Goldman Sachs chief executive David Solomon has done little to stir any festive cheer at the investment bank’s headquarters in lower Manhattan.
The mood soured this month as word leaked out that Goldman was preparing to cut almost 4,000 employees and considering slashing bonuses for investment bankers by at least 40 per cent.
“I’m dreading the conversations I’m going to have with my team,” said one seasoned Goldman banker in anticipation of the lay-offs.
The retrenchment is a stark reversal from under a year ago, when Solomon presented record 2021 results to shareholders and staff enjoyed blockbuster bonuses.
Since then profits at Goldman’s investment bank have plummeted, it has retreated from an expensive foray into retail banking and has faced a string of damaging accusations about the treatment of female employees.
While it has been a disappointing year across much of Wall Street, the looming squeeze on jobs and bonuses are so far set to be deepest at Goldman, long seen as the most prestigious of the big investment banks.
In an interview with the Financial Times, Goldman president John Waldron defended the cost-cutting, pointing to fears of a recession in 2023 and saying he expects other companies to do the same in the months ahead.
“Everyone I know in my job or David’s job is doing the same thing. The forecast is more challenging. We may be wrong, we may get a soft landing and we’ll staff up again,” said 53-year-old Waldron, a key lieutenant of CEO Solomon since he took the top job in 2018.
“But most companies I talk to, financial services or otherwise, are not only not hiring but also reducing headcount,” he said. Waldron would not comment on any of the reported numbers around job or bonus cuts.
Amid a testing year, Goldman executives have been keen to talk up the gains in market share made this year by the bank’s market-leading mergers and acquisitions franchise, as well as robust profits at its trading business. Goldman’s share price has also outperformed the benchmark S&P 500 index this year.
“You’re going to struggle to see the bloom in that rose, but we accomplished a lot in 2022,” Waldron said.
When business slows, banks like Goldman typically manage costs by lowering bonuses. Job cuts are normally limited to a modest reduction of bottom performers each year.
The lay-offs Goldman is plotting — up to 8 per cent of roughly 49,000 employees — go beyond the customary cull. They come after the bank expanded faster than most of Wall Street over the past three years.
Wells Fargo banking analyst Mike Mayo estimates that Goldman’s headcount, excluding any additions through acquisitions, grew by 20 per cent between the first quarter of 2020 and the third quarter of this year — twice the pace of the broader industry.
“In 2020, Goldman was one of the few large banks that committed to having no lay-offs during the pandemic,” Mayo said. “In 2021, business was booming. So now you have a partial catch-up.”
The bank’s hiring spree helped drive Goldman’s efficiency ratio — a measure of the bank’s operating expenses against its net revenues — to 63.8 per cent this year, analysts estimate, up from 53.8 per cent in 2021, a bigger jump than its rivals.
The planned reductions reflect Goldman’s heavy reliance on investment banking and trading for profits, despite four years of Solomon trying to build businesses with less volatile revenues.
The bank is merging its asset and wealth management businesses in an effort to generate stable fee income to help offset the more unpredictable investment banking and trading revenues.
Despite the bank’s efforts, analysts forecast that Goldman’s revenues and profits have fallen faster this year than more diversified rivals such as JPMorgan Chase, Morgan Stanley, Bank of America and Citigroup.
By contrast, Goldman reported higher revenue and profit growth than peers in 2021, the final year of the more than decade-long bull market.
Solomon’s pay last year totalled $35mn, making him the top-paid Wall Street bank CEO alongside Morgan Stanley boss James Gorman in 2021.
Some at Goldman are also braced for top employees to quit due to disappointment over pay.
“We’ll probably have to rebuild [parts of] the business next year with the attrition,” said one senior Goldman banker. “[Solomon] wants to run the business as lean as he can. He’s taking some real risk around that.”
Waldron defended the approach on pay, arguing that employees should look at compensation over a longer timeframe and also pointed out that last year Goldman’s bonuses outstripped competitors.
“We paid our people very well last year, deservedly so. Our people knew coming into this year, in a normalised year, bonuses would be down but if you look at the two-year average, they will have made more [versus peers],” Waldron said.
The depth of cuts, though, has caught some of Goldman’s biggest rainmakers off guard, especially traders at the global markets division who have been told their bonus pool could be down by more than 10 per cent, according to one person with knowledge of the matter. The business generated more than half of Goldman’s revenues in the first nine months of 2022.
One Goldman banker said the bank’s relatively large size compared to other high-paying companies on Wall Street, such as private equity firms and hedge funds, means its stars are at risk of being poached. “Millennium or Citadel can afford to overpay for two or three traders. GS can’t match as they have to pay 50 traders. That’s the vulnerability,” the banker said.
Goldman’s cost base is likely to be on the agenda on January 17, when it reports fourth-quarter earnings. Six weeks later, Solomon will host the bank’s second-ever investor day where he and his top executives will give more detail on the bank’s new structure following a reorganisation made back in October.
The investor day will be a chance to convince shareholders that Goldman can hit its targets for returns in 2023 during what many predict will be a recession.
“It seems like the macro environment might not improve that much, at least in the first couple of quarters,” said Kush Goel, senior research analyst at investment manager Neuberger Berman, which holds Goldman stock. “That’s why there needs to be a bigger focus on managing expenses and efficiency.”
Delivering on the bank’s profitability targets are crucial to winning Goldman a higher stock market valuation. Its price-to-book ratio, a metric which compares a company’s stock price against the value of its net assets, has lagged rivals like Morgan Stanley for years.
“Investors like cost control and expense discipline,” said Christian Bolu, banking analyst at Autonomous Research. “The broader question ultimately then becomes, what is the Goldman Sachs story long term?”