Name: Goldman's Solomon on Where the Bank Goes From Here
Uploaded: 2023-05-19T19:49:00Z
Duration: 19 min 29 s
Description: Goldman Sachs CEO David Solomon responds to critics and explains his vision for the firm.

David Solomon is on a bit of a hot seat—which is curious from a stock market perspective.

Goldman Sachs Group

 (ticker: GS) in October 2018, shares of GS have climbed 45% versus a12% decline for the Bluestar Top 10 Banks Index.  Goldman shares have outperformed the 

 over the same period, as well. And the firm’s vaunted investment banking and trading franchises are still the envy of the industry. All of which would seem to be enough to keep his constituents satisfied—and yet, that isn’t quite the case.

For one thing, Goldman doesn’t shine so brightly when looking at other measures. There’s that unsuccessful, multibillion-dollar foray into the 

. And the fact that net income dropped nearly 48% last year to $11.3 billion and fell 18% in the first quarter.  

That those numbers don’t compare favorably with Goldman’s ancient foe, 

Morgan Stanley

 (MS), which has made a hard turn into the more-stable 

 over the past decade, puts an even finer point on things. Shares of MS have outpaced GS over the past decade.

Finally, there’s the pitter-patter of eyebrow-raising news stories, including some about Solomon and his outside interests, including DJing—a most unlikely pursuit for a Goldman CEO—and his real estate ventures. These stories seem to be partly fed by disgruntled Goldman partners, a mini chattering class of its own, some of whom may feel put out after the firm paid them, say, $30 million instead of $35 million last year. 

 offices to talk about all things Goldman. Here are some edited excerpts from our conversation.

: David, could you give us a snapshot of the firm today?

We’ve got a very, very strong client franchise in our core business of banking and global markets, and we’re focused on continuing that. We’re extremely focused on the growth of our asset and wealth management platform. There’s no question that management fees—and more reliable management fees—get a higher multiple. We’ve been very focused on our ethos of one Goldman Sachs, which has been geared at making sure our clients get an experience that meets their needs broadly in a coordinated fashion. 

I wouldn’t call this a top-quartile environment for a capital markets–focused banking institution. But in my 40 years in the business, there have been environments that were certainly much more challenging. 

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https://m.wsj.net/video/20230520/b4465c60-ae9a-41fa-a313-6d9ea955431f/3/hls/manifest-hd-wifi.m3u8

Goldman Sachs CEO David Solomon responds to critics and explains his vision for the firm.

Goldman's Solomon on Where the Bank Goes From Here

Any new developments on the consumer business?

There are no new developments. It is a small part of the business—about 3% to 3.5% of our capital, and equivalently on our revenue. We’ve narrowed the focus of that business to deposit-taking. That’s been hugely successful and very important for the firm. And we are focused on our two credit-card partnerships [with 

Apple

General Motors

Are the problems in the banking sector limited to spiking rates? Or is there something more at work here?

There’s no question that the very swift change in monetary policy and in the Fed’s policy rate has had implications. It has created asset-liability management issues and interest-rate management issues for financial institutions. 

But I think there are broader secular shifts. For the past 15 years, money has basically been free. It really didn’t matter where you left your money. Now we have a policy rate that’s at 5%. With digital banking, people can move money with a lot less friction. 

If you go back 25 years ago, there were 13,000 banks. Today, there are a little over 4,000. I think you’re gonna continue to see consolidation. It’ll be interesting to see what kind of policy decisions are made around regulation for institutions that are, say, between $100 billion of assets and $700 billion of assets. 

There are also headwinds for midsize and regional banks that large banks have faced for a long time around technology costs, regulatory costs, etc., which can challenge those business models. Scale makes you more competitive. There could be a 100 to 300 basis points of ROE [return on equity] erosion. [A basis point is 1/100th of a percentage point.] For banks below $100 billion, the headwinds could be even more significant. 

So, there will have to be consolidation and adjustments, and people will have to rethink their business models. What happened here accelerated some of that, or shined a brighter light on the industry and some of the challenges that already existed under the covers.

Should the Federal Reserve continue to hike rates next month, or pause?

The Fed is going to be data dependent. I don’t have a strong view on where they are at the moment. I’m watching the Fed debate, just as you are, looking at the different opinions. Personally, I think inflation is going to be a little bit stickier, and I haven’t been in the same place as the markets about a decline in rates as you go out to the end of 2023 into 2024. I would say that the path of monetary policy from here is uncertain, and the markets are responding accordingly.

I want to ask you about some of your outside activities, like DJing, and the fact that you received rights to use a song from a Goldman client. And you were involved in a real estate firm that’s also a Goldman client. What sort of signal does that send to employees? And is it really worth the blowback that you get?

I spend the overwhelming majority of my time focused on my work and Goldman Sachs. I’ve got a few hobbies. DJing happens to get some attention. But I also like to play golf. I also like to road bike. When the weather is nice, I kitesurf. So, I have interests and activities; I think most of my employees have interests and hobbies. I actually think it’s healthy to have some outside distractions.

There’s a blending, some people say, between those activities and Goldman work.

I don’t think there’s a blending. I do invest in things outside the firm. I think most people invest in things outside of their own business. We have very, very complex compliance procedures—as all financial institutions do—for any investment you make or any outside activity that you’re involved in. I am extremely focused on making sure we deliver for shareholders and for our clients. I read the press. I wish people would focus on Goldman Sachs. But I’m gonna have some outside interests because I’m a human being, like anyone running any of these institutions.

Another question is about Kathy Ruemmler, general counsel of Goldman Sachs. Do you have full confidence in her, given disclosures about the business relationship she had with Jeffrey Epstein prior to her coming to Goldman?

Kathy worked in the private sector as a litigator for another firm. Kathy has always been very upfront with us when we interviewed her and brought her to the firm, and was very upfront with us with respect to all the relationships that she has. She has been a great general counsel. She gives great advice, and I’ve got confidence in her.

Do you have full support from the partnership? And does the partnership hinder your management of Goldman Sachs?

I don’t think the partnership hinders my management at all. One of the great attributes of Goldman Sachs is we run a big company, but we’ve managed to keep this partnership culture, which we think is very important. I’m invested heavily in it with the rest of the leadership team to make sure we reinforce it. There are approximately 400 partners, and I assure you that there are some who don’t like everything that I do. I listen to feedback from all constituencies, but we’re focused on an evolution at the firm that allows us to drive higher returns for shareholders. 

And along the way, that has forced us to make some changes, and not everybody likes change. But I think overwhelmingly, the partnership at Goldman Sachs is aligned on the strategy and is helping us drive it forward. 

What is the thesis for owning Goldman Sachs stock going forward? The stock is selling for just slightly more than book value, and you have a fairly low multiple. So the stock is maybe inexpensive, but is there more to it than that?

Well, I hope there’s more to it than that. The two primary things we think that are going to drive [our growth are] our banking and markets platform, where we are a leader, and the shift in strategy in asset and wealth management. We’re committed to executing on that, and I think that will continue to lift the base returns of the firm over time. And if we do that and continue to serve our clients well, I think the franchise, which has been around for 153 years, will continue to grow and will continue to perform well.

Andy Serwer is Editor at Large at Barron's, covering a wide range of topics. Prior to Barron's, he led Yahoo Finance’s editorial team for nearly eight years. He spent 29 years with Fortune Magazine, rising to the position of managing editor, and was the business news anchor of CNN’s American Morning from 2000-2006. Serwer is the 2020 winner of the Elliott V. Bell Award for financial journalism.

Editor at Large

The Goldman Sachs CEO sat down with Barron’s to talk about where the bank is headed, why investors should buy the stock, and how he responds to the critics.

https://images.barrons.com/im-784243?size=1.5

The CEO sat down with Barron’s to discuss his critics’ complaints, the challenging climate for banking, his growth ambitions, and DJing side gig.

The Goldman Sachs CEO sat down with Barron's to talk about where the bank is headed, why investors should buy the stock, and how he responds to the critics.

David Solomon Says Goldman Is Evolving: ‘Not Everybody Likes Change.’

The CEO sat down with Barron’s to discuss his critics’ complaints, the challenging climate for banking, his growth ambitions, and DJing side gig.

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