December 6, 2023

Investment Banking

Let Your Investment Banking Do The Walking

Goldman Sachs is under pressure. So is the rest of Wall Street.

Goldman Sachs (GS) CEO David Solomon acknowledged a series of negative headlines about his company when he spoke to shareholders during an investor day in late February.

“I hate the noise,” Solomon said bluntly, adding that “I wish the noise was different.”

That noise is just as loud five months later.

The most storied name on Wall Street is under a microscope as it fights to maintain its crown as the world’s top dealmaker. It is wrestling with everything from job cuts and a global investment banking slump to reports of partner unrest and concerns about strategy.

Even Solomon’s side gig as a DJ and his partial interest in a real estate company are subjects of scrutiny.

Goldman spokesman Tony Fratto said Solomon “and the entire leadership team are focused on delivering for clients and executing on our strategy” and that the CEO has acted as a DJ at “only a handful of events a year – and hasn’t in over a year.”

As for any dissension among the partners, he said “the reality is people can have disagreements” and that’s “normal.”

Goldman Sachs chairman and CEO David Solomon testifies before the House Financial Services Commitee during a hearing, Wednesday, April 10, 2019, on Capitol Hill in Washington. (AP Photo/Patrick Semansky)

Goldman Sachs CEO David Solomon. (AP Photo/Patrick Semansky)

Goldman is not the only big name on Wall Street under pressure.

Firms with big investment banking and trading units have made or announced cuts of roughly 12,000 jobs since the end of 2022. Dealmaking is drying up amid a rise in interest rates, economic uncertainty and the failures of several sizable regional banks.

Those cutting back include other Wall Street stalwarts such as Morgan Stanley (MS), Citigroup (C) and JPMorgan Chase (JPM).

UBS, which also has a sizable presence on Wall Street, reportedly plans to cut 35,000 jobs at former rival Credit Suisse Group AG following an emergency takeover orchestrated by the Swiss government in March.

These challenges are a reminder that the pain for the banking industry is still acute months after the failures of regional lenders Silicon Valley Bank, Signature Bank and First Republic. And the giant banks that rely on mergers or IPO underwriting for sizable portions of their revenue have specific problems of their own.

‘Green shoots’

The slowdown in dealmaking will come into sharper focus in a few weeks when the biggest institutions report their second-quarter results.

Worldwide revenue from mergers and acquisitions for the first half of 2023 fell 38% compared to the same period last year, according to data from Refinitiv, amounting to the slowest first half for deal making since 2020.

That follows a subpar first quarter when major banks advising on mergers or IPO underwriting reported sizable drops in fee revenue. The largest decrease of 26% belonged to Goldman. 

A hint at the possible results came this week when a smaller investment bank, Jefferies Financial Group (JEF), said its fiscal second-quarter revenue from investment banking plunged 26%, pulling down profit for the period.

One bright spot, however, was that capital markets net revenue surged 30% to $543 million in the quarter. Jefferies also said that “the month of June has brought green shoots.”

Many big banks have warned that trading revenue will also be down in the second quarter. That includes Goldman. Its chief operating officer, John Waldron, has said such revenue may fall 25%.

Goldman is fighting this year to keep its title as the world’s largest dealmaker. It was still ahead of rival JPMorgan through June 30, according to Dealogic, with a market share lead of 1%. Another data provider, Refinitiv, said Goldman trailed JPMorgan as of June 27.

Winning ‘cures all’

It wasn’t long ago that deal making was responsible for helping Goldman — and the rest of Wall Street — churn out record profits.

The last boom came in 2021, when CEOs used surging markets as a reason to buy other companies, go public, or take on new debt. Through the period, Goldman Sachs dramatically outperformed rival firms, scoring its best year of revenue in its century and a half history

Then came a year that most of Wall Street would like to forget.

In 2022, three major stock averages fell by the most since 2008 and bonds had their worst year on record. Inflation reached its highest level in four decades, triggering an aggressive series of interest rate hikes from the Federal Reserve.

All of that new economic uncertainty curbed the optimism needed from the corporate clients that are the lifeblood of Wall Street’s investment banking business. As a result, bonuses were slashed and jobs were cut.

John Waldron, president and Chief Operating Officer of Goldman Sachs, speaks during the Goldman Sachs Investor Day at Goldman Sachs Headquarters in New York City, U.S., February 28, 2023. REUTERS/Brendan McDermid

John Waldron, chief operating officer of Goldman Sachs. REUTERS/Brendan McDermid

Goldman recorded its second-highest annual revenue that year but it had a rough end to 2022, with profits down a whopping 69% in the final quarter amid a sharp decline in deal-making. In January of this year Goldman Sachs let go of roughly 3,000 employees, or 6% of its workforce.

Solomon, facing shareholders at the end of February during the firm’s second-ever investor day, admitted mistakes were made. “I think we’ve accomplished a lot over the past few years. We got some things right, got some things wrong.”

He dismissed chatter about mass partner exits, saying there were fewer partner transitions in 2022 than any other year going back to 2014.

He also made it clear Goldman would be scaling back its prior ambitions to become a consumer banking giant (a project known as Marcus) and would instead look to lean more heavily on the steady, fee-generating business of wealth management. Goldman has sold some Marcus loans and will likely take a write down for a purchase of a fintech lender.

“The culture of Goldman Sachs is incredibly strong,” Solomon said on Feb. 28.

Less than two weeks later Goldman found itself in the middle of another controversial situation when it tried to help Silicon Valley Bank raise capital while purchasing some of its securities. The events preceded a run on the regional bank that upended the banking world.

FILE - People look at signs posted outside of an entrance to Silicon Valley Bank in Santa Clara, Calif., Friday, March 10, 2023. In a sign fears about the global financial system have eased for now, major central banks are scaling back their offer of emergency dollar loans to banks, a crisis step launched after the collapse of Silicon Valley Bank in the U.S. fed fears about wider troubles. (AP Photo/Jeff Chiu, File)

Silicon Valley Bank was seized by regulators on March 10. (AP Photo/Jeff Chiu, File)

A spokesman said Goldman informed Silicon Valley Bank in writing that it would not act as its adviser on the securities sale and recommended the bank hire a third-party financial adviser for that transaction. Federal officials are now reportedly investigating the role Goldman played in those final days.

Devin Ryan, analyst for JMP Securities with an overweight rating on Goldman, predicted the firm would bounce back once markets and dealmaking recovers.

“Goldman Sachs will disproportionately benefit when that happens,” he told Yahoo Finance.

Winning, said Wells Fargo banking analyst Mike Mayo, “cures all.”

“So if and when capital markets resume,” he added, paychecks will go higher and “I think employees will be a lot happier.”

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