Goldman Sachs (GS) CEO David Solomon acknowledged a series of negative headlines about his company when he addressed shareholders at an investor day in late February.
“I hate the noise,” Solomon said bluntly, adding, “I wish the noise was different.”
This noise is just as loud five months later.
Wall Street’s most famous name comes under scrutiny as he fights to retain his crown as the world’s best trader. He grapples with everything from job cuts and a global investment banking meltdown to unrest reports from partners and concerns about strategy.
Even Solomon’s side gig as a DJ and his partial interest in a real estate company are under scrutiny.
Goldman spokesman Tony Fratto said Solomon “and the entire management team are focused on delivering for clients and executing our strategy” and the CEO acted as DJ during “only a handful of events a year – and haven’t for more than a year.”
As for any disagreements between the partners, he said “the reality is that people can have disagreements” and that’s “normal”.
Goldman isn’t the only big name on Wall Street under pressure.
Firms with large investment banking and trading units have made or announced cuts of about 12,000 jobs since the end of 2022. Deals are drying up amid rising interest rates, uncertainty economy and bankruptcies of several major regional banks.
Those slashing include other Wall Street stalwarts such as Morgan Stanley (MS), Citigroup (C) and JPMorgan Chase (JPM).
UBS, which also has a significant presence on Wall Street, reportedly planned 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 sector is still acute months after the bankruptcies of regional lenders Silicon Valley Bank, Signature Bank and First Republic. And giant banks that depend on mergers or underwriting IPOs for a significant portion of their revenue have their own specific problems.
The slowdown in transactions will be evident in a few weeks when the biggest institutions report their second quarter results.
Global M&A revenue for the first half of 2023 fell 38% from the same period last year, according to Refinitiv data, marking the slowest first half for closing deals since 2020.
This follows a lackluster first quarter when major banks advising on mergers or underwriting IPOs reported significant declines in fee income. The biggest drop of 26% belonged to Goldman.
A clue to the possible outcome came this week when a small investment bank, Jefferies Financial Group (JEF), said its second fiscal quarter revenue from investment banking plunged 26%, dragging a decline in earnings for the period.
On the positive side, however, is that net Capital Markets revenue jumped 30% to $543 million in the quarter. Jefferies also said “June brought green shoots.”
Many big banks have warned that trading revenue will also decline in the second quarter. This includes Goldman. Its chief operating officer, John Waldron, said those revenues could fall by 25%.
Goldman is fighting this year to retain its title as the world’s largest trader. It was still ahead of rival JPMorgan through June 30, according to Dealogic, with a 1% market share lead. Another data provider, Refinitiv, said Goldman was tracking JPMorgan as of June 27.
Winning “cures everything”
Not so long ago, making deals was responsible for helping Goldman — and the rest of Wall Street — generate record profits.
The latest boom came in 2021, when CEOs used soaring markets as a reason to buy other companies, go public, or take on new debt. During the period, Goldman Sachs significantly outperformed rival firms, achieving 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 the most since 2008 and bonds had their worst year on record. Inflation hit its highest level in four decades, triggering an aggressive series of interest rate hikes from the Federal Reserve.
All of this new economic uncertainty has dampened the necessary optimism on the part of corporate clients who are the lifeblood of Wall Street’s investment banking business. As a result, bonuses were reduced and jobs were cut.
Goldman posted its second-highest annual revenue that year, but it had a tough end to 2022, with profits down 69% in the last quarter amid a sharp decline in deals. In January this year, Goldman Sachs laid off around 3,000 employees, or 6% of its workforce.
Solomon, addressing shareholders in late February on the company’s second Investor Day, admitted that mistakes had been made. “I think we’ve achieved a lot over the last few years. We’ve done some things right, we’ve done some things wrong.”
He dismissed talk of massive partner exits, saying there were fewer partner transitions in 2022 than any other year dating back to 2014.
He also clarified that Goldman would scale back its earlier ambitions to become a mainstream banking giant (a project known as Marcus) and instead seek to rely more on the stable, fee-generating business of managing heritage. Goldman sold Marcus loans and will likely take a writedown for buying a fintech lender.
“The culture at Goldman Sachs is incredibly strong,” Solomon said Feb. 28.
Less than two weeks later, Goldman found itself in the middle of another contentious situation when it tried to help Silicon Valley Bank raise capital while buying some of its stocks. The events preceded a regional bank run that shook the banking world.
A spokesperson said Goldman had informed Silicon Valley Bank in writing that it would not be acting as an advisor for the securities sale and recommended that the bank engage a third-party financial advisor for the transaction. Federal officials are now reportedly investigating Goldman’s role in recent days.
Devin Ryan, an analyst for JMP Securities with an overweight rating on Goldman, predicted the company would bounce back once markets and trading recover.
“Goldman Sachs will benefit disproportionately when this happens,” he told Yahoo Finance.
Winning, said Wells Fargo banking analyst Mike Mayo, “cures everything.”
“So if and when capital markets pick up,” he added, wages will go up and “I think employees will be a lot happier.”
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