Outlook: Truth of the Goldman float

IF, AS SEEMS highly likely, the partners of Goldman Sachs opt for a $35bn stock market flotation of their investment bank at a meeting to decide the issue next Friday, it will have nothing to do with wanting to enrich themselves. That, at least is what they say, and since all of them already earn more money than they can possibly know what to do with, there may be something in what they say. So what is the reason? Well, they insist, it is to do with our old friend, capital efficiency.

One of the problems with a partnership is that there is a constant leakage of capital out of the business as older partners retire and realise the fruits of their labour. With a wasting capital base of this type, the business has to run overtime. It is faced with the task not just of servicing the capital, but of earning sufficient to replace it as well.

This, it is claimed, puts a partnership at a significant competitive disadvantage to incorporated investment banks as well as making it virtually impossible to acquire businesses of any size. Goldman Sachs is at present the best at most of what it does, but there is a real fear that unless it incorporates it will begin to lag.

There may be something in these arguments but they are eerily reminiscent of the sort of thing said by the converting building societies as they hurtled down the path to flotation. One of the justifications used by the building societies for conversion is that it would give them greater access to capital.

Since flotation, they have all been repaying their capital by the lorry load; as it transpired, they already had more capital than they could sensibly use. So let's be honest about this, shall we guys? Conversion of a partnership or mutually owned organisation into a publicly listed company is about the present generation of owners cashing in their chips at the expense of future generations. We can all desperately search for a higher purpose, but the reality is a more down to earth and self-interested one.

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