- David Solomon broke with his predecessor on Wednesday in showing a willingness to cut deeper into the firm’s once-vaunted fixed-income division.
- “Let me be direct,” Solomon said. “We are fully cognisant of the reduction in industry wallet over the past decade and we will not be complacent waiting for the market to return.”
- Solomon’s stance is at odds with Lloyd Blankfein, who famously defended the fixed-income unit from a bigger restructuring, saying he wanted to be positioned to capture market share when the business bounced back. It hasn’t yet.
If it wasn’t clear before Wednesday that a new era of management had begun at Goldman Sachs, new CEO David Solomon wasted little time in making the point.
Just minutes into the firm’s fourth quarter conference call, David Solomon told analysts the firm was taking a hard look at its beleaguered fixed-income trading division. The review might include shrinking the business further if necessary.
“Let me be direct,” Solomon said. “We are fully cognisant of the reduction in industry wallet over the past decade and we will not be complacent waiting for the market to return. We are running the business with a clear perspective of its revenue potential.”
It was his first conference call as CEO talking about a performance that happened on his watch. Solomon was CEO when he spoke on Goldman’s October conference call, but he discussed results generated while Blankfein was still CEO and chairman.
On its face, Solomon’s declaration doesn’t seem all that controversial. Goldman’s fixed-income business has had a difficult couple of years, and many competitors have already downsized their own desks. Capital rules coming out of the financial crisis have forced banks to shrink inventories and they now take much less risk. Clients have been hamstrung by record low interest rates.
But at Goldman, the comment drew a sharp departure from the public stance espoused by Solomon’s predecessor, Lloyd Blankfein. Inside its 200 West Street headquarters, Solomon’s comment raised eyebrows, according to two employees.
Blankfein, a student of history and business cycles, and Goldman’s CEO since 2006, had famously stuck by the fixed-income trading division that fuelled his rise. For years, Blankfein defended the division against calls to shrink its footprint, explaining how important it is to have traders in seats when the business inevitably bounced back. That has yet to materialise.
To be sure, Blankfein oversaw a dramatic reduction in the capital Goldman devoted to the fixed-income business, made strategic cuts to staffing levels and began to reposition the franchise with more corporate and asset management clients. Over the last three to five years, for example, Goldman cut expenses by about 30% and capital allocation by about 40%, CFO Stephen Scherr said on yesterday’s call.
In March 2016, Goldman reportedly cut between 5% and 10% of its fixed-income staff.
But that was far less than many competitors, including arch rival Morgan Stanley, which famously cut 25% of its fixed-income staff the prior year. And most of the business shift occurred behind closed doors, while Blankfein repeatedly used public remarks to defend the firm’s commitment to the business.
Blankfein’s 2013 comments to a conference of investors and analysts capture his approach at the time.
“There is considerable discussion about the outlook for FICC, given the numerous regulatory changes taking place and the lower client volumes,” Blankfein said at the 2013 conference, using the acronym for the fixed-income, currencies and commodities unit. “Difficult operating environments might lead management teams to overreact. However, when you have a strong franchise and a track record of superior returns, overreacting may be the most dangerous thing that you can do.”
Blankfein largely clung to that stance over the subsequent years. Last January, for example, the then CEO said in an interview with Bloomberg Television that the “FICC business and our commodity business is a jewel.” The 2017 results included the worst performance for the commodities business in Goldman’s history as a public company.
Blankfein stepped down as CEO in September, and as chairman in December.
The fixed-income traders didn’t do any better stepping up for Solomon in his first quarter as a CEO. The unit generated just $US822 million, the worst quarterly performance since the financial crisis. They performed so poorly that senior managers ripped tens of millions of dollars out of the fixed-income bonus pool in the final week of the year, according to a person with knowledge of the matter. The Wall Street Journal was first to report the detail. Three quarters of the decline from the prior year, or 75%, came in the credit business, Scherr said on the call. The performance was enough for Solomon to tell analysts that the firm is continuing to move capital out of the fixed-income business and sees further potential to “reduce expenses.”
Scherr, who took over as CFO in November, admitted that the firm hasn’t touted its own changes as much as some competitors, assuring listeners that the new management team is moving with renewed urgency to shift the business. “While we have not put as much headline to a lot of that activity as perhaps some of the other institutions, this is an evolutionary process that we’ve begun,” Scherr said. “It now has a greater sense of urgency and purpose in the context in which David described it. We have a clear view, along with those running the business, about how to get to the right place and the right size.”
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