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Goldman Sachs - an example of Diseconomies of scale

Thursday, November 15, 2012
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Several news sources are quoting the fact that Goldman Sachs have only appointed 70 new 'partners' to its directorship this month - the lowest amount of high level promotions in the company's public-listed history.  The business appoints the partners as a recognition process for top-ranked employees following the tradition started when it was a private partnership.  This relatively small level of new partnerships not only reflects the reduced level of profits made by one of Americas biggest banks, along with a general reduction in staffing of nearly 10% but also recognition that actually bigger isn't necessarily better in the banking world.

Goldman Sachs own CEO, Lloyd Blankfein, was reported to have told the New York Times this week that he is attempting to increase profits by reducing costs.  The theory goes that some banks have grown so large they are almost untouchable - as soon as they become financially unstable they will be bailed out by central government - as has been the pattern since the crash of 2008.  The flip-side of this, however, is that big banks are now seen as being businesses that are too prone to risk taking - they can afford it given that they will be subsidised by the taxpayer in moments of crisis.  This risk also means that investors are less likely to put their money into such banks - fundamentally slowing the amount of investment coming in to the likes of Goldman Sachs.

So, the key for Blankfein is to directly show how the company is downsizing - becoming more vulnerable but also more profitable.  In effect, the business is trying to move to the left along its average total cost curve and away from the current level of diseconomies of scale.



 

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