The best DJs prefer spinning solo. An electronic music hobbyist called DJ D-Sol — better known as David Solomon — has cued himself up as the act most likely to headline at Goldman Sachs. Last year, incumbent Lloyd Blankfein hinted that Mr Solomon might lead the US investment bank in tandem with rival Harvey Schwartz. On Monday, Mr Schwartz abruptly announced his retirement. The implication was clear, after reports Mr Blankfein could step down this year.
Goldman Sachs remains Wall Street’s shiniest franchise, but has evolved since the financial crisis. Some of those changes bear the fingerprints of Mr Solomon, a hard-nosed investment banker who is currently chief operating officer. If he becomes chief executive, he will be accountable for managing the risks created by those manoeuvres.
In 2017, despite a fixed income trading group in turmoil, Goldman Sachs still hit a return on equity of above the mythic 10 per cent. That is a far cry from the 30 per cent typical before the financial crisis. Back then, Goldman Sachs had a powerful fixed-income trading operation — the business Mr Schwartz came from — and a far more levered balance sheet. The resilience that underpins Goldman Sachs today comes from its longstanding dominance in merger advice. Revenues there were $3bn in 2017, a half greater than rival Morgan Stanley.
The business has also dived hard into more capital intensive areas. In investment banking, it is a top five player in leveraged loans, senior debt extended to companies whose high gearing often reflects ownership by buyout investors. An investment and lending unit that takes private equity and debt stakes in company is prospering as asset valuations have soared. At the same time, Goldman Sachs is dallying with fintech via its consumer lending business, Marcus.
In 2017, even with its problems in fixed income, these other businesses were enough to help earnings grow more than 21 per cent. They may do less well when the economic and credit cycle turn. Risk management has perhaps been Goldman Sachs’s clearest competitive advantage. That will be tested again for new areas of emphasis that involve balance sheet comittments.
Should Mr Blankfein leave this year, he’ll likely get out before any big storms rock the financial markets. Always better to leave the club before the DJ finishes his set.
The Lex team is interested in hearing more from readers. What should Goldman’s next CEO be most worried about?
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