 as a year of ‘touching the stones to cross the river’ for policies in China, with the government reducing excess liquidity as the real economy improves. The implication is negative for asset plays and positive for transportation and industrials. Ranked by top-down incremental yoy growth, we prefer export-exposed sectors to consumption and FAI-related sectors. That said, in the coming months, we may see a slight reversal of the policy exit/normalisation trade. We believe the sectors that will benefit incrementally are property, energy, materials, cement and consumer discretionary. Defensives and agriculture inflation hedge may perform less well on postponed policy exit and reduced inflationary fear. The impact on banks should be positive on low valuations and reduced tightening fears.
Amidst an analyst note on the difficulties of measuring fiscal policy impacts on exchange rates, Goldman has weighed in on the Great British Krona. Good news, sterling: the beatings will stop. More…
…in the long term.
Amidst an analyst note on the difficulties of measuring fiscal policy impacts on exchange rates, Goldman has weighed in on the Great British Krona. Good news, sterling: the beatings will stop. Eventually.
From the note:
The general assumption is that if the UK election does result in a hung parliament, it will become difficult to enact the required legislation to bring the fiscal deficit down…
…Between now and then, the Pound may well remain hostage to developments in the polls and the tone of the election campaign, particularly on the fiscal front…
In addition, Sterling is still plagued by lacklustre activity data and a relatively dovish central bank. We do expect both of these factors to turn more bullish for the Pound further out but in the near term they may also weigh on Sterling. Taking these three factors together, we have revised our 3-month EUR/GBP view to 0.87 from 0.84.
However, we have not changed our 6- and 12-month forecasts, which stay at 0.84.
That’s due to Goldman’s ‘above-consensus’ growth forecast for the UK, which they see as plausible due to business survey data so far. How far above consensus, and how plausible? You decide:
At present, the hard data is weaker than the survey data says it should be. This is particularly true of the GDP data; however, some of the more frequent, monthly hard data still seems to be lagging somewhat. We continue to expect the hard data to catch up with the strength of the survey data and thus look for the Bank of England to change stance and hike rates in August. Specifically, we expect the UK economy to grow by 1.8% and 3.4% in 2010 and 2011, compared with 1.4% and 2.2% from the consensus.
This underpins our more hawkish view of rates, where we expect the Bank of England to hike rates by 300bp vs market expectations of 250bp. The recent change in tone from the Riksbank and the subsequent appreciation of the SEK is a good template for the potential dynamics of the Pound.
Great British Krona, indeed. That would be the Swedish krona as a model for sterling – not the Icelandic krona. Fortunately.
Even so, Sweden is an intriguing model, to say the least. While the Riksbank has been getting ready to end ‘crisis interest rates’, the Swedish economy tipped back into recession in the meantime – throwing monetary policy up in the air.
As a coda to all of this, do bear in mind that Goldman have also recently advised on trading ideas for a sterling slump in the short term. Wily one, that vampire squid.
Oh, and what did the Goldman note conclude overall? Fiscal policy ‘dominates as a key issue’ when it comes to currency valuation. Do remember that, Westminster.
