Goldman Sachs: Will Solomon’s Consumer Gamble Pay Off?

By Laura Noonan, Financial Times

Goldman Sachs spent most of its first 130 years shrouded in the secrecy of a partnership structure. It jealously guarded that mystique for its first two decades as a listed company.

But on Wednesday, David Solomon, who became chief executive in October 2018, will stand before a crush of shareholders, analysts and journalists at the bank’s first-ever investor day. It is effectively a coming-out party for a group that has spent the past two years planning a radical overhaul of its operations as it moves from its trading and investment banking roots to an institution offering everything from current accounts to money management and credit cards for the masses.

For peers on Wall Street such events are routine. Mr Solomon’s decision to pull back the veil and explain Goldman’s strategy is anything but. It is one of the many breaks with tradition the investment banker has made since taking control at Wall Street’s most storied bank.

Rivals such as JPMorgan Chase and Bank of America have blossomed in recent years as their big retail banks and cash management divisions — which help companies make and receive payments and manage their excess money — protected them from a 50 per cent fall in trading revenues in the decade after 2009. Even Morgan Stanley, which like Goldman lacks a retail bank, has weathered the storm better after restructuring its fixed income trading unit in 2015.

It left Goldman as the only US bank overly dependent on a bond and stock trading business characterized by plummeting margins, higher capital charges and fierce competition from hedge funds and other rivals. In June 2016, the bank’s valuation fell to its lowest level in four years.

“Lloyd [Blankfein] did a great job during his tenure [as chief executive] . . . but that was a time of tremendous incursion with Dodd-Frank [regulations], a lot of congressional intervention,” says Bill George, who was a Goldman Sachs board member from 2002 to 2019. “David came in really as the person to put the focus on growth,” he adds, citing the “critical” need to expand into new businesses.

After years of subpar returns, and amid criticism from shareholders, analysts and his own colleagues, Mr. Solomon began a sweeping review of how Goldman makes its money and what it needs to do to make more of it.

Some measures were cosmetic — mandatory formal dress was ditched in favour of a millennial-friendly “come as you like, express yourself” policy. The bank’s top leadership team — most of them appointed by Mr Solomon — are swapping their suites on the 41st floor of Goldman’s New York headquarters for the 12th, so they can be closer to the main businesses.

Other changes are more fundamental. Thousands of technology specialists have decamped from a central division into business lines, to have a more direct impact on products. Goldman bought a mass-market wealth management arm, United Capital, for $750m so it can sell its services to the merely wealthy as well as the enormously rich. It has launched a credit card with Apple, an addition to its mass market consumer business.

In parallel, Goldman has also cut back less profitable parts of its enormous trading business, diverted investment bankers to pursuing smaller clients and promised a “One Goldman” approach to serving clients — an admission that the bank has not always been collaborative in its approach to winning business.

A year in, and despite missing earnings forecasts for the past two quarters, Mr Solomon has claimed an early victory. But there is friction within the ranks. The changes threaten a culture clash between the traders and bankers who powered the Goldman of old, and the retail bankers, cash management experts and engineers who seem to hold the key to future growth.

Outside the company some ask whether it has lost its cachet. “We used to all want to be Goldman Sachs. Now Goldman Sachs seems to want to be Citigroup or JPMorgan,” says a senior rival investment banker.

The investor day is Mr Solomon’s chance to answer some of these questions, and to convince money managers, pension funds and private shareholders that the Goldman of the future will be able to end the poor returns of the recent past. In a comment that would have been unimaginable a decade ago, one senior executive says: “Investor day will be about explaining our reason for being.”

Marcus, Goldman’s consumer bank, is the epicentre for the company that Mr Solomon and his team are trying to build — a place where innovation and customer experience matter more than the prestige that the bank once prized.

The online venture was conceived in 2014, during the era of Mr Blankfein, the charismatic bond trader who ran Goldman for 12 years before Mr Solomon. The idea was to attract deposits that offered a cheaper source of funding than Goldman pays in the wholesale market. A US loans and deposits platform followed in 2016, and then a UK savings account two years later.

One recruit, who joined Marcus as the project picked up steam, says he saw an “opportunity to take a 150-year-old company and turn it several degrees”.

Mr Solomon turbocharged that effort, most notably through acquiring United Capital and striking the agreement with Apple, which he has repeatedly described as the “most successful credit card deal in history” — without providing evidence for the claim.

At its quarterly earnings announcement in January, Mr Solomon gave a glowing account of the consumer division’s progress, including a 67 per cent rise in deposits to $60bn in less than a year. Lower reserves on Marcus’s consumer loan losses also helped calm analyst fears about Goldman’s inexperience in underwriting consumer credit.

Yet some inside the consumer division are more critical of its evolution. One former employee says Goldman underestimated how long it would take to build the technology and products, then lost patience and abandoned them in favour of acquisitions, leading to wasted resources.

He offers personal finance management as one example — Goldman first asked its technologists to develop a platform but then bought Clarity Money in 2018. In mass-market wealth management, Goldman was already working on its own platform before the United Capital deal in 2019. “The veneer wore off and the patience wasn’t there to see a whole lot of it through,” he says.

A former colleague echoes this sentiment but others dispute it. “Unlike a start-up or a fintech, we can’t just work on a product for a couple of weeks and launch it into the marketplace,” says a senior figure at Marcus. “We have to release something that [matches] up to the standards of Goldman Sachs.”

The Apple Card is Goldman’s most high-profile consumer play. Infamous among Goldman’s tech team for gobbling up resources from other projects, the card quickly served up a swift lesson in how not to do business.

When it was launched in August, male customers took to Twitter to complain that they were given higher credit limits — in some cases allegedly 20 times higher — than their wives. That inspired an investigation by New York’s financial services department which has yet to report its findings.

“That was not helpful for us,” says a senior executive from one of Goldman’s traditional businesses. “It could have been better handled.”

Some Goldman executives already feel the consumer division — which accounted for just 2.3 per cent of total revenues last year — is getting a disproportionate amount of attention from Mr Solomon and other senior managers.

They want the investor day to focus more on places where Goldman actually makes money, say people familiar with the discussions. “It’ll be 2030 before you really see a shift in business,” says one, adding that people should invest in Goldman “for the here and now”.

The investor day — which will showcase some of the bank’s new technology — is expected to outline plans for its new cash management division. Mr Solomon will further explain how he plans to attract more client money into the merchant banking division and improve growth and returns at its traditional trading and investment banking units.

The internal tensions highlight why changing the culture of Goldman is such a long-term project. Company veterans describe a tradition of ruthless competition, where colleagues compete against each other for the same deals.

Goldman has, at various times, tried to encourage people to think beyond their own profit and loss account, but those efforts largely failed because pay packages were based on the old metric of how much money individuals brought in.

Ed Schein, an organisational structure specialist and professor emeritus at MIT, says it usually takes “five or 10 years” to change the culture of big organisations. “If the new way requires more collaboration between employees and they’ve been trained for 100 years to be individually competitive . . . it might take a long time,” he adds.

He suggests some “super individually competitive people” might “have to be invited out of the system”.

Goldman has already seen a lot of churn at the top of the business. Trading chiefs Pablo Salame and Isabelle Ealet left shortly before Mr Solomon took over, followed by technology boss Elisha Wiesel, former chief financial officer Marty Chavez and co-head of securities engineering Konstantin Shakhnovich.

“There was a massive regime change,” says one former partner. “We went from a 12-year run with Lloyd Blankfein who was a trader at heart . . . Even in tough times they didn’t want to de-emphasise that business, that was always viewed to be core to the firm.”

In investment banking, while senior managers insist everyone is on board with a push to pursue smaller clients — defined as those with an enterprise value of less than $2bn — some grumble about doing less prestigious deals.

Mr Solomon has made gender diversity a focal point, increasing women’s representation with the partners and managing directors appointed in 2018 and 2019 respectively.

But not all investors are convinced by his efforts. Mark Conrad, who invests in American financial stocks for fund manager Algebris, says he owns Morgan Stanley stock rather than Goldman because “GS is to some extent grasping at straws strategically”. He adds: “We believe Solomon is correctly branching out from an over-reliance on these traditional businesses, but we aren’t convinced that the choice to grow in consumer lending will prove successful.”

An investor at a large fund says he will not buy Goldman while it carries the “headline risk” of the 1MDB bribery and money-laundering scandal. Goldman is close to a $2bn deal with the US Department of Justice over its role in the alleged fraud and is negotiating with Malaysian authorities, which are seeking compensation after $4.5bn that was raised for them by Goldman was allegedly stolen.

Others are skeptical about Mr Solomon’s drive to turn Goldman’s old investing business into a private equity powerhouse like Blackstone by raising more funds from clients instead of being skewed towards investing Goldman’s own capital.

“It’s always been a merchant bank but Blackstone and all the private equity firms have crushed them,” says the investor. “The PE firms are the new Goldman Sachs . . . [while] Goldman Sachs is trying to be JPMorgan.”

Although dismissed as simplistic by some at the bank, such an assessment begs the question: What makes Goldman, Goldman?

Its partnership structure — where 415 of its most valuable staff earn $1m salaries and gain investment opportunities — sets it apart from other US banks. Executives insist the structure will remain even as Goldman evolves. But it is dominated by the traditional units: there are just three partners based in the consumer business.

The consumer business does not “need that many [partners]”, says one, adding that in investment banking “they make their revenue through the sweat and tears of people”, while in consumer banking “if someone is sitting in a call centre they’re not contributing in the same way”.

Internal Goldman statistics show that average partner tenure held steady at seven years but more than 30 partners left in 2019, including a string of high-profile departures in the final quarter.

“I don’t think many people feel like Goldman in its heyday and Goldman now are the same firm,” says a partner who left in 2018. “There was a lot of prestige to being a part of Goldman in the 1990s and in the 2000s, now with this consumer push [there isn’t].”