Goldman’s Lemkau: The cat who got the cream

Goldman Sachs admitted to problems in its global markets unit during the bank’s inaugural investor day on Wednesday. This left investment banking co-head Gregg Lemkau looking the happiest presenter on stage.

Global markets had a return on equity (RoE) of just 7% last year at Goldman, which was a drag on overall performance, given that the division still consumes just over half of all capital – or $40 billion of the $79 billion total for 2019.

The bank was clearly conflicted about how to present the prospects for the trading operation that remains its biggest unit, and will be key to performance in the years before diversification efforts in consumer and transaction banking make a meaningful impact.

Goldman president John Waldron flagged $700 million of cost cuts to come in markets, while chief financial officer Stephen Scherr pointed out that the firm’s blended global markets and investment banking RoE last year was 9.2%, which was behind JPMorgan and Citigroup but better than Morgan Stanley and Bank of America.

Then divisional heads took the floor, presenting further contrasts.   

Lemkau – proud generator of 18% RoE in 2019 – led with the firm’s strengths, boasting repeatedly that Goldman has the number one franchise in his own space, though that was conveniently drawn from total advisory and financing revenues since 2015, ignoring JPMorgan’s more recent rise to the top.

Lemkau took a Trump-like approach to building on this market share.

“We have room to win by more!” he declared, before explaining that this could come from a focus on individual sub-sectors.

Change in tone

Lemkau didn’t literally drop the mike when he ceded the stage to two of the three co-heads of securities – Jim Esposito and Ashok Varadhan, but there was a distinct change in tone after the handover. 

Esposito and Varadhan had a stab at promoting enduring strength, by positioning Goldman as one of a top three for overall markets revenue in 2019, alongside JPMorgan and Citigroup – which again excluded Morgan Stanley and Bank of America.

They also outlined a path to a global markets RoE of 10% within three years, which will be vital to meeting Goldman’s newly announced target of a firm-wide RoE of 13% or more in the same time period.

We used to bring a principal mindset to bear [on pre-trade evaluation]. We pushed it too far 

 - Jim Esposito

This path relies on cost and funding management rather than revenue growth, a cautious strategy that is understandable given the recent weakness in markets where Goldman used to enjoy disproportionate share and high profitability.

It must nevertheless be dispiriting for members of a trading group who once viewed themselves as the elite within a bank that itself has always projected superiority to competitors.

Varadhan, who is the only trader among the three current markets co-heads, tried to give his fellow securities group veterans some comfort.

“Capital is no longer a reduction story, it is a redeployment story,” he said, indicating that there will be scope for growth in certain markets.

Future prospects

Varadhan also talked up the quality of the current crop of global markets employees. “I’ve never felt better about the roster” of trading talent, he said, commending their understanding of regulatory constraints and technology.

That could be taken as a dig at some of the trading veterans who have left Goldman, including Varadhan’s former securities co-heads Pablo Salame and Isabelle Ealet.

Or perhaps Varadhan was trying to convince himself about future prospects, as well as encouraging his deputies.

Co-head Esposito took a truth-and-reconciliation approach to acknowledging flaws in Goldman’s prior practice. 

“We used to bring a principal mindset to bear” on pre-trade evaluation, he said, admitting: “We pushed it too far”.

Goldman will now take a holistic, portfolio approach to generating higher trading returns. It is not clear that this will speed the journey to a higher RoE, but the markets co-heads said that being attached to the “pre-eminent global investment banking franchise” was a key differentiator.     

Off-stage, Lemkau was no doubt nodding in agreement.