The Comeback Kid
From Solomon Gate to King Solomon
It is exactly a year since I wrote a piece in FT Alphaville titled “In defence of David Solomon” with the first line “It’s time to do the unthinkable – defend a Goldman Sachs CEO.”
At that point, New York Magazine and the New York Times had written scathing pieces on Solomon and the media was obsessed with rumours that he had lost the dressing room. Goldman partners were leaking embarrassing stories on an almost daily basis and the gossip was that Solomon’s time was coming to an end.
The headline for New York Magazine’s long and viral piece on Aug. 11, 2023, was “Is David Solomon Too Big a Jerk to Run Goldman Sachs? Inside a banking mutiny.”
The Economist even had an illustration of the old Goldman Sachs logo on a melting tombstone on its front cover in January 2023 with the title “Goldman Sags,” and pounded Solomon through the year:
· On Jan 26th, 2023, the Economist headline was “The humbling of Goldman Sachs - The struggle to reinvent a firm trapped by its own mythology”
· On March 1st, 2023, the Economist headline was “David Solomon lacks answers for Goldman Sachs’s angry investors - The bank’s share price falls after an unsuccessful investor day”
· On 20th August 2023 the Economist headline was “Goldman Sachs has a David Solomon problem - Criticism of the bank’s boss turns vitriolic”
My simple response was that all of this scandal was more Hollywood gossip than serious risk and compliance breaches. After all, there were much greater scandals like 1MDB during the Blankfein years. The strategic missteps around consumer banking were notable but in the grand scheme of things a rounding error relative to the enormous size of Goldman’s traditional business. In the latter, Goldman had done rather well under the stewardship of Solomon.
One year on with Goldman Sachs’ market capitalization now the same as Morgan Stanley, (which has its own woes emerging) it seems a good time to run the numbers again!
In its marque investment banking division, Goldman Sachs fees were up 25% in the first half of 2024 based on LSEG data. This was in line with its US peers. It remains number one in M&A and top 3 in equity underwriting.
In the much larger markets business, Goldman’s market share has consistently been stellar in the Solomon years.
The 13% year-over-year revenue growth in FICC (Fixed Income, Currencies, and Commodities) for the first half of 2024 was well ahead of peers underpinned by strength in financing. Goldman’s market share in FICC out of the top 5 US banks was 13.7% in 2017 the year before Solomon took over and 15.6% in the year he got the top job. Since then, it has been on a steady climb with 21% in the first half of 2024.
Goldman has outperformed all 4 other leading US banks and done particularly well relative to Citi and Bank of America. To be fair much of this is owing to mix because Goldman is more exposed to commodities trading and hedge funds that have both become more active.
In equities, Goldman’s revenue growth of 8% year-over-year this year slightly lagged peers given their blockbuster performance last year. But Goldman has outperformed peers over the previous 3-4 years. Big investment banks have all seen fast growth in their business financing hedge funds especially multi-strategy “pod shops” that are highly leveraged and trade frequently. But this has been especially beneficial to Goldman. It is the market leader in the space and has won significant market share.
For many years Morgan Stanley had established themselves as the number one equity trading firm on Wall Street but over the last year or two Goldman Sachs has pulled ahead by a decent margin.
This year Goldman Sachs celebrated the 25th anniversary of its IPO. The industry has changed massively since then. Although Goldman’s revenue has increased by 250% over the period so has its headcount and revenue per employee growth has been relatively static. More risk people. More compliance people. More IT people.
Add in the massive increase in capital requirements and other regulations and it isn’t surprising that new trading firms like Jane Street and Citadel Securities are winning big or the private markets monsters like Blackstone, KKR, and Apollo.
Nevertheless, the return on equity of 15% across Goldman’s markets and investment banking business in the first half of 2024 is well ahead of all of its peers apart from JP Morgan. And it is hard to blame Solomon for the emergence of these more lightly regulated competitors.
Goldman is making moves in expanding its private investing and private credit business, but broadly new strategic shifts have been limited over the last year.
The message is to let Goldman be Goldman and let Solomon be Solomon.
There may be further road bumps ahead when the trading and hedge fund boom slows down but for now, the Goldman shareholders seem happy.
Since David Solomon became CEO of Goldman Sachs on 1st October 2018 Goldman’s share price has increased by 120%. (blue line below) It is the best-performing of the 5 major Wall Street banks: Morgan Stanley is up 103%, JP Morgan is up 82%, Bank of America is up 28% and Citigroup is down 20%.
Not bad given most of these peers have benefited more from higher interest rates than Goldman.
The outperformance relative to Morgan Stanley since “Solomon Gate” is remarkable. Over the last twelve months, Goldman’s share price is up 44% while Morgan Stanley’s share price is only up 8%.
Solomon will never be remembered like Dimon and rightly so but what a contrast one year makes. Goldman is winning again especially relative to Morgan Stanley, and the leaks have stopped for now!