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Morning Coffee – Did Goldman Sachs have the wrong people in the wrong jobs? Yesterday’s villain is this year’s Banker Of The Year

As Goldman Sachs prepares to face the music of its Q2 results, speculation has begun to grow about what (if anything) might have gone so badly wrong.  Liz Hoffman at Semafor has an intriguing theory – the management team might simply have had too many square pegs in round holes.

She points out that Stephanie Cohen was in put charge of consumer banking despite a background in M&A; Luke Sarsfield went from healthcare and FIG advisory to running the asset and wealth management business, while Julian Salisbury went from the merchant banking group to an uneasy co-head position with Luke Sarsfield.  All of these divisions have had disappointments of one kind of another, so does this reflect on the CEO who made the appointments?

It's not an obviously implausible idea, and it’s certainly an underemphasised point that the skill of being a banking CEO is to allocate all kinds of resources, not just capital and budgets.  But if we’re looking for the root causes of Goldman’s stumbles of the last year, surely this would need to be something that has changed recently?  The general concept of moving high-flying executives around the bank to gain wide experience rather than specialising in a particular business area certainly wasn’t an innovation that David Solomon came up with on his own; it’s been written into the corporate culture for practically the last 150 years.

Even looking through the LinkedIn profiles of the examples above starts to undermine the theory.  Stephanie Cohen spent most of her career in M&A, true, but she went to the Consumer business after two years as Chief Strategy Officer, not straight from doing deals.  Luke Sarsfield’s job previously to being made co-head of asset and wealth management was Global Co-Head of the client business in that same division.  And Julian Salisbury is literally famous for having done a bit of almost everything over the course of his career.

There is potentially a slightly different problem of square pegs and round holes, though.  Investment bankers are not immune to the temptations of snobbery, and one of those temptations is to assume that because they earn much more than average retail bankers and asset managers, that means firstly that they must be much smarter, and secondly that those businesses must be much easier.  On this interpretation, the problem wasn’t a misallocation of managers, but perhaps a failure to sufficiently respect the challenges of the businesses that Goldman has been trying to grow into.

David Solomon’s big problem is that the strategic dilemma for Goldman has always been “banking or trading?” and his answer (which everyone loved at the time he announced it) was “actually neither, but less volatile platform businesses”.  That might have been a wrong decision in hindsight. It might even have been a basically sound strategic call that’s been overtaken by events and the economic cycle.  Or it might alternatively be the case that five years isn’t really all that long to execute such a massive shift, and we need to wait and see.

Elsewhere, the Euromoney Awards for Excellence provide a reminder that this industry is cyclical, as Christian Sewing has been named Banker of the Year.  This would have been hard to believe five years ago; at the time of his appointment as CEO of Deutsche Bank in 2018, the consensus view seemed to be that Sewing was the latest in a series of desperate moves, likely to do not much more than preside over a few years of franchise-destroying redundancies and regulatory scandals, then leave.

Instead, he waited a year to stabilise the cost base, then made the decision to get out of equities trading entirely, rather than allowing the business to gradually and expensively wither.  Equally importantly, since then he has demonstrated that he’s more than a single minded cost cutter; he’s prepared to pay good bonuses for successful traders and bankers, and to invest in business lines with potential even if they’re in very unfashionable business lines like UK midcaps.  Under his leadership, Deutsche even seems to have sorted out its notoriously troubled IT systems.  Industry awards like this are usually somewhere between a bit of fun and a bonus enhancement opportunity, but this one seems well-deserved.

Meanwhile …

Congratulations also to Morgan Stanley, who took the “Best Investment Bank” award. (Euromoney)

Preliminary hearings have begun in the case of Charlie Javice, the fintech founder who is accused of having falsified four million customers.  It looks like it will promise quite a bit of unintentional comedy, although JP Morgan, having paid $175m to acquire her business, presumably won’t see them as cheap laughs. (Business Insider)

Having historically been more of a retail firm, Wells Fargo is steadily increasing the size of its M&A advisory team, at the bottom of the cycle.  It’s hired Tom Drake, an MD from Barclays to its healthcare group and Chris Norman from Citi to be a managing director in the tech group. (Bloomberg)

Not necessarily with the valuation it might have hoped for at launch, but Tidjane Thiam’s SPAC deal has closed, giving a chance to drag out that picture of the former Credit Suisse CEO smiling into the camera again. (Finews)

The pay rises given to junior bankers during the pandemic and boom years were really a rounding error in the cost base of any Wall Street bank.  But “junior” lawyers are often actually quite senior qualified professionals, and they’re proportionately more of the work force, so the salary increases handed out by law firms like Allen & Overy are now beginning to noticeably dig into profits. (FT)

Everyone has been warned, fines have been paid and bonuses docked, but getting bankers to stop using messaging apps is apparently about as thankless a task as getting kids not to take their phones to school.  One banker had a better excuse than most; having been told that it was strictly forbidden to discuss client business over the Telegram app, he pointed out that the client was in fact Telegram. (Financial News)

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AUTHORDaniel Davies Insider Comment

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