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Rupak Ghose is a former financials research analyst at Credit Suisse.
It’s time to do the unthinkable — defend a Goldman Sachs CEO.
For anyone who has worked on Wall Street there is a bit of schadenfreude to seeing Goldman rudderless and in disarray. A steady stream of stories about the bank losing its way has become a tsunami, culminating in several brutal ones over the weekend that focused on increasingly loud internal gripes over CEO David Solomon.
New York Magazine’s “Is David Solomon Too Big a Jerk to Run Goldman Sachs?” was particularly extensive and well-researched chronicling of a team captain that seems to have lost his dressing room.
“David’s not likable,” says a longtime colleague — one of the more diplomatic comments I heard in talking to more than 30 of the CEO’s current and former executives, most of them partners. “He’s a prick,” says another. “Everybody thinks and says he’s a dick,” adds a third. “He’s a tough guy with a very short fuse”; “He dehumanizes you when he talks to you.”
None of this is a great look, to say the least.
But here’s the thing. Goldman Sachs partners that are complaining are famously well-paid and infamous for their sharp elbows, both internally and externally. There is a reason Rolling Stone magazine’s “giant vampire squid” article in 2009 resonated so much. Goldman’s board will have to make a call about whether this is too much bad karma and whether there is a better captain for this team. But there isn’t an obvious successor, which complicates any attempted coup.
Moreover, they need to balance the bad dressing room vibes with the hard data.
Goldman Sachs’ share price is up almost 50 per cent since Solomon took charge five years ago, versus a KBW US banks index down more than 20 per cent over the same period. Clearly Morgan Stanley’s share price has outperformed over the period, but Goldman’s share price has outperformed every other large US bank including the mighty JPMorgan during Solomon’s tenure in charge. It has also materially outperformed European competitors with large investment banks.
Which brings us on to financial performance. The depressed profitability of the first half of 2023 was mostly caused by losses on the consumer lending expansion and writedowns on private investments (which lag public markets), and these losses can’t be extrapolated. Meanwhile, the big money-centre banks have benefited from increasing net interest margins from the sharp rise in interest rates, and the depositor flight to safety after the Silicon Valley Bank debacle — and that uplift won’t last for ever.
Goldman is more exposed to cyclically-depressed investment banking, but its return on equity over the 2020-2022 period has still averaged a healthy mid-teens percentage level. Book value per share has grown by 55-60 per cent since the second quarter of 2018, slightly outpacing the share price. (This book value growth is also among the best in its peer group, outpacing even mighty JPMorgan.)
Goldman’s lowly valuation of just over 1x book value is regularly compared to best-in-class JPMorgan and Morgan Stanley. But JPMorgan has traded on a significant premium for ages and is also a huge beneficiary of the regional banking crisis, while the deals that have underpinned Morgan Stanley’s ascendancy happened around a decade ago. And it is worth noting that valuation multiples for most other large US and European banks have compressed in recent quarters.
Market shares are strong across Goldman’s core global banking and markets businesses. Its financing business has almost trebled in size over the last decade — much the growth happening in recent years. And all of this achieved with fantastic RoEs for a traditionally capital-intensive business. The divisional RoE was an industry-leading 16.4 per cent in 2022, and a still-healthy 13.8 per cent in the first half of 2023.
Equities trading remains strong, thanks to its hedge fund-catering prime brokerage business. In fact, Goldman’s equities revenues were around 20 per cent larger than any other firm’s in the second quarter of 2023. And Goldman’s FICC revenues have massively outperformed all its US peers over the past five years.
What is product mix versus market share is obviously complicated to analyse with imperfect data. There’s no doubt that Goldman Sachs has benefited from increased volatility in commodities and US rates — two of its stronger franchises — but again its hedge fund client base has been crucial.
Its investment banking market share also remains strong. For example, Goldman still leads the industry in its historically stronger M&A and equity capital markets businesses, with year-on-year declines broadly in line with other top players.
League Tables — Investment Banking Review
Business diversification has been Solomon’s Achilles heel. It’s just too dependent on its cyclical core business. But Morgan Stanley’s successful strategic revamp is an outlier, and there are question marks over the sustainability of its old-economy wealth management business.
Credit Suisse’s serial blunders reinforced the fact that the essence of a bank is in the strength of its balance sheet and the assiduousness of its risk management. Solomon’s Main Street blunder cannot be ignored, but the losses are piddling compared to the tens of billions of profits the group has generated over the period the experiment ran. Goldman’s risk management has remained best in class under Solomon as its trading business has performed on all cylinders.
As Wells Fargo’s Mike Mayo told New York Magazine:
“I’ve called for CEOs to be fired before,” says Mike Mayo, a bank analyst well known for his often antagonistic views. “If it’s warranted, I’ll speak up, but I’m not seeing it from the outside metrics.”
There’s been a massive amount of press coverage of former CEO Lloyd Blankfein confronting Solomon about the bank’s poor performance in June this year. But we should be careful about looking at Solomon’s predecessor’s legacy through rose-tinted glasses.
The bank manoeuvred the financial crisis well, but the Blankfein years were characterised by market share losses in FICC as the Dodd-Frank rules began to bite, a costly mortgage trading scandal, limited business diversification, and — most seriously — the 1MDB debacle. Memories are short but the financial and reputational costs of the latter were huge.
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