By Roy C. Smith
Goldman Sachs‘ announcement on Tuesday that David Solomon
will replace Lloyd Blankfein as CEO was expected, but when the actual change occurs
on Oct 1 it will brings to an end the super-eventful 16-year period in which
Blankfein reshaped the firm – not once but twice – while maintaining its
preeminent role as one of the world’s foremost investment banks even through
the worst financial crisis since the 1930s.
Blankfein took over as Fixed Income Commodities and Currency
chief in 2002 just as the three-year “tech-wreck” crisis was ending. Working
with Hank Paulson, Goldman’s CEO at the time, Blankfein smoothly managed a
massive expansion of the firm’s trading business, transforming Goldman Sachs
from a cautious, client-oriented investment bank into a global trading colossus
engaged with “counterparties” all over the world. By 2006, when Blankfein
replaced Paulson as CEO, more than 70% of the firm’s profits were from trading.
But, by the end of that year Blankfein and others among the
firm’s top managers noticed changes in the housing market and sharply adjusted
trading positions, which enabled the firm to survive the maelstrom that
followed better than any of its competitors. But the crisis, and the regulatory
aftermath that followed changed everything, so Goldman had to affect another
transition -- to decrease its reliance
on trading. In 2017, trading accounted for only about 20% of profits, about the
same as 2000.
This second transition, however, has been Blankfein’s major
undertaking of the past ten of his 12 years as CEO. He has called the process
“re-engineering” in a labyrinth of regulation to strike the right balance
between the firm’s traditional businesses, while investing heavily in new technology
to make the process more efficient and to open up opportunities. Today 25% of
Goldman’s total headcount of 36,000 are engaged in various engineering roles.
Though the combined market value of all tradable financial
assets in the world, according to McKinsey Global Institute, has grown from
$200 trillion in 2007 to more than $300 trillion today, the financial services
industry has been in a slump. Besieged by an avalanche of regulatory costs,
restrictions and litigation settlements, and hamstrung by a slow growth economy
with markets distorted from intervention by central banks and competition from
new and different sources, the “systemically important financial institutions” have
struggled to get things right. Though Goldman Sachs has performed better than almost
all of its peers, its returns on equity capital have only marginally exceeded
its cost of equity capital since 2010, and its price-to-book value ratio today
is only 1.18.
Many banking industry observers believe that the
highly-leveraged, go-for-glory days of the industry are permanently in the past
and that most banks now can only look forward to a regulated public utility existence.
Blankfein’s approach throughout the transition has been to
keep all four wheels on the road, tinker with the engine and the chassis, but let
the vehicle do what it has always done well. He has looked at strategic
possibilities – spin offs, mergers or investing in retail banking or insurance
– but (in traditional Goldman fashion) found nothing better than sticking with
the tried and true.
David Salomon’s job will be to figure out a way back to
double digit growth that will be worthy of the Goldman DNA of the past. First,
he will have to form a management team of his own, get around and schmooze up
all Goldman’s important clients, regulators and the financial media in the US,
the EU and Asia, and then figure out how and when he is going to address the tough
strategic questions that face the firm.
When he gets to it, he will have to ask himself three simple
questions: (1) can the $1 trillion (assets) business model we have, weighted
down by the combined burdens of regulation, damaged industry public relations and
now permanent exposure to big-ticket litigation, ever get back to sustainable double-digit
growth? (2) if we are going to end up as a glorified public utility, how do we
keep all the overachieving hot-shots around here from going somewhere else? and
(3) can we transform some of the high valued-added stuff we do in lending,
investing, venture capital and FinTech into a more entrepreneurial, private
equity format and split if off from the overburdened rest?
David Salomon has more than 30-years’ experience in the
industry, most of it at Goldman Sachs in fixed income and investment banking,
which he led. But being CEO is a tough
job for which no one is ever adequately trained or prepared. But the selection
process has been solid from among highly qualified inside candidates that are
well and truly steeped in the Goldman Sachs culture. And, as a graduate of
Hamilton College, he well knows the line from the musical about the school’s
namesake in which the young Hamilton announces “I am not throwing away my
shot!” Nor should he. It’s his turn now.
From Financial News,
July 17, 2018
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