U-turns seem to be in vogue at the moment – along with the tendency of those doing the U-turning to pitch any reversals as logical evolutions of what came before. So it is at Goldman Sachs, whose chief executive David Solomon this week cast his latest reorganization of the firm as “the next phase of our growth”.
It might still turn out to be just that. For all the commentary that the latest moves mark a backward step in Solomon’s ambitions for Goldman to broaden its appeal beyond investment banking, there is in fact very little being unwound here. There is also no doubting both the continued strong performance from the firm’s core franchises and the difficulty of hitting precisely on the ideal version of a new approach at the first attempt.
In a bid to make his latest changes look proactive rather than reactive, Solomon has been at pains to portray them as a continuation of the strategy that the firm set out in its now-famous investor day in January 2020, and which we have already discussed here, here, here, here and even here.
Gold standard
Boiled down to its essentials, it meant doing a little more of the stuff that is less volatile than the core advisory, underwriting and trading businesses that Goldman has always been about. That meant expanding its asset and investment management offering and starting up a consumer banking arm.
Of course, Goldman being Goldman, the firm wanted to do all that while at the same time not tarnishing the gold standard that it had built up in investment banking. Eye-catching partnerships with the likes of Apple would keep the brand value high in consumer banking, while a new ‘One Goldman Sachs’ initiative would serve to keep employees’ minds focused on the importance of the bank’s key institutional – and, increasingly, corporate – relationships within the investment bank and how they could be better leveraged for the benefit of the entire firm.
The next phase that Solomon talks about sounds in many ways a bit like the last phase, based on the principles of growing and strengthening existing businesses, diversifying products and services, and operating more efficiently. That it sounds similar is kind of his point – this is not a radical undoing of a previous plan.
Back at the 2020 investor day, the new strategy was accompanied by a tweak to the corporate structure in the form of a new consumer and wealth management division. Solomon has reached for the org chart again, this time around lumping Goldman’s investment banking and global markets divisions together into something that is more comparable with other firms’ investment banks, putting wealth management (and consumer banking) together with asset management in another division, and finally parcelling out some of the funkier bits of the firm into something called platform solutions.
This last part is obviously the odd man out when it comes to structure, since it is the one part that doesn’t reflect a set of clients but is more of a factory for stuff like GreenSky, the fintech home improvement loan origination platform that Goldman bought in the last year, or the various consumer partnerships that the firm now boasts, or its transaction banking platform, which bankers sometimes like to make sound cooler by calling it TxB.
Reflecting the facts
Why bother with all the rejig? Does it really have any practical purpose?
The realignment of the business segments has been driven by serving clients, Solomon told analysts on Goldman’s quarterly earnings call on October 18. And in some ways, it reflects what are already the facts on the ground.
Solomon must have bored even himself in recent years explaining that the firm’s investment banking and global markets divisions are working ever more closely together: it is what a large part of One Goldman Sachs was all about and it is what a lot of Solomon’s strategic update in February explained.
Likewise, the bank sees the combination of asset and wealth management as a logical step, and one that it has been moving towards inexorably over time. Chief operating officer John Waldron talked about this at the Bernstein Strategic Decisions Conference in June, charting how closer alignment would help Goldman achieve its target of firmwide asset and wealth management fees of more than $10 billion in 2024, of which $2 billion is from alternatives. Fees reached $7.6 billion in 2021, and stand at $6.5 billion for the first nine months of 2022.
As for the new platform solutions division, Solomon told analysts that by organising the firm in this way, Goldman can “shine a brighter light” on the investments it has made.
A lot of this, then, is about the optics. If investors can better see what Goldman has and what it is doing with it, the better they can value it
A lot of this, then, is about the optics. If investors can better see what Goldman has and what it is doing with it, the better they can value it.
But what about the consumer business? Go back to 2016 and the talk was all of building a full-scale digital consumer bank. Now that the firm is giving up on marketing direct to a mass audience, it feels as though the ambitions are more limited. Did something go wrong?
“There have been bumps, not everything is perfect, and that always happens when you are building things,” Solomon told analysts.
And while the firm has never broken out the P&L for the consumer bank, it concedes that it is certainly an L.
The way Solomon tells it, it is not quite that something went wrong with the original ambition, but more that it made sense to refine it. He concedes that the original aspirations were set out in a broader way than the firm looks at consumer banking now, but he’s still proud of pulling in $110 billion of deposits from a standing start, and seeing 15 million customers engage with the platform.
Now he talks of a realization that scaling this will require the firm to be more focused in its approach. It sounds like it can’t just keep spending the way it has.
That is why he is setting so much store by the new alignment of the consumer bank with the firm’s wealth management and workplace businesses.
Rather than spending money on marketing its direct-to-consumer banking products to a mass audience, Goldman now thinks that the stuff it has built will sit much more neatly alongside wealth management and workplace.
Doing so means that the forward spend on customer acquisition is “meaningfully lower”, says Solomon. And it is not exactly going niche by doing so, either. Goldman reckons its workplace platforms give it access to nine million employees at hundreds of the best names in corporate America.
In some ways, Goldman’s desire to make its consumer offering as smooth as possible has come back to bite it. Its landmark credit card agreement with Apple has just been rejigged to add a new high-yield savings account for Apple Card customers, all integrated with Apple Wallet.
Describing the tweaks to the agreement as an “amend and extend”, Solomon said that customers had been paying down their cards so actively – because it was so easy for them to do so – that balances were not running as had been originally predicted.
For Apple, the change is a further push into finance. For Goldman, it is a way to open up an alternative deposit-gathering approach to Marcus, the savings account brand that it already had, as well as ensuring that its Apple partnership still makes sense given the card balance dynamics that Solomon talked about.
Goldman being Goldman
Part of the reason that consumer banking attracts so much attention when Goldman does it is because it doesn’t tally with what people think of as Goldman. Perhaps the latest changes reflect that it has ended up not quite tallying with what Goldman thinks of as Goldman either, but that is probably not quite right.
There is no question that deposits are hugely valuable for the firm, and that much of what it has built on the consumer side is indeed going to “deliver accretive value to the firm” elsewhere, to use Solomon’s phrase.
Solomon also likes to note that the firm has made a habit of changing over the course of its 150-year history. After all, not many thought of asset management as core to Goldman Sachs when it started up in the 1980s. Now the firm is the fifth-largest active asset manager in the world.
It is also why he is not bothered by the fact that the new platform solutions accounts for “less than 5%” of the firm. What it represents to him is opportunities to serve clients in new ways, and that will take the firm in new directions, not all of which can be foreseen even now.
And he can also boast that staying focused on the core business has played out pretty well since that 2020 investor day. After all, Goldman racked up its best ever quarterly revenues in the first three months of 2021, when it posted some $17.7 billion. That was not just the best quarter since another extraordinary crisis rebound in the second quarter of 2009, but it was fully 29% better than it.
This year is going to be far from a vintage one for investment banking, but nonetheless Goldman remains top-ranked in a slew of areas and has even seen the biggest growth of any business line among the five big US investment banks to have reported so far. Its fixed income trading revenues are up 36% in the first nine months of 2022, a result that is testament to a concerted effort in recent years.
“Play to our strengths and narrow our focus,” was Solomon’s assessment of what he had learned from what the firm had spent the last few years developing in consumer banking.
For him, a strengthened wealth management and workplace platform is the natural home now for some of what the firm has built in consumer. At another firm, that might risk sounding like making the best of a bad job, but things rarely turn out like that at Goldman.
There might be hubris, but there is still pragmatism. Told by one analyst that investors are rarely excited by anything Goldman says it is doing in consumer banking, Solomon sounded like he acknowledged the sentiment.
“That informs our decisions,” he said.
