Investment bankers Wolfgang Fink and Jörg Kukies gave their first interview since taking the reins in November from Alexander Dibelius, the long-time managing director in Germany, with a view of Frankfurt city and mountains in the background.
Alex Dibelius was the German face of Goldman Sachs for more than ten years and is an integral part of the company. What role will he play in the future?
Mr. Fink: As one of the three global chairmen of investment banking, he will remain a point of contact for important clients. We are pleased the bank will continue to profit from his contacts and experience.
How are the tasks divided between you two?
Mr. Kukies: I am primarily in charge of trading securities and solutions with derivative financial products. Wolfgang focuses on classic investment banking, meaning fusions, takeovers and financing as well as securities issued by companies. We make many decisions in the divisions. We closely coordinate with and supplement each other on matters that involve the whole business.
Mr. Fink: We want to more intensely mesh the various aspects of our business. The better we are aligned internally, the better we can react to the expectations and wishes of our clients. We already have launched some projects for this.
Name an example.
Mr. Kukies: Due to the low interest rates, insurance companies and funds are no longer able to buy only traditional bonds if they want to meet their return on investment targets. With our help, they search for alternative investment possibilities. If Wolfgang’s team happens to be advising a seller of financial assets, perhaps there is a match there. And if our investors are investing more money into the dollar zone, as happened last year, that’s important information for companies that want to issue bonds.
What goals have you set for yourselves?
Mr. Fink: We both have the ambition and demand to maintain our very good market position in all business sectors in Germany, as well as to further expand it. For years, we have been one of the first places major companies go for advice on transactions on the German capital market, but there is room for improvement. In addition, there is the very interesting target group of medium-sized companies. We want to become more involved with them.
Almost all banks are pouncing on medium-sized businesses. What can you offer them?
Mr. Fink: We aren’t entering into competition with classic banking business, but we are seeing that financing through capital markets is becoming more attractive to medium-sized businesses. We could, for example, score with them with high-yield bonds. Our products, however, are sensible only for companies above a certain size. It is generally a matter of financing in the hundreds of millions.
Mr. Kukies: We also want to strongly increase our care of very wealthy customers and investment fund business. We already have a very large share of the market in the United States. We have also grown strongly in recent years in Europe, especially in Germany, and we want to continue doing so. Since we don’t have our own sales network, we rely, in our asset management sector, on institutional business and cooperation with other banks that offer our products.
Your plans are ambitious. Are German bankers right to warn about all-powerful U.S. financial institutions like yours?
Mr. Fink: There are very strong European banks that we don’t want to compete against in all disciplines. We concentrate on offerings that give our clients added value, which is primarily a result of our global presence and strength. When a European company wants to buy a competitor in South America, or float part of its company on the stock exchange in Seoul, there are not many advisors with the relevant expertise. That is where the air gets thin.
Goldman is earning as much as before the financial crisis. What is the big difference?
Mr. Kukies: It is always wrongly said that banks didn’t learn anything. I spend two hours each week in a committee that examines transactions and business policy initiatives to determine whether they could be damaging to our reputation. Based on this, we regularly reject very concrete transactions.
All the same, customers don’t know what they are getting into with your products.
Mr. Kukies: One of the core things learned from the crisis is that we must explain all the probabilities and risks to the investor. This includes precisely informing buyers of the potential consequences of a product, for example, in an extreme downturn of the market or in the case of other unforeseen developments. We have thousands of specialists working to ensure that these types of scenarios are transparent to our clients and the people in charge.
Sometimes your clients didn’t even know whether the bank or another customer was their business partner. This caused you a lot of trouble - and rightly so.
Mr. Kukies: We assume different roles, particularly in trading with securities. Our clients also want it that way. When, for example, a bank wants to sell off a portfolio of loans, we can search for an investor for part of it, and step in ourselves as lender for the other part. What is important is that we make our role transparent. And that’s what we do. We have very clear guidelines for that.
There are even more conflicts of interest in your business model. Goldman advises on the sale of companies and also acts as a buyer itself.
Mr. Fink: When we want to be a buyer of shares, it must be clear from the start to the seller, and they must welcome our interest. It is crucial that this is clearly and transparently communicated.
What do you expect in 2015?
Mr. Fink: Mergers and takeovers, as well as the capital markets, should continue to operate actively. Many companies have strong balance sheets with large cash reserves and are looking to grow worldwide. Raising debt and equity capital is possible at historically attractive conditions and in huge volumes. However, that comes with the provision that there be no more major political crises.
Mr. Kukies: I also am optimistic about our business with German banks, insurers and fund managers. They have, for example, reacted to the challenges of a low interest environment and tackled subjects such as investment in infrastructure and renewable energies. Banks in Germany are clearly stronger now. The German funds industry has recognized early on areas such as multi-assets, meaning diversification over various asset classes, and compared to the rest of Europe, has achieved a substantial influx of funds.
The high valuation of stocks and securities over long stretches is the result of the relaxed monetary policy of the central banks. Do you see any price bubbles?
Mr. Kukies: The valuations of European stocks are far from it when compared historically. They could be interesting investments, particularly in view of their dividend yield. I also see no bubbles with corporate bonds.
Some of the interest rates of high-yield bonds from companies with weak credit ratings today are only 2 percent. That is certainly no longer a realistic measurement of the default risk.
Mr. Kukies: When 10-year German government bonds have only a very low interest rate of 0.6 percent, it radiates out to all the asset classes. The yields are absolutely very low at that rate. However, I consider the premium for more risky corporate bonds with shorter maturity to be fair. Most of these companies are well situated and the world economy is stable despite increased uncertainty.
The financing of company takeovers by financial investors is on the same large scale as before the financial crisis. It would seem you and your colleagues have learned nothing in that respect.
Mr. Fink: I see it differently. The shock of the financial crisis remains very present. For our generation, it was the great professional turning point and it continues to be felt everywhere. Many people in responsible positions in the banking world today remember well how they got into the crisis with billions in loans and no securities. Today, no financing is structured in a way that would become problematic at the first signs of a crisis. Sellers today also set very clear specifications for an investor before they trust it with a company and its employees.
Regulators work to make financial systems more stable to avoid crises. What particular issues concern you at the moment?
Mr. Kukies: At the moment, the central question is who could provide liquidity in a crisis. That was never a question before because the world believed markets would always be solvent - which proved to be incorrect.
Your critics ascribe your early reaction less to the economic models than to your connection to politics and the central banks. Many former co-workers, who presumably wouldn’t mind doing their old employer a favor, are sitting there now.
Mr. Fink: As long as there is Goldman Sachs, there will be conspiracy theories, as absurd as they may be. We will continue to conscientiously serve our clients in the public sector and in all other branches of the economy. We know we have to re-earn their trust every day.