Tuesday28 January 2020 ★ FINANCIAL TIMES 11

FT BIG READ. BANKING

Once renowned for its brash traders, Goldman Sachs is increasingly reliant on retail bankers and tech

specialists. Having overhauled its operations, David Solomon must reverse years of below-par returns.

ByLauraNoonan

ditional businesses, but we aren’t

convinced the choice to grow in con-

sumer lending will prove successful.”

An investorat a large fundsays he will

not buy Goldman while it carries the

“headline risk” of the1MDB bribery and

money-laundering scandal. Goldman is

close to a $2bn dealwith the US Depart-

ment of Justice over its role in the

alleged fraudand isnegotiating with

Malaysian authorities, which are seek-

ing compensationafter $4.5bn that was

raised for them by Goldman was alleg-

edly stolen.

Others arescepticalaboutMr Solo-

mon’s drive toturn Goldman’s old

investing business into aprivate equity

powerhouse like Blackstone y raisingb

more funds from clientsinstead of being

skewed towards investing Goldman’s

own capital.

“It’s always been a merchant bank but

Blackstoneand all the private equity

firms have crushed them,” says the

investor. “The PE firms are the new

Goldman Sachs... [while] Goldman

Sachs is trying to be JPMorgan.”

What makes Goldman, Goldman?

Although dismissed as simplistic by

some at the bank, such an assessment

begs the question: What makes Gold-

man, Goldman?

Its partnership structure — where 415

of itsmost valuable staff earn$1m sala-

ries and gain investment opportunities

— sets it apart from other US banks.

Executives insist the structure will

remaineven as Goldman evolves. But it

is dominated by the traditional units:

there are just three partners based in the

consumer business.

The consumer businessdoes not

“need that many [partners]”, says one,

adding that in investment banking

“they make their revenue through the

sweat and tears of people”, while in con-

sumer banking “if someone is sitting in a

call centre they’re not contributing in

the same way”.

Internal Goldman statistics show that

average partner tenure held steady at

seven years but more than 30 partners

left in 2019, including a string of high-

profile departures in the final quarter.

“I don’t think many people feel like

Goldman in its heyday and Goldman

now are the same firm,” says a partner

who left in 2018. “There was a lot of

prestige to being a part of Goldman in

the 1990s and in the 2000s, now with

this consumer push [there isn’t].”

G

oldman Sachsspent most

o f i t s f i r s t 1 3 0 ye a r s

shrouded in the secrecy of a

partnership structure. It

jealously guarded that

mystique for its first two decadesas a

listed company.

But tomorrow, David Solomon, who

becamechief executive in October 2018,

will stand before a crush of sharehold-

ers, analysts and journalists at the

bank’s first-everinvestor day. It is effec-

tively a coming-out party for a group

that has spent the past two years plan-

ning a radical overhaul of its operations

as it movesfrom its trading and invest-

ment banking roots to an institution

offering everything from current

accounts to money management and

credit cards for the masses.

Forpeers on Wall Streetsuch events

are routine. Mr Solomon’sdecision to

pull back the veil and explainGoldman’s

strategyis anything but. It isone of the

many breaks with tradition the invest-

ment banker has made since takingcon-

trolat Wall Street’s most storied ank.b

Rivalssuch asJPMorgan Chase nda

Bank of America ave blossomed inh

recent years as theirbig retail banks nda

cash management divisions — which

help companies make and receive pay-

ments and manage their excess money

— protectedthem from a 50 per cent fall

intrading revenues in the decade after

2009. EvenMorgan Stanley, which like
      Goldman acks a retail bank, has weath-l
      ered the storm better afterrestructur-
      ingitsfixed income trading unit n 2015.i
      Itleft Goldman as the only US bank
      overly dependent on abond nd stocka
      trading business characterised by plum-
      meting margins, higher capital charges
      and fierce competition from hedge
      funds and otherrivals.In June 2016, the
      bank’s valuation fell to its lowest level in
      four years.

“Lloyd [Blankfein] did a great job

during his tenure [as chief executive]

.. but that was a time of tremendous.
incursion with Dodd-Frank [regula-
tions], a lot of congressional interven-
tion,” says Bill George, who was aGold-
man Sachs board member from 2002 to
2019. “David came in really as the
person to put the focus on growth,” he
adds, citing the “critical” need to
expand into new businesses.
After years of subpar returns, and
amidcriticism from shareholders, ana-
lysts and his own colleagues, Mr Solo-
mon began a sweeping review of how
Goldman makes its money and what it
needs to do to make more of it.
Some measures were cosmetic —
mandatory formal dress wasditched ni
favour of a millennial-friendly “come as
you like, express yourself” policy. The
bank’stop leadership team — most of
themappointed by Mr Solomon — are
swapping their suites on the 41stfloor of
Goldman’s New York headquarters for
the 12th,so they can be closer to the
main businesses.
Other changes are more fundamental.
Thousands of technology specialists
have decamped from a central division
into business lines, to have a more direct
impact on products.Goldmanbought a
mass-market wealth management arm,
United Capital, for $750m so itcan sell
its services to the merely wealthy as well
as the enormously rich. It haslaunched
a credit card with Apple, an addition to
itsmass market consumer business.
In parallel, Goldmanhas also cut back
less profitable parts of itsenormous
trading business, diverted investment
bankers to pursuing smaller clients and
promised a “One Goldman” approach to
serving clients — an admission that the
bank has not always been collaborative
in its approach to winning business.
A year in, and despite missing earn-
ings forecasts for the past two quarters,
Mr Solomonhas claimed an early vic-
tory. But there isfriction withinthe
ranks. The changesthreaten a culture
clash between thetraders and bankers
who powered the Goldman of old, and
theretail bankers, cash management
expertsand engineers who seem to hold
the key tofuture growth.
Outside the company some ask
whether it has lost its cachet.“We used
to all want to be Goldman Sachs. Now
Goldman Sachs seems to want to be
Citigroup or JPMorgan,” says a senior
rival investment banker.

management, Goldman was already

working on its own platform before the

United Capitaldeal in 2019.“The veneer

wore off and the patience wasn’t there to

see a whole lot of it through,” he says.

A former colleague echoes this senti-

ment, but others dispute it. “Unlike a

start-up or a fintech, we can’t just work

on a product for a couple of weeks and

launch it into the marketplace,” says a

senior figure at Marcus.“We have to

release something that [matches] p tou

the standards of Goldman Sachs.”

The Apple Card is Goldman’s most

high-profile consumer play. Infamous

among Goldman’s tech teamfor gob-

bling up resources from other projects,

the card quicklyserved up a swift lesson

in how not to dobusiness.

When it was launched in August, male

customers took to Twitter to complain

that they were given higher credit limits

— in some cases allegedly 20 times

higher — than their wives. That inspired

aninvestigationby New York’s financial

services departmentwhich has yet to

report its findings.

“That was not helpful for us,”says a

senior executive from one of Goldman’s

traditional businesses. “It could have

been better handled.”

Culture clash

Some Goldman executives already feel

the consumer division — which

accounted for just 2.3 per cent oftotal

revenues last year — isgetting a dispro-

portionate amount of attentionfrom Mr

Solomon and other senior managers.

They wanttheinvestor day to focus

more on places where Goldman actually

makes money, say people familiar with

the discussions. “It’ll be 2030 before you

really see a shift in business,” says one,

adding that people should invest in

Goldman “for the here and now”.

The investor day — which will show-

case some of the bank’s new technology

— is expected to outline plansfor itsnew

cash management division. Mr Solo-

mon will further explain how heplans to

attract more client money into the

merchant banking division and improve

growth and returns at its traditional

trading and investment banking units.

The internal tensions highlight why

changing the culture of Goldman is such

a long-term project. Company veterans

describe a tradition of ruthless competi-

tion, where colleagues compete against

each other for the same deals.

Goldman has ried to encouraget peo-

ple to think beyondtheir own profit and

loss account, but those efforts largely

failed because pay packages were based

on the old metric of how much money

individuals brought in.

Ed Schein, an organisational struc-

ture specialist and professor emeritus at

MIT, says it usually takes “five or 10

years” to change the culture of big

organisations. “If the new way requires

more collaboration between employees

and they’ve been trained for 100 years

to be individually competitive... it

might take a long time,” he adds.

He suggestssome“super individually

competitive people” might“have to be

invited out of the system”.

Goldman has already seen a lotof

churn at the top of the business. Trading

chiefs Pablo Salame and Isabelle Ealet

left shortly before Mr Solomon took

over,followedby technology boss Elisha

Wiesel, former chief financial officer

Marty Chavez and co-head of securities

engineering Konstantin Shakhnovich.

“There was a massive regime change,”

says one formerpartner. “We went from

a 12-year run with Lloyd Blankfein, who

was a trader at heart.. .Even in tough

times they didn’t want to de-emphasise

that business, that was always viewed to

be core to the firm.”

In investment banking, while senior

managers insist everyone is on board

with a push to pursue smaller clients —

defined as those with an enterprise

value of less than $2bn — some grumble

about doing less prestigious deals.

Mr Solomon has madegender diver-

sity afocal point, increasing women’s

representation with the partners and

managing directors appointed in 2018

and 2019 respectively.

But not all investors are convinced by

his efforts. Mark Conrad, who invests in

American financial stocks for fund

manager Algebris, says he owns Morgan

Stanley stock rather than Goldman

because “GS is to some extent grasping

at straws strategically”. He adds: “We

believe Solomon is correctly branching

out from an over-reliance on these tra-

Goldman’s changing business













  

Trading* and

principal

investments

Asset management

and securities services

Investment banking

Institutional

client

services

Investing and lending

Investment management

Global

markets

Asset management

Consumer and wealth

management

Revenue by division (bn)

Source: company

*Trading revenues are now included as part of global

markets

Left behind by US rivals

Change in market capitalisation from

Jan  to Jan  (bn)

   

JP Morgan

Bank of America

Citi

Wells Fargo

Morgan Stanley

Goldman's market cap

Goldman Sachs increased by just bn

Source: Refinitiv

The investor day is Mr Solomon’s

chance to answer some of these ques-

tions, and to convince money managers,

pension funds and private shareholders

that the Goldman of the future will be

able to end the poor returns of the

recent past.

In a comment that would have been

unimaginablea decade ago, one senior

executive says: “Investor day will be

about explaining ourreason for being.”

Consumer appeal

Marcus, Goldman’s consumer bank, is

the epicentre or the company that Mrf

Solomon and his team are trying to

build — aplace where innovation and

customer experience matter more than

the prestige that the bankonce prized.

The online venturewas conceived in

2014, during the era of MrBlankfein,

the charismatic bond trader who ran

Goldman for12 years before Mr Solo-

mon. The idea was to attract deposits

thatoffered a cheaper source of funding

thanGoldman paysin the wholesale

market. A US loans and deposits plat-

form followed in 2016, and then a UK

savings account two years later.

One recruit, who joined Marcus as the

project picked up steam,says hesaw an

“opportunity to take a 150-year-old

company and turn it several degrees”.

Mr Solomon turbocharged that effort,

most notably through acquiring United

Capital and striking the agreement with

Apple, which he has repeatedly

described as the “most successful credit

card deal in history” — without provid-

ingevidence for the claim.

At its quarterly earnings announce-

ment in January, Mr Solomon gave a

glowing account of the consumer divi-

sion’s progress, includinga 67 per cent

rise in depositsto $60bn in less than a

year. Lower reserves on Marcus’s con-

sumer loan losses also helped calmana-

lyst fears about Goldman’s inexperience

in underwriting consumer credit.

Yet some inside the consumer divi-

sion aremore criticalof itsevolution.

One former employee says Goldman

underestimated how long it would take

to buildthe technology and products,

then lost patienceand abandonedthem

in favour of acquisitions, leading to

wasted resources.

He offers personal finance manage-

ment as one example— Goldman first

asked its technologists todevelop a

platform but then bought Clarity Money

in 2018. In mass-market wealth

‘The private equity firms

are the new Goldman

Sachs... [while]

Goldman Sachs is trying

to be JPMorgan’

‘If employees have been

trained for 100 years to

be competitive... it

might take a long time

[to be collaborative]’

Will Solomon’s consumer bet pay off?

David Solomon, above, will use

tomorrow’s investor day — the first

in Goldman’s 150-year history — to

set out the bank’s new growth

opportunities —Patrick T Fallon/Bloomberg

JANUARY 28 2020 Section:Features Time: 1/202027/ - 18:28 User:alistair.hayes Page Name:BIG PAGE, Part,Page,Edition:LON , 11, 1