Last year was difficult for many financial firms. Most Wall Street firms are making lay-offs and cutting costs. But Goldman’s missteps have required earlier and deeper cuts
Save time by listening to our audio articles as you multitaskaccused the firm of being “everywhere”, and that was not so far from the truth either. Goldman’s best and brightest, having cut their teeth on its trading floor or in wood-panelled conference rooms finessing mammoth deals, founded formidable hedge funds or giant private-equity firms.
The problem is not really Goldman’s main business, advising corporate clients and executing trades for them. The profits of these divisions are strongly cyclical, but they have done well in recent years. The wild swings in asset markets in 2020 pumped up trading volumes; the roaring bull market of 2021 led to a surge in initial public offerings, mergers and acquisitions; in 2022, despite adverse conditions in other respects, Goldman’s bond-traders were able to capitalise on rising rates.
Mr Solomon was going to change all this. He promised not only to improve returns in Goldman’s core units, as he has done, but also to hasten its move into steadier, more predictable businesses, such as consumer lending and wealth-management. The idea was to generate lots of recurring revenues and thus deliver much more stable returns.
Soon after came a credit-card partnership with Apple, organised by Mr Blankfein and launched by Mr Solomon in 2019. In 2021 Mr Solomon expanded the consumer-lending business yet more by buying GreenSky, an online platform that makes home-equity loans, for $2.2bn. After a reorganisation of Goldman’s different divisions last year, the second on Mr Solomon’s watch, much of the consumer-lending business has moved to a part of the business called “platform solutions”.
Goldman’s other defence is that consumer lending is a tiny fraction of its business. Just 3% of revenues and only 4% of common shareholder equity , is allocated to that part of the firm. But consumer lending was not supposed to be an obscure sideline for Goldman in the long run. The point of diversifying was to make a significant reduction in the share of the bank’s earnings affected by volatility in capital markets.
What is more, the steady wealth management is now paired with Goldman’s much more volatile asset-management business. Returns in that unit gyrate because it invests not just its clients’ money, but Goldman’s as well. The firm says it will cut back on this form of investing, but not eliminate it entirely. “Our investors like to know that managers have some form of skin in the game,“ explains Mr Coleman.
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