There’s been a lot of hand-wringing about Goldman Sachs on Wall Street lately. With an equity market value of $88 billion, it finds itself the smallest of its peer group. And that’s not where it wants to be, nor where it has been historically. In fact, it’s been quite the opposite. But facts—remember them?—are stubborn things, and the fact is that Goldman lags behind its chief competitors. JPMorgan Chase, the new king of Wall Street, has a market value of around $430 billion; Bank of America is valued around $300 billion; Wells Fargo is valued around $200 billion and Citigroup is valued around $170 billion. Morgan Stanley, Goldman’s longtime rival, is now worth around $90 billion, a fact that surely gets the competitive juices flowing at 200 West Street.
Of course, market values have at least some correlation to earnings. And this, too, is where Goldman has been lagging of late. While Jamie Dimon’s JPMorganChase has been racking up net income at an astounding clip of around $9 billion per quarter and some $36 billion for 2019—thanks in large part to its roaring consumer business and free money, courtesy of the Federal Reserve—Goldman’s fourth quarter net income was a mere $1.9 billion, although that profit was nicked by more than a $1 billion litigation charge related to Goldman’s ongoing effort to resolve the 1MBD scandal that has cast a bit of a pall over the firm for the last few years. The fact is that Goldman had a criminal—former partner Tim Leissner—in the midst of its village of 37,000 people. Like all litigation, it will get resolved one way or another, most likely with an unprecedented and large settlement. And that will be that.
But here’s the thing: As much as several Democratic presidential candidates might wish it to be otherwise, you can never count out Goldman Sachs. As the author of a book about the history of the firm, I know firsthand that Goldman has been in and out of trouble many times during its 150-year existence—including nearly going kaput at least four times—and it has an uncanny knack for finding the right man (so far, yes, only men have been Goldman’s senior partners or CEOs) to lead the firm at the right time.
Time will tell, of course, whether David Solomon, who has been Goldman’s CEO for 15 months, will prove to be that person. My bet is that Solomon will be, and not only because he still seems to have Goldman’s investors on his side. Despite the bad news that has been flowing out of Goldman lately, at $250 per share, its stock is trading near the all-time high of around $270 per share reached two years ago. On January 29, Solomon will make his case to investors formally, conducting the firm’s first-ever presentation, led by its CEO, as to why Goldman isn’t going away and might be on the cusp of regaining a slice of its former greatness.
I visited with a Goldman insider a few weeks back at 200 West Street, and we talked about what the firm has been through lately, missed opportunities, and where Solomon plans to take Goldman. Not surprisingly, it’s a combination of wanting to keep doing what Goldman does best—for instance, staying the best investment bank on the planet—and taking advantage of new opportunities on the margins—such as continuing Goldman’s push into digital banking—that Solomon believes will prove to be very profitable. What the Goldman insider seems reluctant to do—or at least to say to a working journalist—is suggest that Goldman might be buying a big bank anytime soon. First, of course, the Federal Reserve would have to approve any such merger, and it has been mostly unwilling to permit such material acquisitions among the banks it supervises since the financial crisis. Then there’s the matter of culture. Unlike JPMorgan Chase, or Bank of America, or Citigroup, which have all been built through a series of transformational mergers over many years, Goldman has remained insular. The few mergers it has attempted have mostly failed, although one in particular—that of J. Aron, in 1981—worked out spectacularly well. In other words, don’t look for Solomon to buy a big bank, such as PNC, U.S. Bancorp, or Bank of New York Mellon, anytime soon.
But he is looking to change some of the traditional ways people at Goldman think about making money. That won’t be easy. One of the toughest leadership challenges for any CEO is to change the mind-set of a bunch of people who have been very, very successful doing what they are doing. They are reluctant to change because they believe that what got them where they are will get them to the next great place. But my bet is that either the Goldman mind-set will change or Solomon will find the people who will change.
One mind-set that Solomon wants to change, according to the insider, is how people at Goldman Sachs think about products that cater more to Main Street than Wall Street. He won’t consider opening a bunch of Goldman Sachs bank branches (although he could imagine a Goldman Sachs pop-up store at, say, the corner of 57th and Fifth to share with visitors the history of finance and to show off Goldman’s latest technology and products). But he is very focused on creating the largest digital bank in the United States. Marcus, Goldman’s online savings platform, is the first step in the strategy. Goldman is working hard to build out the technology that will enable customers to seamlessly move money back and forth between financial institutions to capture the difference between the interest rate banks pay on your deposits. For instance, Marcus pays its online depositors 1.7% a year in interest on their money; JPMorgan Chase offers .04%. Goldman, which of course is seeking to grow its deposit base, is paying roughly 42 times more to its depositors than JPMorgan Chase is paying to its depositors. Solomon envisions a world where the money could flow from one firm to another to take advantage of that difference. “We will have to build infrastructure,” the Goldman insider says. He sees this as very profitable business, despite paying the higher rates, because Goldman does not have an expensive branch system like the big banks.
Goldman will also, the insider believes, get credit with investors for lowering its cost of funding from the higher rates Goldman has been paying for “wholesale funding”—financing in the long-term and short-term markets—to the cheaper funding obtained from depositors. “Even at our level, it will cost a lot less and we just increased our profitability,” the insider says. “We will do more of that.” With a 1% market share of deposits, Goldman can become the nation’s largest digital bank.
There are two more prongs of Solomon’s long-term attack. One is to vastly increase the firm’s cash-management business, the business of managing the cash of corporations so that they can efficiently access it to pay bills and make payroll, among other uses. Goldman has developed the technology to do that for its corporate clients, just as the big banks do, and Solomon intends to ask its clients to switch that service to Goldman. In fact, the executive says, Goldman has already saved $100 million that it used to pay to other banks to do that for Goldman. Now it can manage the cash itself. He wants Goldman’s corporate clients to consider using Goldman for cash management. “It’s a bigger wallet than investment banking,” the insider says.
Then there is the “alternative asset management” business—investing in private equity, venture capital, and hedge fund-like investments—that Goldman has been involved in for 30 years. “We are really good at it,” the insider says. But the firm has always been very secretive about its capabilities, whether because that’s just the Goldman way or because the political winds militate against people knowing more about what Goldman was doing in this area. (For instance, after the Volcker Rule was implemented.) Solomon wants to change that. He wants people to know how good Goldman is in alternative investments, the way Blackstone and KKR boast about their prowess. Goldman, with $280 billion of assets under management, is now the fourth-largest manager of alternatives investments. Number one, with around $500 billion in assets, is Blackstone, and it says it’s looking to grow to $1 trillion by 2026. Number two is Brookfield Asset Management; it, too, wants to have $1 trillion under management in five to seven years. Number three is Leon Black’s Apollo Global Management, which has roughly $300 billion under management and wants to double that in five years. The Goldman insider thinks Goldman should easily be able to raise another $100 billion. “Sometime in the next three or five years,” this person continues, “people will wake up and they will look at that business and say, ‘Wow, that business is a monster business because of the way they are growing at and we should give it more value.’”
In addition to the long-term strategies of becoming the biggest digital bank, of increasing Goldman cash-management business, and of increasing the amount of alternative assets under management, Goldman does not intend to ignore the low-hanging fruit in both its investment banking and trading businesses. Because of the booming stock market, many more companies have market values of more than $1 billion than 10 years ago; Goldman intends to cover those companies. “We can do that,” the insider says.
Goldman also intends to increase its wealth-management business. Last year, Goldman bought United Capital, one of its biggest acquisitions in years, in order to manage the money of the newly wealthy, not just the Establishment wealthy. The insider is still bullish on Goldman’s trading businesses, which have come under criticism in recent years. It’s now a $16 billion-a-year revenue business, making $5 billion of profit a year. “It’s a real business,” the insider says. And when it comes to “huge bespoke risk intermediation,” there’s “nobody close” to Goldman Sachs. Finally, the insider says, Solomon intends to run Goldman more “efficiently,” which is corporate CEO-speak for cutting costs.
Solomon, apparently, also has a few other clever ideas up his sleeve, like thinking about monetizing the firm’s proprietary risk-management software, in the way that Amazon has so successfully reaped huge profits by selling cloud services to others. Solomon would like to do something like that at Goldman—a digital platform that would connect Goldman’s institutional clients with its risk-management tools, its analytics, and its databases. In the last year, Goldman has hired Marco Argenti away from Amazon Web Services to help make this dream a reality. The firm how has more than 9,000 engineers, out of a workforce of around 37,000. “We’re not doing that just because we’re twiddling our thumbs,” the insider says.
Mostly, the message coming from 200 West Street is a simple one: Goldman is here for the long haul. “In the virtuous ecosystem of what makes Goldman Sachs Goldman Sachs, Goldman Sachs is the best corporate investment bank,” the insider says. “And we are going to continue to be that. And that blend of business is a good business. And we are the leader. And we are going to stay that way.”
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