Goldman Sachs: David Solomon’s Unfinished Reforms

Published November 24, 2022, 4:39 pm

The amount gives a measure of the reputational stake. To settle a dispute with an executive who complained about the macho culture (salacious jokes and sexist comments) within the bank in 2018 and 2019, Goldman Sachs sealed a $12 million deal two years ago, comes to reveal the agency Bloomberg.

“Since I took over as CEO, I have consistently emphasized the importance of promoting the diversity of our business,” US bank head David Solomon explained simultaneously before Congress. “I believe an essential part of my tenure as CEO will be defined by our progress in this area,” he insisted.

That wasn’t its only roadmap: A notch below its best peers, Goldman Sachs needed to restore its image after the Malaysian sovereign wealth fund 1MDB looting scandal and close the gap in stock market performance. A strategy was identified: expand into retail banking to raise deposits and recurring income, and thereby dilute the DNA of an investment bank heavily dependent on financial market volatility.

“Playing to our strengths”

Four years later, Lloyd Blankfein’s change of model seems as complex to implement as the change of culture. “One of the great lessons of recent years is that it is better to play to our strengths,” summed up David Solomon during the presentation of the latest quarterly results. A euphemism to herald the end of the expensive new customer rush for Marcus, its private account platform…

However, the volumes are there – over 15 million customers, 110 billion dollars in deposits and 19 billion in loans – but not the profits: since its inception six years ago, retail banking has lost billions of dollars.

“The foundations are solid, but the direction has been lost in the past year, with people who have been hired without having led consumer companies,” points out an inside source. “They’ve also racked up too much expense in unprofitable functions,” especially in computer development, this same source continues.

When the mechanisms get stuck, what made the originality of the new boss – DJ at techno festivals – becomes his fragility. Ordering a private jet or being fined for playing your music in violation of health rules during Covid suddenly gets worse. The stubbornness of wanting to bring the teams back to office, the anger of young recruits under pressure… Goldman Sachs’ image has not substantially improved in recent years.

Upside down organization

In order to “play to (his) strengths”, David Solomon decided to turn the internal organization upside down again in mid-October. Investment banking (business consulting) will now be linked to market activities (trading), two activities that still dominate the income statement.

“While the value of deals they advised on decreased from last year, their market share increased from 29.5% to 32.7%,” notes Refinitiv. With 376 M&A deals since the beginning of the year, Goldman Sachs once again remained number one in the industry, with nearly 30% more deals than its prime challenger, JPMorgan.

A second division will combine Asset Management and Wealth Management, to which Marcus will be attached. At the head of this entity, Marc Nachmann, a close friend of the CEO who, at 52, has spent his entire career at Goldman Sachs and is known for knowing how to cut costs. “While we welcome management’s strategy of increasing alternative assets and management fees, we would like this strategy to be less taxing on the balance sheet,” JPMorgan analyst Kabir Caprihan said in a note.

The third entity (“platform solutions”), of minimal size, will bring together partnerships on bank cards, but also corporate cash management (“transaction banking”), a growing business.

This reorganization aims to strengthen synergies between businesses, at the heart of the bank’s motto (“One Goldman Sachs”), but has yet to convince. “This new move can help keep Goldman’s executives and employees on their toes. But we still wonder how much difference this reorganization will make,” notes Wells Fargo analyst Mike Mayo. “There is more glitter than substance,” an inside source also judges.

Return on investment

David Solomon, who will detail his strategy on February 28 during an investor day, nonetheless improved the bank’s stock market performance. The stock price has risen 60% in five years, against 80% for Morgan Stanley, but around 40% for Bank of America and JPMorgan, against declines for Citi and Wells Fargo.

In terms of total return on investment, $10,000 invested in Goldman Sachs in early 2018 is worth $16,410 today, while the same amount invested in JPMorgan is worth “only” $14,384, calculates Morningstar Direct. But Morgan Stanley did it better: the investor would have $19,467 in hand.

And the price to book ratio, an indicator scrutinized by the market, remains lower than that of its peers, around 1 against 1.5 for Morgan Stanley and JPMorgan, also indicating the company data . “We continue to believe that the consensus does not fully appreciate the scale of market share gains in recent years and the implications this has on revenues,” Judge Mike Mayo.

In terms of corporate culture, Goldman Sachs has made some efforts to become more feminized: 29% of its newest promotion of “partners” – the bank’s nobility – are women, up from 14% eight years ago and 26% in the 2018 The management committee has 8 women out of 34 members (23%). But the bank, which now sponsors the McLaren Formula 1 team, hasn’t finished with its “boys’ club” reputation: a trial is due next June, following a class action suit for “gender discrimination”, filed in 2005.

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