For only the second time in Goldman Sachs’ 154-year history, investors will gather on Tuesday to ponder the future of a Wall Street giant that seems to have lost its way. The bank whose dominance was once so assured it gained notoriety as the “Vampire Squid” is now more of a damp squib. A nosedive in profits in the last quarter of 2022, punishing job cuts denting morale, and a botched strategic overhaul have left Goldman trailing its arch-rival, Morgan Stanley. The Investor Day presents a rare opportunity for shareholders to press the chief executive, David Solomon, on how Goldman can regain its status as top dog. They ought not to demur.
Solomon can point to higher profits and a larger market share in Goldman’s core businesses of investment banking and trading since he became CEO in 2018. But investors do not value those businesses as highly as they once did because the profits they generate are more unpredictable and undercut by capital demands. Morgan Stanley has pulled ahead of Goldman largely because after the financial crisis, it diversified into asset and wealth management, which generate more stable returns.
Goldman remains more reliant on dealmaking and trading, hence investors value it less. Efforts to change its business mix have been lacklustre. A foray into consumer banking and technology was ill conceived. That is not all to be laid at Solomon’s door; his predecessor, Lloyd Blankfein, started the push into retail banking. But Solomon doubled down and Goldman has lost more than $3bn since 2020 on its consumer and fintech venture.
Prickly (even with two private jets and occasional DJ sets to distract him), Solomon is not universally popular and has failed to soothe old rivalries between the advisory and trading teams. A former leveraged finance banker, his recent visit to the Goldman trading floor was notable because of its rarity. He has work to do internally and externally to persuade people that his vision is the correct one. Five years into the job, Goldman under Solomon looks largely as it did under Blankfein.
The fundamental problem is that banking just is not what it was, even for Wall Street behemoths. Goldman’s strengths in investment banking and trading make it a bank fashioned for the pre-2008 era. Post-crisis regulations increased the amount of capital that banks have to allocate against risk, meaning that Goldman’s traditional strengths do not deliver the returns they once did. Financial firms beyond the banking sector — like private equity firms and hedge funds — can offer similar activities but are not weighed down by capital requirements. Hence the boom in the so-called shadow banking sector, which has doubled in size since the crisis.
Solomon’s options to redress Goldman’s balance are limited. A merger with a commercial bank would meet tough regulatory hurdles. Besides, Morgan Stanley has stolen a march on picking targets to buy. Now that consumer banking is rightly taking a back seat, it makes more sense for Goldman to intensify organic growth in asset and wealth management, including in its alternative investments business, which invests in assets such as real estate.
It ought also to speed up the process of shedding its own balance-sheet investments in asset management in favour of revenues generated from fees from third party funds. Meanwhile, sizeable investments in technology should allow it to become a credible supplier to third parties. Solomon did not err in his judgment that Goldman needed to diversify; the question is the wisdom of the mix he chose and its bungled implementation.