Reinventing Wall Street’s apex predator |
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It has been
a rough few weeks for Goldman Sachs.
On January 11th the firm laid off roughly 6% of its workforce. A week later it posted dismal fourth-quarter and full-year earnings, including a quarterly return on tangible equity—a measure of profitability—of just 4.8%, its worst in a decade. Employees in the firm typically get told their bonuses the day after full-year results are announced. The bonus pool is reported to be down 40-50% on last year.
This is familiar to me. I joined a trading desk at a European bank in 2012, after a year in which the euro-zone debt crisis had killed profits. The firm was in the middle of a huge post-crisis reshuffle. A month or so after I joined, it laid off thousands of workers, most of whom only found out when their access cards no longer worked. When I walked into the lobby at 6.30am there were bouncers manning the turnstiles. One of my colleagues got to her desk ten minutes later, typed in her password and, when she appeared to be locked out, burst into tears. She was consoled by our boss, who clarified that she was not fired and must have simply made a typo. A few months later it took a whole day for said boss to communicate bonuses to—and listen to the grievances of—his dozen
or so staff because most of them had been paid next to nothing. The next year when business was better it took him just an hour or so.
It is remarkable that, a decade later, Goldman still appears to be in the middle of a post-financial-crisis reshuffle. As regulatory change, slow growth and low interest rates snuffed out profits in Goldman’s traditional businesses, the kings of Wall Street did little to adapt (in contrast with their long-time rivals, Morgan Stanley). Its earnings fell short of expectations and it stopped growing. An investor who purchased a share in Goldman at the end of 2009 would have made just 4.5% total return per year by October 1st 2018, when David Solomon, its current chief executive, took over.
The new boss launched a new strategy in January 2020.
Goldman would change in two ways. First it would focus on growing its core business—investment banking and trading. Second, it would expand its efforts in newer, more stable businesses. It was going to expand Marcus, the “digital bank of the future”, and its wealth-management business. Then Goldman launched the Apple card, a consumer credit card. It also planned to shrink the size of investments made with its own balance-sheet, to reduce volatility.
The first strand of the strategy has paid off—and far more than Mr Solomon or anyone else could have predicted. The chaos of the early pandemic in 2020, the financial boom in 2021 and the rate shock in 2022 have caused revenues across trading desks to surge. Initial public offerings and merger-and-acquisition volumes exploded in 2021. The pie was suddenly huge and Goldman managed to expand the size of its slice. The firm’s share price picked up. An investor who bought when Mr Solomon took charge would have made 13.2% annualised total returns. The big question now is whether this business can maintain the good returns if economic conditions deteriorate.
But the execution of the other bits of the strategy have not gone well. The push into consumer lending has been a disaster. It has cost Goldman several billion dollars in expenses and loan loss provisions. The firm seems to have to set aside inordinate amounts for losses—some 13.5% of loan value, twice what other banks and even other consumer-lending startups provision for. Its new wealth-management initiatives are growing, but slowly. And on-balance-sheet investing, which causes wild swings in earnings and was one of the main drivers of poor fourth-quarter results, has clearly not come down enough to insulate the firm.
When Goldman’s performance is good it is very, very good and when it is bad it is rotten. This volatility is not something investors like. Outshone by Morgan Stanley and shown up by less glamorous consumer bankers, Goldman trades at close to its book value—in other words, what it would be worth if liquidated.
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moneytalksnewsletter@economist.com.
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We calculate that “platform solutions”—the business that houses Goldman's consumer-lending efforts—made up just 3% of revenues in 2022, but 10% of costs, once provisions for loan losses and expenses are accounted for. | | |
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