‘Sentiment Business’

Goldman Sachs doesn’t have a single firmwide target. The bank has resisted calls for an ROE goal and has dismissed the notion that benchmarks in its executive-pay packages represent a target. Blankfein, humbled by decades in the financial markets he calls the “sentiment business,” might hesitate to predict what he’ll have for lunch. Calls for forecasts are met with some version of “I will have a very clear answer in hindsight.” He prizes flexibility and speaks often of his firm’s need to be nimble. Any stated targets may reduce its ability to be opportunistic with capital or pay.

Blankfein’s trust-us approach gets the benefit of the doubt from investors because his firm has had the highest ROE of any major investment bank over the past three years. Goldman Sachs executives also note that shareholders aren’t missing out on much: Almost every competitor that has published an ROE target has later cut it.

Meanwhile, Blankfein preaches patience. “You can’t extrapolate from the highs, and you certainly can’t extrapolate from the lows,” he said after the company’s annual meeting in San Francisco in May. “I hope I don’t look back at this period as the golden age.”

Role Reversal

Wall Street’s most enduring rivalry has gone through many cycles over its eight-decade history. Morgan Stanley, founded in 1935 after the Glass-Steagall Act forced J.P. Morgan & Co. to separate its investment- and commercial-banking businesses, was once the white-shoe firm with a pedigree. It was a coup for Goldman Sachs to join it in advising big U.S. companies such as Ford Motor Co. When Morgan Stanley went public in the 1980s, Goldman Sachs was buying a commodities shop, J. Aron & Co., and bolstering its reliance on trading.

Morgan Stanley weathered power struggles after its 1998 merger with Dean Witter, whose Main Street brokerage and Discover credit card business made the firm more retail.

Meanwhile, Goldman Sachs was riding the growth of fixed-income trading. Its 1999 IPO was 12.5 times the value of Morgan Stanley’s, and it had better stock performance in each of the next six years. The firm spread its influence. Alumni include U.S. Treasury Secretaries Robert Rubin and Henry Paulson and the current leaders of the two biggest central banks in Europe, Mario Draghi and Mark Carney.

Casino Loss

Under John Mack, Morgan Stanley tried to emulate Goldman Sachs’s formula of boosting profit through proprietary trading and investments with the firm’s money. That ended with a mortgage prop-trading desk losing more than $9 billion and an investment in an Atlantic City, New Jersey, casino that cost it $1 billion.

Both firms converted to bank holding companies in 2008 so they could borrow from the U.S. Federal Reserve, recruited outside investors, and received government bailouts. But the rates at which they bounced back differed dramatically.

Morgan Stanley continued to limp along as Gorman took over at the end of 2009, while Goldman Sachs posted record profit that year, taking advantage of recovering markets and fewer competitors.

‘Strategically Underperformed’

Goldman Sachs’s performance, along with its reputation for aggressive behavior and its short bet on the U.S. housing market, made it the face of Wall Street greed. Morgan Stanley stayed out of the spotlight, prompting the joke told at both firms that it “strategically underperformed” during and immediately after the financial crisis.

Those experiences shaped the banks’ trajectories. Morgan Stanley needs to show steady progress after years of financial turmoil and one-time charges. Goldman Sachs, whose reputation is the worst of any major U.S. company according to a Harris poll this year, has to try to change the public’s perception.

“Everybody’s got to do whatever they do based upon their own circumstances,” Gorman said in May. “And clearly we were more fragile than some, and less than others, coming out of the financial crisis.”

Gorman is an unabashed champion of his firm, extolling the changes it has made and speaking on each quarterly investor call. Blankfein has taken a statesmanlike role in recent years, commenting on the economy and government policies more often than on earnings. He’s more likely to appear alongside a politician promoting Goldman Sachs’s philanthropic work than he is to speak at an investor conference.