Summary
- The Goldman Sachs Group, Inc., in the time period following the Great Recession, tried to change its business model to produce steady, more consistent results as the Federal Reserve was changing policy.
- It did not do a very good job.
- Recently, Goldman Sachs has been talking about returning its business model to something that more closely resembled its past business model.
- This has not gone well, investor dissatisfaction grew, important management left the company, and discontent seemed to rule insider employee attitudes.
- Goldman Sachs is not functioning well, and little confidence is being expressed about the ability of the current management to turn the situation around.
Who would have thought of ever calling The Goldman Sachs Group, Inc. (GS) "lackluster?"
And, who would have ever thought that the leaders of Goldman Sachs, beginning with David Solomon, chief executive officer, would spend hours trying to explain why Goldman Sachs was where it was?
Unfortunately, Goldman Sachs has spent the last 15 years or so, destroying its image as a fantastic company with the all-stars of the universe inhabiting its offices!
Well, I have attempted to provide some answers to these questions in earlier posts .
But, the story still lingers, which is not good for Goldman Sachs.
The very fact that Goldman and Mr. Solomon are doing so much whining is evidence, to me, that no solution to Goldman's problems has been reached.
Soon after the Great Recession, the leaders of Goldman Sachs believed that the world had changed and, consequently, they needed to make some changes to "stay in the game."
Goldman Sachs was an investment bank and lived off of trading and fees. It had the very best in people to produce results in this space.
Goldman Sachs had been the model of the industry for years. Most others wanted to emulate Goldman.
Goldman Sachs lived and thrived off of volatility. This was the case because the markets that Goldman operated in were the essence of volatility.
And, then the world changed...or, at least the Federal Reserve changed.
Ben Bernanke became the chairman of the Board of Governors of the Federal Reserve System, and he instituted changes that changed the nature of markets.
Mr. Bernanke smoothed out a lot of the volatility of the markets Goldman Sachs operated in.
Mr. Bernanke operated the Federal Reserve so as to create a wealth effect that would drive consumer spending. The Federal Reserve began to operate with a program called "quantitative easing."
Quantitative easing consisted of the Federal Reserve buying consistent amounts of securities in the open market on a monthly basis. Thus, financial markets experienced a constant flow of funds coming into the market for an extended period of time.
The objective here was to provide funds for markets, especially the stock market, to rise on a regular basis, regular enough for market participants to feel secure in buying into these markets, especially the stock market.
During the decade of the 2010s, stock prices rose constantly supported by the regular buying of securities on the part of the Federal Reserve.
The Fed went through quantitative easing periods Q1 and Q2.
Market volatility decreased while market returns rose to support the smooth execution of this approach to monetary policy.
This was not the monetary policy for Goldman Sachs.
Other firms adjust their model. Morgan Stanley, for example, altered its business model, focusing more and more on the management of assets and prospered as a result.
In response to this change in market results, Goldman Sachs decided to alter its business model and move more and more into the management of assets and into consumer banking.
Unfortunately, in my mind, the move was only half-hearted. Goldman Sachs was a star. Goldman Sachs operated with stars. Goldman Sachs prospered as a star.
The move into consumer banking and asset management did not fit in with the Goldman model. And, the support that Goldman management received for the change was not very enthusiastic.
And, the earlier results showed this.
Goldman Sachs stock performance (S&P Capital)
But, the Federal Reserve came to the rescue again.
Another round of quantitative easing, Q3, came into the picture and Fed chairman Jerome Powell entered into another round of consistent market support to as to prevent the U.S. economy from going into a tailspin.
As can be seen, the S&P 500 Stock Index (SP500) took off following the Covid Recession of 2020, and as the Fed-created asset bubble continued, the price of Goldman Sachs stock took off.
Talk about rising inflation in the United States grew and grew during the latter part of 2021, and by November of 2021 it was pretty clear that stock prices were going to be impacted.
The last historical high reached by the S&P 500 stock index came on January 3, 2022.
The rest is downhill as the Fed officially opened its program of "quantitative tightening" in the middle of March 2022.
The "new" economic climate was introduced.
The Fed was not constantly underwriting stock prices.
Goldman Sachs program really fell out-of-favor in the investment community, and Goldman CEO David Solomon started talking.
Goldman was backing down. The "new" model was not working as Solomon wanted, and so Solomon said he was doing something about it.
As one can see towards the end of the chart, Goldman Sachs' stock rose relative to the S&P 500 index.
And, that is where we are today.
But, investors are not happy.
This unhappiness can be combined with events from inside the company.
We read in the Financial Times :
"Solomon will again have to address signs of unhappiness inside the bank, typified by a raft of senior departures including chief financial officer Stephen Scherr, co-head of investment banking Gregg Lemkau and co-head of asset management division Eric Lane."
"More than a third of the 26 speakers at Goldman’s first-ever investor day three years ago have now left the bank."
"Other bankers remain angered."
These are the people that investors would point to in exclaiming what a great organization Goldman Sachs was.
All one can read from this now is that Goldman Sachs is facing some real management problems.
And, the same leaders are still guiding the company.
The Future
My first takeaway from this situation is that, in the near future, we are going to see several books appear that investigate the "fall" of Goldman Sachs.
Goldman is still producing a relatively good Return on Equity, the major target of a performing company. For 2022, the company produced an ROE of 10.30 percent.
But, this is not the "old" Goldman Sachs.
Goldman Sachs has a leadership problem. My guess is that the future will not be that pleasant. The leading indicator on this conclusion is the "leaving" of so many of the top management.
Something is not working.
Goldman Sachs is trying to "find itself" and does not appear to have the leaders capable of achieving this goal.
Christian Bolu, a senior research analyst at Autonomous Research, is quoted in the Financial Times article as saying,
“It’s a lukewarm grade for strategic transformation so far. In essence, Goldman is essentially what it was five years ago."
Not good!
For further details see:
Lackluster Goldman Sachs