What is Goldman Sachs?
It’s a question that chief executive David Solomon has fielded more often than usual in the last 12 months, not least because late-2020 vintage Goldman is starting to look subtly different from the firm of even a few years before.
But he also has a fairly simple answer: Goldman Sachs is a bank. Gone are the days of differentiation between investment banks and other banks, he argues. In today’s world, he told the audience at a Credit Suisse conference back in February, “there are just banks.”
Goldman is certainly starting to look more like a bank. And even the staff of its storied mergers and acquisitions franchise are buying into that identity.
Take transaction banking, a business that featured prominently at Goldman’s first-ever investor day in January. Goldman has fairly moderate ambitions for this franchise, which it launched internally in 2019 before rolling it out to clients. But Solomon regularly notes that the scale of the opportunity means even a 1% market share will be all the justification needed to embark on it.
For new ventures like transaction banking to fulfil their potential at a firm such as Goldman requires investment bankers to get with the programme. There is no shortage of opportunities for them to do so, even if some are hardly high profile.
Motivation
One is cash in escrow. Until this year Goldman’s M&A franchise had never competed for the cash that typically gets placed in escrow pending a deal’s completion. Its bankers would provide leading advice to a top corporate client only to watch that client hand over billions to a commercial bank for safekeeping.
How to change that? Simple: tap the famously competitive juices of Goldman staff.
At the start of 2020 Solomon set them the challenge of being the first to pull in an escrow mandate. Within a few weeks, it was Ryan Limaye, an archetypal investment banker in the firm’s technology franchise and a 26-year veteran of the firm, who stepped up.
Solomon sent him a toaster.
“That’s all it takes to motivate people at Goldman Sachs,” Solomon said at the time.
Our client focus means we will capture our fair share – or better
Stephen Scherr, Goldman Sachs
The quip downplayed a serious point. When Goldman sets its mind to building a business that it argues is an extension of what it already does rather than some untested whim, there should be little to stop it succeeding. Its bankers will see to that.
That philosophy is captured by ‘One Goldman Sachs’, a phrase that is in danger of being worn out through over-use, but that nonetheless does sum up the approach of reorienting every part of the business around client relationships, rather than the firm’s traditional ultra-transactional approach.
If the firm needed a reminder of why that shift was long overdue, it was provided by the 1MDB fiasco, forever repeating on Goldman like undigested beans. The lowlight of the year was the multi-billion-dollar settlement of that affair in October with regulators in the US, the UK, Hong Kong and Singapore.
For Solomon, able to declare himself pleased that the firm was finally putting 1MDB behind it, it may have been a highlight. A more convincing one, however, was the year’s bottom line. Pre-provision profits rose 11% in the first nine months.
New view
Stephen Scherr, chief financial officer at Goldman, is in no doubt that 2020, dominated by the disruption of the coronavirus pandemic, has proved One Goldman Sachs to be the right approach at the right time.
Old-style Goldman would always have done well in the perfect storm of secondary market volatility and primary issuance needs that have characterized much of 2020, but Scherr thinks that at least some of the firm’s strong performance is down to its new view of the business.
“The last six or seven months have served to reinforce the strategic priorities that we set for ourselves,” he tells Euromoney. “Our focus is now on activity that is less balance sheet-intensive, less stress loss-producing and on more durable fee-based revenue.
“And that pivot is more relevant today than it was when we described it at our investor day in January.”
Scherr is the first to acknowledge that when he, Solomon and chief operating officer John Waldron took the helm a couple of years ago, there was a perception that the investment bankers were taking over. He thinks that was overdone, but correct in one regard.
“The truth is there was one element of investment banking that we did bring to the securities business, which was viewing it through a client lens,” he says.
And that securities business, both fixed income and equities, has been one of the stars of 2020. Nine-month revenues are up 50%.
Scherr likes to tell analysts on his quarterly earnings calls that it’s all about balance-sheet velocity, but is he really describing an opportunistic return to prop trading? He balks at that.
“It’s not about punting, it’s not about positioning, it’s about making more of our money in the intermediation of flows and in financing,” he says.
Scherr says he doesn’t know if the next quarter will be great for the banking industry or not. But he adds: “I am more sure than ever that our client focus means we will capture our fair share – or better.”
