How Goldman can regain its swagger

The writer is a former investment banker and author of Power Failure: The Rise and Fall of an American Icon

Goldman Sachs has lost its swagger. The market value of the venerable 154-year-old investment bank, at $121bn, is now $42bn less than its longtime arch-rival Morgan Stanley. It used to be that Goldman was the more valuable bank for many years.

Likewise, it used to be that the pay of Goldman’s chief executive was the gold standard on Wall Street. But in 2022, Morgan Stanley’s chief executive, James Gorman, was paid $31.5mn for his work, down 10 per cent from the year before, while Goldman’s CEO, David Solomon, received $25mn, down 29 per cent.

Then there are reports of a morale problem at the firm, which I guess is to be expected in the wake of Solomon’s recent decision to fire 3,200 employees, roughly 6 per cent of its global workforce of nearly 49,000, and of his recent confession that the bank’s strategic focus on the Main Street consumer and other more mundane commercial banking products has pretty much flopped.

Here, then, is some unsolicited advice for Solomon and the bank’s august board of directors on how it can get its game back. First and foremost, Goldman needs to bulk up its balance sheet, to better compete with its Wall Street rivals, such as JPMorgan Chase, Bank of America and of course Morgan Stanley. The latter has pulled ahead largely because of its decision to focus on the more stable profitability of wealth management rather than on the more volatile investment banking business that remains Goldman’s bread and butter.

Goldman needs access to the cheap capital that banking deposits provide to keep its lending machine humming. In short, it needs to buy a big commercial bank but not one that also has an investment bank, or investment-banking aspirations. The perfect merger candidate for Goldman has long been Bank of New York Mellon, which operates in 35 countries around the world and has $1.8tn of assets under management and another whopping $44.3tn of assets under custody or administration.

It also owns Pershing, one of the leading clearing houses on Wall Street, and — perhaps best of all — the company is a complementary fit with Goldman. There is no overlap with Goldman’s world-class investment banking and principal investment businesses. What’s more, Bank of New York Mellon’s relatively new chief executive, Robin Vince, spent 26 years in a variety of jobs at Goldman Sachs before moving last August. He knows Goldman and vice versa.

There are obstacles, of course. Goldman has an unrivalled record advising others on strategic deals but a lousy record making acquisitions on its own account, which is another factor that separates Goldman from its rivals.

No one much remembers Goldman’s $6.5bn acquisition in 2000 of Spear Leeds & Kellogg, the market maker, which ended poorly. It has made plenty of other smaller acquisitions over the years but none has been particularly memorable or game-changing (with the notable exception of J Aron & Company, the commodities trader. But that was back in 1981).

With a market value of more than $40bn, buying Bank of New York Mellon would be a transformational deal for Goldman and one, I believe, that would allow Goldman to keep intact its unique and insular culture while also allowing it to get bigger in asset management, deposits and the back-office mechanics of Wall Street. BNY Mellon would be a good counterpoint to Goldman’s perennial strengths of investment banking and trading — a business that seems less volatile at the bank than at other places. Goldman is simply better at it than its competitors.

But there is also the no small matter of whether Goldman’s prudential regulator, the US Federal Reserve, would permit Goldman to make such a large, horizontal acquisition. The Fed has not approved any such deals on Wall Street since the days before the 2008 financial crisis (and those were forced, of course). But it’s high time for the Fed to allow much-needed consolidation in the still-bloated banking sector to continue.

Then there is the issue of employee morale. It’s a problem across Wall Street but Goldman being Goldman, its problems tend to be magnified and showcased. And, to be frank, Solomon has become part of the problem. Time for him to ditch the two Gulfstream private jets bought in 2019 under his direction; put the extracurricular DJ-ing gig on hold until the tension inside the bank subsides; and, for goodness sake, reinstate the free coffee, tea and snacks. We all know how hard everyone at Goldman is going to have to work to make the turnround a success. There might as well be a few moments of enjoyment along the way.