Jeremy Warner's Outlook: Goldman Sachs taps into dream conditions for investment banking, but can they last?

Bristol Myers: another axing in Big Pharma; Nationwide: don't expect windfalls
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The Independent Online

In just three quarters, those latter-day masters of the universe otherwise known as Goldman Sachs have recorded a higher profit than was achieved in the whole of last year. This was itself an all-time record for Wall Street, so you could say that Goldman is doing pretty well. Is this as good as it gets, or is there still more to come?

Investment banks were once upon a time just an each-way bet on the interest rate cycle, which they would track closely. Today they seem to make as much money - actually, on the evidence, even more money - on the way up as they do on the way down. Whether they have become similarly disconnected from the economic cycle I somehow doubt, but certainly Goldman managed to keep growing profits right through the last downturn.

With the US economy now slowing fast, can the bank hope to do so again? The key to Goldman's success as an investment bank has been in diversification, both across the capital markets and geographically. It has also become exceptionally good at risk control. With the IMF warning of a potentially lethal cocktail of risks, these techniques may soon be needed as never before.

But have no fear: Goldman has the measure of it all. One of the scenarios that Goldman plans for is WOW - the worst of the worst, or what happens if 20 different asset classes fall to the lowest level they have been in recent years all on the same day. Unfortunately, not even Goldman can plan for the totally unforeseen. In such circumstances WOW won't prevent calamity either. Yet absent of the unexpected, Lloyd Blankfein, the new chief executive, is almost certainly right in believing economic wipe out rather unlikely.

Despite the profits already achieved, the third quarter marked a big slowdown for Goldman on the previous two. That should have come as no surprise after the May sell-off in equity markets and the general de-leveraging of positions that took place at that time. The question now is whether the economic slowdown that this correction anticipated is going to end happily or badly.

Goldman's own chief economist, the London-based Jim O'Neill, reflects the house view in thinking on balance that a happy outcome is the more likely one. This opinion is based on a number of lead indicators that Goldman tracks. True enough, some of these are negative, not least the shape of the US yield curve, parts of which have again become inverted. This is traditionally a sign of recession to come. The bank's quarterly survey of confidence among chief executives is also notably more gloomy. Consumer confidence has, meanwhile, slowed markedly with the US housing market.

Yet other lead indicators, particularly the bank's "financial conditions indicators", which give a more precise view of the behaviour of modern US consumers and business leaders, point to a more upbeat outcome, with no dramatic easing of US growth.

Factor in the growing importance of developing markets to global economic growth, and it is no wonder that the only sleep Mr Blankfein is losing right now is from his constant globetrotting, not from worrying about the future. More stand-up comic in his manner than caricature of the polished international investment banker, he's right to be looking forward to another good year, if perhaps not quite as good as the near-perfect conditions he's enjoyed over the past one. Bonuses all round? It wouldn't be modern investment banking if it wasn't.

Bristol Myers: another axing in Big Pharma

It seems to be a universal changing of the guard in Big Pharma right now. In short order, the CEOs of three of the US's leading drugs companies - Merck, Pfizer and now Bristol-Myers Squibb - have been ousted, while back in Britain the chief executive of AstraZeneca has just retired, with his counterpart at GlaxoSmithKline, Jean-Pierre Garnier, due to go the year after next.

It is always dangerous to read too much into what may be little more than coincidence. The two UK bosses have or are going simply because they have reached their companies' retirement age. Sir Tom McKillop is judged to have done not a bad job at AstraZeneca - though there are continued concerns over the drugs pipeline he has left behind - while after a somewhat shaky start, JP is generally thought in the City to have put his company right back at the very top of the pharma league table.

Yet the story in the US is a very different one, and here it is indeed perfectly reasonable to read a definitive trend into the spate of departures. These ageing CEOs have all been chopped for varying degrees of under-performance. At Merck, Raymond Gilmartin was axed in an attempt to draw a line under the debacle of Vioxx. At Pfizer, Hank McKinnell was given the bullet for presiding over a 40 per cent slide in the company's share price. His management style was said to be secretive and the pipeline looked an increasingly poor one following the spectacular success of Viagra. He was confirmation that pharma boards had broken with the past in their willingness to fire their leaders.

With Bristol-Myers Squibb the surprise is perhaps that it has taken the directors as long as it has to act over a chief executive whose five-year rule has been marked by a series of mishaps, deceptions and bungles. The icing on the cake, as it were, was the deal that the miscreant CEO, Peter Dolan, struck with a rival to delay the launch of generic competition to the company's biggest-selling product, Plavix. It was little more subtle than a backhander bunged the rival's way. For some reason, the anti-trust authorities hit the roof when they heard about it.

There's to be no gold watch for Mr Dolan, who leaves without a job to go to and without an obvious successor to replace him. The board didn't have any choice in the matter. It was required to sack him by the ombudsman appointed to supervise the company's management after a previous accounting scandal.

If there is a theme to this trend, it is this: the blockbuster discoveries of the past are becoming increasingly thin on the ground as the easy pickings waste away to leave drug companies focused on finding cures to much more complex, intractable disease.

At the same time, regulators have become more demanding in standards of efficacy and safety, and customers ever more litigious. Add in the growing challenge of price competition from generics, and the industry's traditionally fat profit margins are starting to look like a thing of the past.

Interestingly, however, the problem of slim pipelines is more one for the US-based operators than their European counterparts right now. Glaxo, Novartis and Roche fare relatively well on this front, the big US companies rather worse. Is that something structural, or are the Europeans just better managed? Whatever the answer, this is one thing that Europe seems to be getting right.

As for Bristol-Myers Squibb, the best hope for investors may now lie in prospects for a takeover, though the attraction would not be in the pipeline, but the potential for cost cuts. Mega mergers are still deeply unfashionable in the pharmaceuticals industry after some well chronicled disasters, but they may be just the placebo needed to distract from present traumas.

Nationwide: don't expect windfalls

Members of the Portman Building Society are to receive windfalls of a minimum £200 each after an agreed takeover bid from Nationwide, which as a consequence gets to be the second biggest mortgage lender in the country. Nationwide members, many of whom joined in anticipation of a demutualisation the society has refused to contemplate, would be forgiven for wondering how this benefits them. Their company is paying top dollar to achieve this "enviable" position in the mortgage market. It is not clear directors could have got away with it in a plc. But there is little point in lobbying for a conversion. Nationwide made itself all but conversion proof back in the late 1990s by having new members sign away their economic interest in the company to charity.

j.warner@independent.co.uk

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