Goldman Sachs CEO Admits Mistakes: ‘There Were Clear Failures’

new York David Solomon struggles to find the right balance. The CEO of Goldman Sachs emphasized his bank’s recent successes at Investor Day on Tuesday. But he also has to address the problems of the institute, which has become accustomed to success. “There were clear successes, but also some clear failures,” he admitted.

It’s only the second investor day in the Wall Street Institute’s 154-year history, and Solomon knows the new strategy has to work. The CEO, who has been in office since 2018, is stricken and has been sharply criticized for the recent failures for months.

On Tuesday, the Goldman boss focused on the asset and wealth management division, AWS for short. In the future, it will be the “central growth driver” – and should above all ensure that Goldman becomes less dependent on the volatile trading and investment banking business.

Achieving more stable earnings has long been a goal of the bank. Solomon failed at the first attempt. A broad-based push into retail banking was originally intended to reduce reliance on investment banking. But despite investments worth billions, the desired successes did not materialize.

>> Read here: Goldman cut CEO Solomon’s salary by 30 percent

Solomon announced last year that he would scale back the ambitions surrounding the online bank Marcus. “We wanted too much and too fast,” he said on Tuesday. Marcus hasn’t been lending for months, only accepting deposits that carry relatively high interest rates.

The bank is looking for “strategic alternatives” for parts of its retail banking business, which includes credit cards and specialty lender Greensky, Solomon said. However, he left details open. According to financial sources, the bank is considering finding a buyer for the loans that are still on the books.

Solomon meets investors from a position of weakness: the bank only had to report unusually poor quarterly results in January. Profits collapsed by two-thirds. The return on tangible equity, an important measure of profitability, was 11 percent for the year, well below the announced target of 15 to 17 percent. Bonuses were cut by 50 percent and Solomon cut more than 3,000 jobs in the largest wave of layoffs since the 2008 financial crisis.

A German manager suddenly takes center stage

Time and time again, Solomon has had to admit mistakes over the past few months – not often at a bank that is considered the leading house on Wall Street and prides itself on attracting the brightest talent in finance.

“And it’s not well received internally either,” complains a former employee. “The mood is miserable.” A cover story in the British magazine “Economist” in January then sent the morale of the Goldman bankers to a new low. “Goldman Sags” was the headline, which in the play on words means “Goldman Sags”.

Analysts are also worried about the bad mood – and what effects this could have on business. Wells Fargo banking analyst Mike Mayo urged the board to address the issue — again, that’s very rare on Wall Street.

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With the new focus on asset management, a German manager is taking center stage: Marc Nachmann has been in charge of the division for a few months, which combines business with institutional investors as well as with wealthy clients with assets of 30 million dollars or more. This includes a number of private equity and other mutual funds that Goldman issues.

Goldman is already “the fifth largest active wealth manager in the world,” said Nachmann, who has worked at Goldman for 29 years and previously served as co-head of investment banking and co-head of the global markets unit, which includes securities trading. According to Nachmann, earnings are expected to grow in the “high single-digit percentage range” over the next three to five years. Last year, the division generated $8.8 billion in fee revenue.

But asset management is still in the middle of a strategic restructuring. In future, less of the company’s total assets should be used for investments. Instead, Nachmann would rather manage the money of institutional investors. A major focus should be on insurers.

It won’t be an easy road for Goldman, warns Wolfe Research analyst Steven Chubak. “It will take years for the strategy to be implemented,” he says.

The rising key interest rates and concerns about a recession in the USA are also making Nachmann’s division more difficult. But the longtime Goldman manager points to recent successes. At the beginning of February, Goldman announced that the division had set up a so-called growth equity fund with a volume of 5.2 billion dollars and will invest in fast-growing technology companies. Last year, Goldman raised $9.7 billion for a private equity fund — the largest since 2007. It invests in companies with enterprise values ​​ranging from $750 million to $2 billion.

A newly created division called Platform Solutions is intended to generate additional income, among other things, with a push into so-called transaction banking. Goldman completely relaunched the business a few years ago. It helps international companies to efficiently manage transactions across different currencies.

The business, which is intended to compete with Deutsche Bank, among others, is still in deficit, with a loss of $1.7 billion last year. The Goldman boss announced that he wanted to break even by 2025.

What the comparison to Morgan Stanley reveals

Solomon took over as CEO in 2018 to mark a turning point at Goldman. He encouraged his employees to pursue hobbies alongside work and set a good example. As “DJ D-Sol”, Solomon spins records, he loosens the dress code and ensures a better “work-life balance”.

But the plan didn’t work out. Much of it “was just cleverly staged,” complains another former employee. “If the performance isn’t right, then the DJ hobby is simply out of place.”

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It’s time for a fresh start. Investors keep pointing to archrival Morgan Stanley. After the financial crisis, the institute quickly decided to expand its wealth management in order to achieve more stable profits and be less dependent on the volatile investment banking.

Clearly stricter capital requirements in the course of the major financial market reform also made securities trading significantly less lucrative. But Goldman, then still under the leadership of CEO Lloyd Blankfein, did not move for a long time – too long, as analysts complain today. In 2018, just before Solomon took over as CEO, Morgan Stanley’s market cap drew level with Goldman’s for the first time since the financial crisis. Today, Morgan Stanley is worth a third more in the stock market.

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After all: The core business is strong, emphasized Solomon. Goldman continues to be the leading bank in M&A advisory, gaining market share both here and in the bond trading business. The area generates around 70 percent of the income and – depending on the market situation – 60 to 90 percent of the profits, as Mayo has calculated.

The shareholders have also recently looked to the bank with confidence. Goldman stock is up 6.5 percent this year, well ahead of the broader S&P 500, which rose 3.7 percent. On Tuesday, the paper was almost two percent in the red in a weak market.

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