The reinvention of Goldman Sachs: what has David Solomon achieved?

Napoleon Elizer

Not long after becoming the chief executive of Goldman Sachs in 2018, David Solomon asked for a private plane.

It was a controversial request. Goldman bankers traditionally eschewed ostentation, and when the chief executives used private aircraft they rented them from NetJets. Solomon reckoned that his lost time from flight delays cost the bank money and the Goldman team conducting a cost-benefit analysis ended up seeing things his way. The bank wound up ordering two Gulfstream jets. Solomon even had a hand in choosing the decor, says a person familiar with the matter.

Goldman’s new boss was sending a signal. He wanted to do things differently, and in his own way. The company that Solomon inherited was still among the crème de la crème of investment banking and trading, but it needed to be more. Its stock market valuation lagged behind peers such as Morgan Stanley that earned a greater portion of their revenue from steadier, fee-generating businesses like fund management.

Solomon’s mission was to develop new income streams and “drive more durable revenue,” in the process making it easier for outside investors to understand a still enigmatic bank that had been structured as a private partnership until its initial public offering in 1999.

Yet despite Solomon ploughing billions of dollars into businesses such as consumer banking, asset management and transaction services, little has changed in Goldman’s revenue mix since the days of his predecessor, Lloyd Blankfein. Trading and investment banking still make up the lion’s share.

Goldman’s challenges are particularly pronounced in retail finance. Six years after setting up its own online consumer bank, called Marcus, Goldman has yet to say when the operation will turn a profit, and people familiar with the matter say management is currently conducting a review of the division’s spending plans.

A growing number of Wall Street analysts wonder whether the only way for Solomon to really change Goldman is through acquisition — perhaps by following the lead of Morgan Stanley, which shifted its business mix after the 2008 financial crisis with the purchases of wealth manager Smith Barney, online trading platform ETrade and asset manager Eaton Vance.

“True transformation will be hard organically,” says Christian Bolu, banking analyst at Autonomous Research. “And we know that from looking at Morgan Stanley, you don’t have to go that far.” 

Line chart of Share price performance in % showing Goldman share price has lagged Morgan Stanley in the past 5 years

So far, Solomon has nibbled on the acquisition front, with deals including paying $2.2bn for Atlanta-based consumer finance company GreenSky and €1.6bn for the investment management arm of Dutch insurer NN Group.

Bigger deals would be harder to bring off. Goldman has an idiosyncratic culture and — despite its history as an adviser on big deals — little record of making major acquisitions itself. When Goldman recently surveyed investors, some of whom owned its stock and others who did not, about what it should do with excess capital, they rated acquisitions as the lowest priority, behind reinvesting in its business, dividends and share buybacks, according to a person with knowledge of the survey.

By most measures, Solomon’s tenure so far looks like a success: Goldman has delivered record profits and seen its share price hit a record high last year. But these milestones were largely on the back of the bank’s legacy trading and investment banking businesses putting up stellar numbers.

On one of the key measures by which Wall Street keeps score — its price to book ratio, a metric which compares a company’s stock price against the value of its assets to give a sense of its true valuation — the bank’s performance remains stubbornly static and well behind its major US rivals.

If Solomon’s strategic goal is to convince outside investors that Goldman is a steady bet, he still has some work left to do. After almost four years in charge, his new Goldman still looks a lot like the old one.

The song of Solomon

Solomon, 60, made his name in leveraged finance and came into the top job with a reputation as a cost-cutter and a blunt manager.

He was an unlikely figure to take charge of Goldman. Solomon and the bank’s president, John Waldron, 53, both came to the company more than two decades ago from Bear Stearns, a less prestigious investment banking rival.

Despite the passage of time, some members of Goldman’s fabled alumni network still refer to him and Waldron as “the guys from Bear”. Solomon’s flamboyant character — typified by his well-publicised stints as a music festival DJ and appearances on the TV show Billions and in Jennifer Lopez’s recent Netflix documentary — is also an incongruous fit to lead a bank once known for its inscrutability.

Solomon DJing at an event in Los Angeles
David Solomon’s flamboyant character — typified by his well-publicised stints as a musical festival DJ — is an incongruous fit to lead a bank once known for its inscrutability © Jonathan Liebson/Polk Imaging/Shutterstock

At the bank’s first-ever investor day in January 2020, Solomon and Waldron outlined the new diversification strategy. While building up legacy businesses, he outlined a focus on four growth areas: consumer banking, transaction services, asset management (raising funds from investors and managing them for a fee) and wealth management (advising well-heeled clients on their investments). Solomon has also cut $1bn in costs and promoted more internal collaboration under the “OneGS” mantra.

The expectations for change at Goldman are particularly high in asset and wealth management, where it has about $2.5tn in assets under supervision, which includes money managed by Goldman as well as other client assets. Goldman hopes to boost its annual fees in those areas to more than $10bn by 2024, up from about $6bn in 2019.

Solomon’s strategy has been to build on Goldman’s historical strengths. In asset management, Goldman has long made big money with its own equity investments in areas like private equity. To smooth out the resulting earnings volatility, Solomon is scaling back private investments using the bank’s capital and prioritising managing third-party funds, which promise more stable fee income.

Workers cross the street at Goldman Sachs’ headquarters in New York
Workers cross the street at Goldman Sachs’ headquarters in New York. The expectations for change at the bank are particularly high in asset and wealth management, where it has about $2.5tn in assets under supervision © Michael Nagle/Bloomberg

In transaction banking — the business of helping companies move their money around — Goldman is hoping to tap into its vast corporate contact book to grow. Although its revenue target of $750mn by 2024 is meagre, transaction banking promises stable returns and does not require Goldman to hold large quantities of capital.

“You’ve got to give [Solomon] five stars for the vision and the outlook on what he wants to do, and how he wants to change the bank,” says Gerard Cassidy, a banking analyst at RBC Capital Markets. “But we’ve always maintained with any bank, not just Goldman, to really incorporate that kind of change, it’s impossible to do it organically.” 

The acquisitions it has made have been smaller, so the company can learn about new business and get better at integrating them, insiders say. The experience has been positive; Goldman’s deal for NN Investment Partners, which had about $355bn in assets under supervision, has stirred the bank’s appetite to make similar purchases. “If we can do a few NNIPs, that would start moving the needle,” says one Goldman executive.

The weakest link in Goldman’s diversification strategy is consumer banking, the only one of its four growth pillars that remains unprofitable. Goldman launched the consumer business in 2016 under Blankfein, naming it Marcus after the bank’s founder, Marcus Goldman.

Marcus has cycled through a series of leaders. Harit Talwar, the first head of the consumer division and the former US cards boss at Discover, was replaced in 2021 by his longtime deputy Omer Ismail, but he abruptly departed Goldman for a Walmart-backed fintech. Marcus is now run by Peeyush Nahar, who joined Goldman last year, having previously worked at Uber and Amazon.

Under Solomon, the combined consumer and wealth management division is run by Tucker York and Stephanie Cohen, with Cohen overseeing consumer operations and York spending more time on the wealth business.

The consumer business has at least succeeded in amassing more than $100bn in deposits, giving Goldman low-cost funding that the bank estimates saves it tens of millions of dollars a year. In 2021, sources including savings accounts, retail loans and credit card partnerships with Apple and General Motors brought in $1.5bn in revenues, a figure the bank hopes could top $4bn by 2024.

But Goldman was snubbed by Apple and only given a minimal role in the tech giant’s new buy now, pay later product. Goldman had been a financial partner to the iPhone maker since 2019, providing the credit underwriting and much of the financial infrastructure behind Apple’s credit card.

A sign advertises the Apple Card in the World Trade Center Apple Store in New York
Goldman has been a financial partner to Apple since 2019, providing the credit underwriting and much of the financial infrastructure behind its credit card © Richard B Levine/Alamy

The bank is still in talks with Apple to play a role in possible expansion of the latter’s buy now, pay later offering, according to one person familiar with the matter. Unlike Apple Pay Later, which is interest free, consumers would be charged interest for longer-term BNPL loans funded by Goldman if the expansion takes place.

The regulatory risks in consumer finance were also highlighted this month when Goldman disclosed that the US consumer finance regulator was investigating how it managed accounts at its credit card business.

Goldman remains unsure when its consumer operations will move into the black, leading to the current review of spending plans, according to people familiar with the matter. This has included cost review meetings between Cohen and the bank’s president. “Waldron has been holding Stephanie’s feet to the fire,” one source says.

Dealer’s choice

The emphasis on change has not made much of a difference in terms of how the business makes its money. The year Solomon took over, Goldman earned 62 per cent of its revenues from investment banking and global markets. In 2022, analysts forecast that those two divisions will provide almost 69 per cent of revenues, dropping back down to about 62 per cent in 2023.

To some extent, Goldman suffers from an embarrassment of riches: the last two years have played to its historical strengths. Rock-bottom interest rates, market volatility and the rush of pandemic dealmaking helped push Goldman’s profits and share price to record highs in 2021.

Goldman veterans who cut their teeth when the bank was a partnership question whether its reliance on its traditional areas of strength is really a problem. They argue that fee-based businesses such as asset management can be volatile in downturns, and maintain that Goldman’s trading operations can churn out massive profits regardless of the environment.

Line chart of Share of full-year revenues in % showing Goldman Sachs is still generating the bulk of revenues from trading and investment banking

Their point was underscored last quarter when the trading division overcame volatile markets to produce more revenues than Goldman’s three other units combined. In the second quarter, Goldman earned more money from investment banking and reported a bigger jump in trading revenues than any rival.

Investors disagree. Analysts note that running a giant trading business requires Goldman to set aside huge amounts of capital, making it harder for the bank to boost its return on average tangible common equity, a key measure of profitability. Goldman’s current Rote target lags behind competitors Morgan Stanley and JPMorgan Chase.

It is also the case that Goldman stockholders have had to deal with their fair share of nasty surprises from its wheeling and dealing. In 2010, Goldman paid a $550mn fine to settle US regulators’ allegations that it misled investors in a complex mortgage-backed security called Abacus. In 2020, it agreed a $2.9bn global settlement with regulators over its role in the 1MDB money-laundering scandal in Malaysia.

The share of revenue Goldman makes from investment banking is likely to take a hit as well, as inflation and a looming global recession have created a chilly environment for dealmaking. The company’s recent struggles to offload debt to back the £10bn takeover of grocer Wm Morrison will have been a painful reminder of a changed market.

Line chart of Price to book multiple showing Morgan Stanley stock market valuation leapfrogs Goldman

Making so much of its revenue from unpredictable activities such as trading in financial markets and advising companies on deals has not impressed investors, judging by Goldman’s price-to-book ratio.

Goldman now trades at about 1.1 times book value, slightly ahead of its average multiple over the past five years of 1.06. Morgan Stanley, by comparison, trades at about 1.7 times book, ahead of its five-year average of 1.3.

A millstone around Solomon’s neck since he assumed command, the price-to-book ratio also presents a hurdle to Goldman using its stock as an acquisition currency to buy any company with a higher valuation.

“The traditional capital markets businesses are perceived to be very cyclical in terms of those revenues. The cyclicality of revenues tends to get a pretty healthy discount in the market,” says Devin Ryan, banking analyst at JMP Securities.

The guy from Bear

Part of Solomon’s task has also been to modernise Goldman’s culture and move on from the bank’s macho “masters of the universe” reputation. It has made more diverse promotions to its coveted partner ranks, for example, and introduced a more relaxed dress code.

However, the new outward-facing corporate image to accompany its push into consumer banking are not to everyone’s taste at Goldman — and nor is Solomon’s own flashy personal style.

Once the quintessential behind-the-scenes firm, Goldman is now sponsoring McLaren’s Formula 1 team as part of a branding effort by Fiona Carter, the bank’s chief marketing officer whom Solomon recruited in 2020 from AT&T. Spending money on the partnership has displeased some at the bank in a year when it has warned of potential job cuts, according to bank insiders. “Doing the McLaren partnership is tone deaf,” says one Goldman Sachs banker.

A Gulfstream G500 business jet sitting on the tarmac is seen through a heads up display
Goldman bought two Gulfstream jets after Solomon became chief executive in 2018 © Seong Joon Cho/Bloomberg

Managing the bank’s talent — a job some at Goldman liken to serving as a Hollywood producer — has proved challenging for Solomon. Although Goldman has long boasted of its deep bench, it has been hit by several significant departures — including senior bankers Gregg Lemkau, Stephen Scherr and Eric Lane. Complaints have also been made to Solomon about his return-to-work policies, with the company looking to get many of its bankers back to the office five days a week, according to people familiar with the complaints.

Solomon’s ostentatious style has grated on some at Goldman. His DJ career — a passion he developed while working on a financing deal for a Las Vegas hotel in 2008 — has attracted scrutiny from the board of directors, according to people familiar with the matter.

Some members of Goldman’s board, which Solomon chairs, told him they were uneasy about his decision in 2019 to perform at Tomorrowland, a Belgian music festival, one of the people says. Board members noted an article in the New York Post that described the event as being known for its “undulating throngs of naked, sweaty, drug-fuelled revellers”. 

Solomon also apologised to Goldman’s board after DJing at a 2020 event in the Hamptons resort area of New York that was criticised for flouting social distancing rules during the Covid-19 pandemic, another person familiar with the matter says.

But the attention hasn’t slowed him down. This summer, Solomon, who has promised to donate earnings from his DJ efforts to charity, hit the road to perform at Lollapalooza, a four-day music festival in Chicago attended by hundreds of thousands of people. Goldman declined to comment on whether Solomon took the company jet to Chicago.

Solomon hit the stage in Grant Park on July 29 after holding a town hall with Goldman’s Chicago staff and meeting some clients. Clad in a black T-shirt, Solomon treated the crowd to Abba and Queen remixes and was joined by OneRepublic singer Ryan Tedder to perform a 2021 collaboration. The track’s title: Learn To Love Me.

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