This is an audio transcript of the Behind the Money podcast episode: Is Goldman Sachs too big to change?

Michela Tindera
In January of 2020, David Solomon, the new CEO of Goldman Sachs, stepped on stage to address investors for a public presentation.

David Solomon
Good morning, everyone, and welcome to Goldman Sachs. I am really, really excited to have you all here today, and super excited . . . 

Michela Tindera
David was just a couple of years into the job as CEO of the massive bank and the FT’s US banking editor Josh Franklin says, at this time, Goldman had a pretty established game plan for how it made its money.

Joshua Franklin
They’re really at the intersection of what makes global finance tick. They helped provide a lot of the liquidity and plumbing around the, around financial markets to do a lot of market-making activity. Their trading operations are really important to how global markets function. They also advise some of the biggest companies and private equity firms in the world on their dealmaking and corporate finance needs.

Michela Tindera
What was unusual about David’s presentation was that it was the very first time that the 150-year-old bank had ever done something like this.

David Solomon
We’re gonna ask you to hold your questions till the end of the day. That said, you should feel free to break into open applause any time it suits you.

Joshua Franklin
He invited all of their biggest investors, biggest analysts to Goldman Sachs’s headquarters at 200 West in Manhattan in Tribeca, gave them all a multi-hour presentation about Goldman Sachs’s strategy, Goldman Sachs’s business model, where it was looking to expand.

David Solomon
Today is about our path forward. Our goal is to clearly communicate our strategic direction, our plans for execution, our financial objectives, and our paths to achieving these goals, business by business.

Michela Tindera
Dressed in a black suit and a silver tie, David lays out his vision for Goldman in front of a big blue screen that says things like “an era of transformation and opportunity”.

Joshua Franklin
His big mantra is that Goldman needs to operate as the Fortune 50 company when it comes to having how the bank operates. More of a kind of public company mindset, so less freewheeling, more process-oriented.

Michela Tindera
Basically, David is saying he wants to run Goldman Sachs like it’s an Amazon or a Walmart. And that means putting more of a focus on things like delivering returns for their shareholders.

Joshua Franklin
And this really was symbolic of the new faces and the new type of Goldman Sachs that David was trying to present to shareholders, to be more shareholder-friendly, to be less of a black box company and be more communicative with investors.

Michela Tindera
When it comes to making these sorts of changes, there is a lot at stake here. Goldman Sachs is a bank with assets under supervision so big that they rivalled the entire GDP of a country like Italy. But not everyone has been on board with these new changes.

Joshua Franklin
With that comes more bureaucracy, which some people who’ve been at Goldman for a long time feels like takes some of the fun out of the place. Maybe it dilutes the special sauce that makes Goldman what it is. And so that’s kind of the tension that he faces, of kind of modernising it and making it more shareholder-friendly, people feel like this isn’t the Goldman that I grew up in.

Michela Tindera
So now it’s been more than two years since that Investor Day at the Goldman Sachs headquarters. Has David Solomon been able to realise the vision he described back then and cement his legacy as the leader who changed Goldman? Or is this old bank just unable to change from the ways it’s always done things?

[MUSIC PLAYING]

Michela Tindera
I’m Michela Tindera from the Financial Times. On today’s episode of Behind the Money, is Goldman Sachs too stuck in its ways to change?

[MUSIC PLAYING]

Michela Tindera
Hi, Josh, thanks for coming on the show today.

Joshua Franklin
Thanks very much.

Michela Tindera
So Goldman Sachs has a really long history on Wall Street, more than 150 years, actually. And, you know, we probably don’t need to go back that far for this episode. But let’s take things back a bit to David Solomon’s predecessor, Lloyd Blankfein. He became CEO in 2006. So, Josh, can you tell me a bit about what his time at Goldman was like?

Joshua Franklin
Lloyd’s . . . Lloyd Blankfein’s legacy at Goldman Sachs really was steering Goldman through the financial crisis in pretty decent health. Goldman became one of the poster-child banks for everything that was wrong with the modern financial system coming out of the 2008 financial crisis. And that really did damage the Goldman brand. And in the public perception, you know, Lloyd Blankfein several times was hauled in front of Congress, among other big bank CEOs, to testify and defend the bank, really, and the work that it was doing.

News clip
Eleven gruelling hours. That’s how long senators sparred with the top executives from Goldman Sachs yesterday.

Lloyd Blankfein
What we and other banks, rating agencies and regulators failed to do was sound the alarm that there was too much lending and too much leverage in the system.

Joshua Franklin
Famously, he gave a magazine interview once where he joked that Goldman was doing God’s work. And that comment really stuck with Lloyd for really his entire tenure. But inside Goldman Sachs, he won a lot of credit. And people felt he did a really good job there. Where there was some more criticism for the job that Lloyd Blankfein did was around turning Goldman Sachs into a true corporation.

Michela Tindera
And what do you mean by when you say turning it into a true corporation?

Joshua Franklin
It’s interesting with Goldman to think about them as a public company. They only went public in 1999, so only 23 years ago. And I think there has always been this very, very slow motion transition from Goldman Sachs to go from being a kind of partnership structure where at the end of the year, the partners would kind of divide up the money among themselves that the bank made and share the wealth, to becoming a shareholder-oriented public company. And I think one of the knocks on Lloyd’s tenure at the bank was that there wasn’t enough focus on the outside stakeholders of Goldman Sachs and too much focus on how the bank internally was being perceived.

Michela Tindera
OK. And so after a dozen years in the top job, Lloyd Blankfein retires in 2018. And then this guy, David Solomon, wins the top spot. Earlier in David’s career in finance, he worked at a place called Bear Stearns, which listeners might remember as the bank that had to be rescued by JPMorgan during the financial crisis. But Josh, tell me more about David Solomon’s career at Goldman Sachs.

Joshua Franklin
David joined Goldman Sachs in 1999. He rose the ranks, came up mainly through leveraged finance, which is helping heavily indebted companies raise debt financing, ended up becoming co-head of investment banking and then being made co-president. So David Solomon has been at Goldman Sachs for 23 years and almost four years as CEO. And 23 years sounds like a long time. But Goldman is such an idiosyncratic culture that even when you’ve been there for as long as David has, if you’re not a Goldman lifer, you’re still seen as being a bit of an outsider. Some of Goldman’s kind of partner alumni network still refer to David and John Waldron — who’s Goldman’s, Goldman Sachs’s president, who’s also at Bear Stearns — as the guys from Bear.

Michela Tindera
And David Solomon does have this other sort of side gig. What’s that all about?

Joshua Franklin
So one of the big things that people often associate with David Solomon is his DJ-ing. He got into DJ-ing pretty late in life, in 2008. He was working on a Las Vegas hotel financing deal. And as part of, as part of work on that deal, he went to a club night at one of the hotels and he fell in love with the music scene. And his kind of fascination with DJ-ing grew from there. And it’s become a bigger and bigger part of his public persona and also his perception inside Goldman. He performs at regular gigs. His most recent single was “Learn to Love Me”, which he performed and produced with Ryan Tedder from One Republic.

[“LEARN TO LOVE ME” PLAYING]

Michela Tindera
He even performed at Lollapalooza in Chicago last month. Here’s a clip of it posted on Instagram.

[CLIP PLAYING]

Joshua Franklin
And he feels like it helps make Goldman Sachs feel like a more modern place to work. It makes him more approachable to young people who work at Goldman Sachs or want to work at Goldman Sachs. But it is definitely a very . . . it’s a unique thing for someone in his position to be doing.

Michela Tindera
OK. So David comes in as CEO in 2018. What’s happening with the bank then?

Joshua Franklin
It was seen as being one of the smartest places on Wall Street, top dog when it came to investment banking, when it came to trading. But the business had stagnated to some degree in terms of expanding into, to newer areas and innovating in the businesses that it was already doing. So when David Solomon came in, he looked at things and thought, There’s some great businesses here, but we really need to do more than what we have been doing. The other thing that Goldman has struggled with over the years, like all big banks, is increasing regulation after the 2008 financial crisis. And this has made banks kind of stodgier, slower institutions, made it harder for them to take more risk. And risk, one of the things that it can’t do is choose returns. So Goldman has struggled with that. And it underscores the need for diversification of its business, so that even if some of the other parts of their businesses are more challenged by regulation, these newer businesses provide growth opportunities.

Michela Tindera
And so Goldman has sort of two areas in their business that they specialise in and are best known for. Those are investment banking and trading. Can you just explain what those businesses are exactly?

Joshua Franklin
So investment banking is advising companies on transactions, essentially. So whether or not that’s taking them public through an initial public offering or advising them on a sale of their business or a merger with a with a competitor. That’s really what investment banks like Goldman do. And along the way on these kinds of deals, they collect a fee. Sales and trading is more of the business of working with mutual funds, hedge funds, institutional investors as they buy and sell stock. They buy and sell debt. Any kind of instrument they, Goldman acts as a market maker in these, in these businesses to kind of provide what’s known as liquidity in the financial system.

Michela Tindera
And so in 2020, we already heard about how he holds this Investor Day, where he outlines his own big goals for the firm. So what are they?

Joshua Franklin
At that Investor Day, David outlined his four pillars of growth that he wanted to hang his hat on. And they are asset management: so kind of raising funds from investors to make public and private market investments. Wealth management: so managing the money for the wealthy and the uber-wealthy. Consumer banking and then transaction banking, which is basically just, you know, moving, helping big corporations move their money around the world. And that is, over time, supposed to supplement and make up a bigger share of revenue.

Michela Tindera
So these other businesses, investment banking and trading, they’ve been Goldman’s bread and butter for years and years, and they make a lot of money for the firm. So why does he wanna shift into these other areas then?

Joshua Franklin
The struggle for Goldman is that under David, despite really communicating to investors this diversification strategy, these four new businesses that they wanna go into, the revenue mix is still so heavily weighted towards trading and investment banking, and it’s proving very hard for David to meaningfully shift. So these businesses, investment banking and trading are incredibly lucrative. They’ve minted a lot of millionaires out of Goldman Sachs, out of Wall Street. But the knock on them is that shareholders don’t really like them. They are very, very unpredictable. They ebb and flow with how the market’s doing. And when you look at the example of someone like Morgan Stanley, Goldman’s historical rival, they’ve been in the process for more than ten years of trying to grow in wealth management. By May they’ve made a number of acquisitions in this space and they’ve really been rewarded with a better share price over the last few years.

Michela Tindera
So what steps has he actually taken to make these changes? I think you reported that Goldman has poured billions of dollars into these initiatives. So where has that gone and what’s happened?

Joshua Franklin
So they’ve spent a lot of money trying to grow out their consumer business, and that was a business that started under Lloyd Blankfein. But under David, that business, they’ve really tried to pursue a lot of areas. They’re doing more, in addition to just, you know, being a consumer-facing brand with their Marcus product, which is . . .

Michela Tindera
And that’s consumer in the sense of like you or I could open an account . . . 

Joshua Franklin
Exactly.

Michela Tindera
 . . . you don’t have to have some sort of really high net worth?

Joshua Franklin
Yes. It’s like going to a Bank of America, like having a bank account with Bank of America in the US or Barclays or HSBC in the UK. But what Goldman is trying to do is it be a digital-only bank so they don’t have retail branches. It’s all done online. And this and Goldman has been pretty successful at growing that business. They have . . . they have tens of billions of dollars worth of deposits.

Michela Tindera
OK. And so Goldman’s also pushed into this other emerging area known as banking as a service. What’s that?

Joshua Franklin
That’s essentially when licensed banks like Goldman Sachs work with non-bank companies to provide financial services. The best example of that is the Apple Card, which Goldman worked on, which was launched in 2019. And that’s basically a product. It’s a credit card that Apple is responsible for the, you know, the customer-facing part of things, issuing the credit card, the consumer experience, the website, things like that. And Goldman provides the kind of financial foundations, the underpinnings for the credit card.

Michela Tindera
So those are a couple of things that David has done. What what else has he done?

Joshua Franklin
So he’s also invested in Goldman’s asset management business. So Goldman has a long history of investing money in, you know, making private equity investments. So instead of managing, investing the banks’ own money or own capital they’re, in that they’re saying to investors, give us your money and we’ll invest it. Another thing he’s done is make a number of acquisitions. The two largest deals that he’s done are actually two of the biggest deals that Goldman’s done. And in recent history, there was the GreenSky acquisition, which is a consumer finance company based in Atlanta. It makes point-of-sale loans for home improvement products and medical procedures. It’s not typical what Goldman’s been involved in. And the other one is for an asset manager in Europe called NN IP, and that’s brought with it a few hundred billion dollars in assets. And investors do like the direction that those deals point the bank into, especially on the asset management side. I think the concern is that it’s not big enough to really change the bank in a meaningful way.

Michela Tindera
So how has all of this been going for David and for Goldman Sachs?

Joshua Franklin
So. There are achievements you can point to. 2021 especially was, it was a banner year for Goldman in a lot of ways. They posted record profits. They saw their share price rise to a record high. David’s also managed to cut costs by about $1bn, goes back to the efficiency drive that he’s on to make the bank more shareholder-friendly. But a lot of the, a lot of these achievements, especially the record profits and the record share price, really were on the back of the legacy Goldman Sachs businesses. He can take credit for growing market share in those businesses, but what he’ll really be judged on as his legacy at the bank will be diversification and whether or not he was successful in really cementing Goldman’s place in these newer businesses.

Michela Tindera
And why is it taking so long to make that transformation, though? I mean, David Solomon is the one in charge. Can’t he just kind of give out orders to move more swiftly into these other areas so they can diversify their revenue?

Joshua Franklin
So part of that is Goldman is to some extent a victim of its own success because investment banking and sales and trading have had such a good run over the last two years, especially during the pandemic. You know, 2020 and 2021, investment banking had record years for Goldman Sachs. There was just so much activity. Companies raising so much debt. IPOs were on fire. You had Spacs that Goldman played a meaningful part in, sales and trading as well. Goldman really benefits when there’s lots of market volatility like there has been and this year as well, especially in commodity markets with what’s been going on with the war between Russia and Ukraine. Goldman has one of the best commodity practices on the Street. So they’ve really been making a lot of money from that. So these legacy businesses that Goldman has have been so successful that it’s kind of raised the bar for what these newer businesses have to do in order to change the revenue mix.

Michela Tindera
So how are people receiving these changes inside Goldman?

Joshua Franklin
I think the one area where people externally have had some criticism is the number of senior people who’ve departed the bank since David has been there. They’ve lost a lot of talent that people feel is indicative of just the cultural change that he’s trying to implement.

Michela Tindera
So you found in your reporting last year that CEOs of big banks are staying in their positions for longer than ever. So if that holds true for David Solomon, then he’s still very much in the early part of his tenure as CEO. So where do you see Solomon taking Goldman in the next four years at the helm or down the line even further?

Joshua Franklin
I think the thing for him is when we look back on the tenure, you know, five years from now, what does the revenue mix of the bank look like? Has he succeeded with the diversification push that he’s been trying to do? Or will Goldman in 2027 look a lot like the Goldman of 2022, a lot like the Goldman of 2018? I think that’s the, that’s the challenge, and that’s the big looming question for him.

Michela Tindera
Well, thank you so much, Josh, for coming on the show.

Joshua Franklin
Great. And I’m really happy to be here.

[MUSIC PLAYING]

Michela Tindera
Behind the Money is hosted by me, Michela Tindera. This episode was edited by John Buckley. Topher Forhecz is our executive producer. Sound design and mixing by Sam Giovinco. Cheryl Brumley is the global head of audio. Thanks for listening. See you next week.

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