The leaders coming out of a crisis are rarely the same as those who enter it. – Todd Harrison at

Prior to the subprime mortgage meltdown and subsequent financial crisis there were two models that stood apart in the financial world.  On the buy side the endowment model, exemplified by the Yale University endowment run by David Swensen and on the sell-side Goldman Sachs (GS).

The post-crisis era has seen both of those models discredited in whole, or in part.  In the case of the endowment model, which focused on alternative investing vehicles, to generate outsized returns  poor returns and a liquidity crunch caused a reassessment of the virtues of this investment approach.  It should not be surprising that Goldman was a key player in the alternative investment arena along with  One could argue, as we did, that the virtues of this model were emulated by those who did not recognize the risks involved.

Goldman Sachs has had its detractors for some time, especially in light of its approach ever since having received TARP funds as a part of the broader financial rescue.  In the case of Goldman it wasn’t poor returns, or Matt Taibbi, that brought down this market leader.  Rather it took the SEC to finally puncture the aura surrounding Goldman.

Now however it seems that it is open season on Goldman.  Just today we saw articles criticizing Goldman’s poor trading calls for clients year-to-date and also noting criticisms of the many conflicts of interest Goldman has.  The overhang of the SEC case against Goldman adds the specter of fines and further litigation down the road.

As an investor you can’t directly invest in the endowment model as practiced by Yale.  However you can purchase stock in Goldman Sachs.  The problem for Goldman shareholders is that no one else seems to want to buy in.  Felix Salmon at Reuters highlights the relatively poor performance of Goldman shares noting that the stock is now down (in an up market) over the past twelve months.

Goldman now trades just a shade above its book value and with a solidly single-digit P/E ratio.  Quite low for a company that is still exceptionally profitable.  Salmon attributes this low valuation to two factors:

So the risk here is reputational: Goldman really has lost its golden aura, and with it the prospect of garnering a lot of fee income going forwards. And if Goldman ends up getting convicted of criminal charges — which is still a possibility — then it could just disappear entirely, just like Arthur Andersen.

Just as the endowment model was emulated by investors both big and small so was Goldman Sachs.  Salmon notes that there is a book coming out whose thesis is that the financial crisis was caused in part “by banks trying to emulate Goldman and failing.”  One could criticize Goldman for many things, but failing to make money was not one of them.

Prior to the financial crisis Yale and Goldman were held up as exemplars of both the buy and sell-side.  If Goldman escapes the clutches of the SEC and other aggrieved investors without paying too high a penalty its share price today could look cheap.  However what it can’t get back is its place on the pedestal.  Per the earlier Todd Harrison quote we are now in search of new financial leadership for the new normal.