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A dangerous balancing act ahead for David Solomon

Morning Coffee – Goldman cuts could hit anywhere. The “good guys” of banking might be in legal trouble

Over the weekend, rumours about the forthcoming redundancies at Goldman Sachs have been getting more and more detailed and specific.  The precise number hasn’t been locked down, but four thousand is certainly within the bounds of possibility and some “people familiar with the matter” are only prepared to say that the headcount will remain higher than its pre-pandemic level.  It seems that David Solomon is planning to take on the biggest challenge for a chief executive of an investment bank – making big cuts to the workforce without damaging the franchise.

The reason why this is a difficult task is that in the banking industry, you tend to lose about fifteen employees for every ten you intentionally get rid of, and the extra five are usually ones that you really wanted to keep.  This is an easy phenomenon to understand – when redundancy is in the air, people tend to update their resumes and refresh their headhunter contacts, just in case.  They start returning calls from lower-status competitors that they would previously have ignored.  And over the course of a few months, a few high-performing teams and individuals exit the building along with the dead wood.

This problem gets worse the longer the phenomenon rolls on, which is presumably why Goldman managers have been asked to provide a list of names before the end of the year.  Presumably the idea is to announce the cuts early in January, then give a rousing team talk about having “rightsized” and tell everyone to get back to business.  It’s a strategy that sometimes works, but it’s quite demanding of trust in the management – people need to believe in the reasons for the redundancies, and to be confident that there won’t be further rounds.

Which is itself quite a difficult promise to make.  The motivation for the current job cuts is apparently a perceived need to make a shareholder returns target – in Goldman’s case, the target in question is a 14% RoE.  The trouble is that banking fundamentally isn’t the kind of industry that you can manage by ratios in this way.  The revenue line is incredibly cyclical and volatile; there’s just no way that you can match its variability with anything you do on the cost line, even when you take the bonus pool down by 40%.  If the cuts are being designed to reach a specific target amount of money, then they might not be matched to any particular business logic.

That means that the thing to watch will be the shape of the job cuts, not the size.  It’s certainly true that Goldman has grown its headcount a lot in the last three years, and it wasn’t noticeably understaffed in 2019.  The growth of Marcus and the mass hiring of engineers to build out the Marquee platform means that there isn’t necessarily the same kind of relationship between the headline number of redundancies and cuts to front-office professionals that existed in previous cycles.  But nonetheless, the main characteristic of a “one and done” reduction in force is that it cuts entire teams and sectors, rationalising the business to cope with a changed market reality.  A round in which the pain is evenly distributed with everyone asked to slim down by a couple of heads – historically, that’s been a sign of more cuts to come.

Elsewhere, ESG bankers have always been the object of a little bit of jealous shade from their less ostentatiously ethical colleagues.  As well as having been one of the hottest hiring markets of the last few years, ESG types have a tendency to be a bit judgey, as if they’re the only ones in finance with any morals.

So there’s room for a bit of schadenfreude at the fact that ESG may now be the industry’s leading source of legal risk.  As well as various nuisance lawsuits from “anti-woke” politicians who view their co-ordination activities as equivalent to a cartel, they are highly vulnerable to “greenwashing” charges from people who suspect that the ESG branding is really just a fee enhancement tactic.

In many ways, it’s a signal that ESG finance has reached maturity; you can’t call yourself a mainstream asset class until you’ve had a few high profile scandals.  But it looks like there will be a few snarky chuckles, one way or the other, over the next year, as some big names turn out to be not quite as perfect as they claimed to be.

Meanwhile …

He might not be keen to follow the way they got there, but Deutsche Bank seem to be well on the way to achieving the goal that David Solomon has set for Goldman Sachs – rebalancing their revenues away from dealmaking and toward more stable business lines like transaction banking. (Reuters)

Don’t overdo it in the festive season – an equity analyst at a New York hedge fund is about to start getting LinkedIn endorsements for “drunken rages” and “punching subway workers”.  He didn’t even win the fight, taking a lunchbox to the face before the cops arrived. (New York Post)

It hasn’t been a bad year for everyone in M&A – the four partners at Robey Warshaw are sharing £26.5m.  The thirteen employees had to share £6.6m between them.  One of the partners is former Chancellor of the Exchequer George Osborne … (Financial News)

… And George Osborne appears to be doing better than his former boss; David Cameron is now signing up to teach a course on “how to do politics” at Abu Dhabi University (Bloomberg)

There’s moving house, and then there’s moving house.  Ken Griffin of Citadel has decided that a historic building on his Florida estate is a bit in the way, so he’s trying to get permission to take it apart brick by brick and rebuild it somewhere else (Daily Mail)

If you like sand and sun and you don’t like tax, Dubai is a fine place to live.  More and more hedge funds are recruiting there, with people like JP Morgan’s former head of European high-yield credit trading taking advantage of a place where you can live 500 metres from the office. (Financial News)

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AUTHORDaniel Davies Insider Comment

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